Oil Production in Uganda: Is the Nation Ready?

Oil Production in Uganda: Is the Nation Ready?

As Uganda warms up for oil... the prospects and implications.

By Gerald Rulekere
more from author >>
First published: September 15, 2006

Sections in the article:

  • Introduction
  • Good oil quality
  • Where exactly is the oil?
  • National oil and gas policy
  • Where to refine the oil from
  • How will oil benefits be distributed?
  • Uganda's oil in the Global perspective
  • Environmental concerns on oil
  • Possible oil related conflicts
  • Political dimension to possible oil conflict
  • Oil may lead to neglect of sectors like Agriculture
  • Bunyoro's interests in oil
  • People can provide services to the oil sector

    Also read: Company Profiles: Heritage Oil Corporation Holding Ugandas Oil Dream

    Hardman Resources: Oil in Uganda
    Hardman Resources: Oil in Uganda

    Introduction (Back to top)
    The prospect Uganda becoming an oil producing country soon has caused a lot of excitement among many Ugandans. Even the government has boasted of the possibility of import savings of about a billion dollars (almost 2 trillion shillings) a year if the country's oil needs are met from domestic oil supply, freeing much needed foreign exchange, and even of the possibility of Uganda becoming a net oil exporter.

    This follows the confirmation Hardman Resources, an Australian drilling company working in conjunction with Tullow oil from the United Kingdom, that Uganda has the capacity to produce oil to a tune of 10,000 barrels per day.

    The world's current oil consumption stands at 80 million barrels of oil per day having gone up from 65 million bpd over the last five years. This jump in demand is a result of China and India's rising demand for oil. Locally, Uganda's demand for oil products is also rising at a rate of 6 % per day. Last year, Uganda consumed 700,000 cm of petroleum products worth $250 million. Per day, the country's fuel needs stand at 50,000 cm (1,000 litres make up 1 cm). Per capita consumption of petroleum in Uganda has grown from 16 litres in 1991 to 24 litres at end of 2004 and that figure must be higher now.

    At the cost of $70 (about 125, 000 shillings) a barrel, the average current price, 4,200 barrels a day from Waraga 1 would generate about $294,000 (Shs 546m) a day and Shs 199.5 bn annually just from one well.

    Good oil quality (Back to top)
    Simon Potter, Hardman's Chief Executive Officer says the oil found at Waraga 1 well is light but waxy, with a low gas to oil ratio and that "pressure build-up tests" also showed the petroleum has good permeability.

    The company has so far drilled three exploratory wells-Waraga 1, Waraga 2 and Mputa-1-and they have all showed vast traces of petroleum deposits. Potter contends that although the oil field does not seem connected between various wells, it is still an extensive and significant resource.

    According to information available on their website, this demonstrates the oil's ability to flow in the reservoir and is a determinant of how much oil a well can produce. Thick oil on the other hand may necessitate numerous wells to be drilled for exploitation, which spikes production costs and in the worst cases such oil may be declared unviable and abandoned.

    Where exactly is the oil? (Back to top)
    Reuben Kashambuzi, the Commissioner for Petroleum Exploration and Production Department at Entebbe says that four companies have been licensed by government to drill and prospect for oil. They are Neptune Petroleum [now Tower Resources] (Rhino camp basin), Heritage Oil and Gas Limited (Pakwach basin and Semliki basin) and Hardman Resources Limited and Energy Africa (Lake Albert basin).

    Heritage Oil & Gas: Oil in Uganda
    Heritage Oil & Gas: Oil in Uganda

    The four companies are exploring Waraga I, Turaco I, Turaco II, Turaco III, Mputa I and Mputa II as the current oil exploration sites. The oil exploration activities started in Uganda about five years ago.

    According to the Ministry of Energy and Mineral Development, four of the six exploration areas are licensed and six wells have so far been drilled in two of the four licensed areas.

    Block 2, which was licensed on October 8, 2001 to Hardman Resources and Tullow Oil of UK (50% shareholding each), has 4,675 sq km and stretches over Hoima, Kibaale and Masindi districts.

