Total Deal Catalyst for Uganda Oil, COVID-19 Should Not Delay Upstream final investment decision (FID)

By Thomas Hedley, Field Editor, Africa Oil & Power

Hosted under the theme ‘Taking Advantage of Opportunities in Uganda’s Oil & Gas Sector,’ an Africa Oil & Power webinar yesterday highlighted the domestic and regional opportunities associated with the Uganda Lake Albert project, oil and gas exploration, and associated services and infrastructure including the $3.5-billion East African Crude Oil Pipeline project.

Speakers included Hon. Dr. Elly Karuhanga, Chairman of the Uganda Chamber of Mines and Petroleum; Gilbert Kamuntu, Chief Commercial Officer, Uganda National Oil Company; NJ Ayuk, Executive Chairman of the African Energy Chamber and Brian Muriuki, MD and Country Chair of Shell Ghana.

Uganda’s oil and gas sector potential was revealed in 2006 and 2007 when sizeable amounts of oil were discovered in Lake Albert on the remote western edge of the country, by Tullow Oil.

On 23 April 2020, Total announced it had signed a deal with Tullow Oil to acquire its long-standing stakes in the Uganda Lake Albert project for $575 million. With Tullow’s exit, the joint venture partners are now Total and China National Offshore Oil Corporation (CNOOC).

Hon. Dr. Elly Karuhanga expressed: “This deal brings a lot of hope to the Ugandan oil and gas sector, which was first put in light upon first discoveries in 2006. It is amazing to see Total sign [a deal of] over half a million [dollars] at times when the oil prices are so low. We are grateful for the vote of confidence and are excited about what lies ahead.”

This milestone takes Uganda closer to a long-awaited final investment decision on the Lake Albert Project (Tilenga project) which is associated with the $3.5-billion East African Crude Oil Pipeline project. The Tilenga project comprises oil exploration, a crude oil processing plant, underground pipelines, and infrastructure in the Buliisa and Nwoya districts of Uganda.

In the midst of COVID-19, Total’s announcement surprised many as most operators are currently looking to save costs rather than invest in new projects. Brian Muriuki stated: “I don’t believe COVID-19 will delay the final investment decision on this project, given the long-term perspective. However, the project execution and associated timelines may be at risk of delays due to the potential difficulty to mobilize people and put together a strong workforce, depending on how long COVID-19 lasts and how we can contain it.”

A key aspect of Uganda’s nascent oil and gas industry is the East African Crude Oil Pipeline from Holma in Uganda to the port of Tanga in Tanzania. Stakeholders are hoping the Total transaction will accelerate development. Front end engineering and design works have been finalized as well as environmental and social impact assessments, both in Tanzania and in Uganda. The pipeline route has been traced and the land acquisition process is well understood. According to Gilbert Kamuntu, “The remaining steps mainly include the suite of commercial agreements that surround. There will be no change to the project following Total’s announcement. We will reach final investment decision imminently and start project execution”.

The planned Holma refinery is expected to produce 30,000 barrels per day on commissioning to reach a maximum production of 60,000 barrels per day in subsequent phases. “Total’s announcement has boosted confidence of investors involved in the refinery project, as they can now foresee first oil.” said Dr. Karuhanga.

Despite progress, concerns remain regarding sector recovery in the midst of the COVID-19 crisis. On the question of exploration contract renegotiation, Gilbert Kamantu said: “Governments take a prudent approach to renegotiating product and sharing agreements as they are the basis to operators’ strategy right from the start. Although we are currently in a COVID-19 situation, a production and sharing contract is a 25-year-long agreement so we can’t go ahead and change the terms on a punctual situation. The [Ministry of Energy and Mineral Development] of Uganda is considering negotiating extension of periods in order to provide relief to the companies.”

Uganda currently has an ongoing licensing round which was launched in September 2019 and will close in September 2020. The round includes five blocks for a total acreage reaching 5,000 square kilometres.

Further discussions around the impact of the pandemic touched on the opportunity for African companies to fill the vacuum. As a local content advocate, NJ Ayuk called on African executives: “This is a great time for domestic companies to step up. The real economic impact on major projects will come from local companies, skill transfer, and partnerships with global players. We need to start building on joint ventures, and build capacity in the long-term. Cost implications of this model are obviously a factor to consider. Such local content growth can be costly. However, this stance can be an enabler for the economy across sectors. We should quickly negotiate local content parameters in order to get the project moving forward, without being dogmatic. Local engineers, welders, pipeline management companies, must be proactive and engage with project leaders right now.”

The World Bank expects Uganda to grow at a rate of over 10 percent per annum from oil production and related activity, sending a message to investors that there are immense opportunities for comparatively high returns in Uganda’s oil and gas sector, despite the current challenges of the COVID-19 pandemic.