Journey to oil production mired in uncertainty as govt and oil firms haggle over pipeline

Until recently, the most realistic estimate for when Uganda will start producing oil was 2021. Not anymore

By now, Uganda, Tanzania and the oil companies active in the former’s petroleum sector should have finalised negotiations on the development, construction, and operation of the Uganda-Tanzania crude oil pipeline.

The two governments and the oil companies — France’s Total E&P, China National Offshore Oil Corporation and UK’s Tullow Oil PLC — should also have signed host government agreements, which define the rights and obligations of each of the parties on the proposed $3.5bn oil pipeline.

These processes have however dragged on, and analysts now believe that oil production by 2020, the official target, is no longer feasible.

Uganda is now looking at 2021 to start commercial oil production, but industry sources believe it could even delay further to 2023 or 2024.

The host government agreement, which has to be ratified by the Parliaments of both countries once signed by all partners, also includes a shareholders agreement, project financing agreements and a transportation agreement.

The shareholders agreements sets out the shares each of the two countries and oil companies will hold in the pipeline holding company, PipeCo, which once formed is expected to shape most of the remaining activities of the project planning phase, including the final investment decision.

Sources familiar the ongoing discussions told this website that they have dragged on because the oil companies to trying to “play dirty” by using their financial clout to box the two governments into a tight corner.

In all this, Uganda is the “most bruised” because the pipeline is key to starting commercial oil production.

One issue on which the parties are stuck is PipeCo, the result of which has been the suspension of discussions on the transportation agreement. The oil companies want PipeCo to be incorporated in the United Kingdom with branches in Tanzania and Uganda. This was, however, strongly rejected by Uganda.

Still, some previously contentious issues have been ironed out, our sources said, and the remaining discussions could be resolved soon since the parties understand what is at stake. But even with that optimistic outlook, they are wary of putting a timeline to the ongoing negotiations.

PipeCo will have Uganda through the Uganda National Pipeline Company and Tanzania through the Tanzania Petroleum Development Corporation, and the oil companies as major shareholders.

The shareholders will finance the project’s construction through a mix of equity and project financing, and seek to achieve between 60% and 70% of external debt.

Related: Uganda and Tanzania mull going to international market for oil pipeline financing

The 1,445km heated pipeline will run from Hoima district in Western Uganda to the Tanzanian port of Tanga on the Indian Ocean. It was chosen over a route through North and North Eastern Kenya to the Kenyan coast.

The Tanga route, according to feasibility studies, was deemed the least cost route with a tariff of $12.5 per barrel for Uganda to transport its crude oil to international markets. Other favourable factors were its convenient constructability due to a flat terrain, highest availability, and that it had the lowest environmental footprint.

It also provided the shortest schedule for achieving oil exports — mid-2020.

But some of these factors have changed. In recent discussions, the oil companies had revised the tariff to $18 as recommended by their front-end engineering design studies. Both Uganda and Tanzania rejected the revision.

Uganda and the oil firms are now looking at April next year as the last date at which a final investment decision for upstream projects should be arrived at. This is to allow for an early engineering, procurement and construction process and the finalisation of tenders, as other discussions on the project continue.

The capital expenditure for developing the oil fields is about Shs6.7bn. Activities in this phase include constructing feeder pipes across the fields [in Buliisa, Hoima and Nwoya districts], constructing two central processing facilities, drilling, land acquisition, among others.

Uganda has extended the expected oil production dates four times already. When the discovery of commercially viable oil reserves was first announced at a prayer breakfast on 8 September 2006, President Museveni said that production would start in 2009.

The date was later moved to 2014, 2018, and eventually 2020. This will be pushed back, again.

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