    The Albertine Graben, the area that forms the country's petroleum exploration frontier, has five prospecting blocks and only three are currently licensed. Canada's Heritage Oil and Gas and Tullow Oil are conducting drilling in the two other exploration areas.

    Heritage Oil also found vast oil in Turaco well located in Semliki Basin (Block 3) but was contaminated with carbon dioxide. Even then, experts say that that carbon dioxide has plenty of use and can be commercially exploited. In certain cases it's pumped into wells that have insufficient pressure to enable oil to flow to the surface.

    "Frankly, now Uganda has moved to another level and internationally we can now start speaking with firm confidence," Kashambuzi asserted in an interview.

    Kashambuzi cautions though that even with the new high watermark reached in Uganda's petrol power ambition, there are still more tests to be conducted and data analyses to be done before the country can embark on producing oil.

    The confirmation of oil wells in mid western Uganda is already generating a lot of national expectations and concerns. There are a lot of informal debates all over the country as to how the oil will be exploited, sold and benefit the country and especially the people in Bunyoro kingdom who have made specific demands to benefit from the oil.

    National oil and gas policy (Back to top)
    As a result of the oil prospects, the government has decided to expedite development of a national Oil & Gas Policy to guide the country in exploitation of its petroleum resources.

    The minister of Energy and Mineral Development, Daudi Migereko says the national oil and gas policy will be ready soon with provisions on payment use and management of petroleum revenues.

    Hardman Resources: Oil in Uganda
    Hardman Resources: Oil in Uganda

    Where to refine the oil from (Back to top)
    With confirmation of greater quantities of oil deposits and more definitive geological data analyses, the government will commence negotiations with the companies on some of the critical issues like whether the oil should be refined in Uganda (if the country and the companies can afford to construct a refinery), or exported as crude for refinement in, say Kenya, which some people say is a big possibility.

    "We should be thinking along the lines of refining the oil here in Uganda and exporting the finished product. The idea of governments exporting crude oil then using the revenue from it to import refined oil sounds more like selling a live chicken in order to buy a cooked one!" says Judy Auma in article for the African Executive.

    Auma adds that as Africa becomes an increasing supplier of global energy, it should develop capacity to provide the now scarce industrial skills. "The continent should work towards Africans testing, exploring, drilling as well as refining oil. That is when the big bucks will start rolling, ushering Africa to First World status," she says.

    How will oil benefits be distributed? (Back to top)
    Eunice Akullo, a mineral consultant says the discovery of Oil in Uganda has a good change of leading to the development of the country. "Oil being a rich natural resource should be able to increase the returns to the country in terms of Gross Domestic Product. Uganda's returns from exports should be able to increase drastically," she says.

    She is however, not sure whether the proceeds will be evenly distributed among the population of the people of Uganda and whether those living within the areas of oil reserves will benefit at all.

    "Having foreign investors mine the oil is good enough but what are the chances that in the end, Uganda will not suffer environmental problems at a cost of most of the proceeds being repatriated back to the investors' country?" she asks in an email post.

    Akullo says for Uganda to increase the benefits arising from the oil exploitation, foreign investors in the oil exploitation should be required to float shares for the corporations to allow Ugandans to buy up to 50% of the shares or even stipulate that up to 50% of the employment opportunities in the oil industry should go to Ugandans.

    But such measures are unlikely since Uganda, struggling to attract foreign investors to the country is known for instead giving as many incentives to investors as possible.

    Migereko dismisses reports that the oil companies will take 70% of the oil revenues. "The government will get a royalty, then the company will recover their costs up to 50-60% and what is not recovered is carried forward to subsequent years. The remaining profit from the oil will be shared between government and the oil company. All these sharing ratios and royalties are negotiations and contained in the Production Sharing Agreement between government and the oil company," Migereko reveals.

    He says the two companies have so far spent a total of about $80m (about 150b Uganda shillings).

    Uganda's oil in the Global perspective (Back to top)
    According to Aloys Tegera, the manager of the Pole Institute, Africa is becoming increasingly interesting for the global oil industry.

    The confirmation of oil in mid western Uganda puts the country with Nigeria, Angola, and Chad among the latest black African countries to join the oil producing countries of the world. World consumption of oil products is projected to rise from around 70 million barrels per day today to 120 million by 2030 a rise of 55%.

    While two thirds of known global oil reserves are in the Middle East, production there would have to be doubled to satisfy the rise in demand, and this would increase global dependence on that part of the world to a politically unacceptable level. Thus the major international oil companies are currently engaged in finding new sources of oil.

    Here, Africa is in the forefront. Currently, the continent provides slightly over 11% of world oil production, 14.3% of US oil imports and 23.1% of Western Europe's, according to British Petroleum figures for 2002. US imports are due to rise substantially, and US experts estimate that Africa will provide a quarter of US oil imports by 2025.

    Environmental concerns on oil (Back to top)
    Oil exploration is thus taking place with gusto in African countries including Uganda and the DRC to find oil deposits. But at what environmental cost is this being done?

    Before undertaking any exploration programme, Migereko says companies are required to carry out an environmental impact assessment and submit a report to the National Environmental Management Authority (NEMA) for approval. He says the results of the seismic surveys in the areas of exploration have been minimal as areas of exploration have totally recovered their vegetation in less than a month.

    An environmental assessment for the Uganda Wildlife Authority carried out by Ugandan consultant Yakobo Moyini of Environmental Management Associates in 2002 concluded as Migereko says that environmental impacts of test drilling in the Semliki flats "are expected to be limited", but that additional drilling in the protected areas could cause damage such as "a reduction on underground fluid pressures leading to a depression (subsidence), which causes flooding during rainy season", discharges of oil and also of water and toxic chemicals used in drilling.

    "Uganda Wildlife Authority can basically live with the activities of the test drill. With proper mitigation measures, the damage on biodiversity in the protected areas can be minimized. On the other hand, the future of tourism in the area is likely to be impaired, but this too may be a temporary effect. The caveat on proper mitigation measures requires closer scrutiny and is premised on effective monitoring and enforcement," the assessment concluded.

    Possible oil related conflicts (Back to top)
    While the benefits from oil are obvious, the Prime Minister of Bunyoro-Kitara kingdom, Byenkya Erisa Kagoro appeals to government to extend adequate social services to the mid western Uganda kingdom, as a proactive measure against oil related clashes.

    Byenkya says that people in the area may chose to antagonize the oil business as happens often in the Niger Delta in Nigeria, if adequate social services like health, education, and infrastructure are not extended to the region, which is still relative underdeveloped.

    He told journalists in July that some people in the area may not feel well to see their natural riches going to benefit other people while they live in abject poverty.

    The interim speaker of Bunyoro Kitara Kingdom supreme council (Orukurato) Kiiza Alibankoha Emmanuel says that the kingdom is concerned over recent reports that the discovery of large oil wells in the Albertine rift valley could displace hundreds of people inhabiting the area because the government plans to construct an oil city in Buseruka Sub County, Hoima district.

    That is why even in Bunyoro, the discovery of oil is causing excitement over prospects for substantial economic development, but other people are concerned about the purchase of land near the oil wells on the shores of Lake Albert. Reports indicate that local council officials are reaping huge sums of money from the illegal sale of land in the area, with allegations that top army officers are leading the chase to buy land in the area.

    Byenkya also says government must ensure that locals who will be affected by the oil industry are adequately compensated. He says the government should also give a fair percentage of the revenue from the oil proceeds to King Solomon Gafabusa Iguru's Bunyoro kingdom, which he says have known for long (since the 1930s) about the existence of oil in Bunyoro and have been urging the central government about it's existence.

    Despite the lingering fear that local communities may loose land, Migereko says much of the exploration areas are in gazetted community wildlife conservation areas, game reserves and national parks.

    "The areas of exploration may be big, however when it comes to production, very small areas are required. A production well may require not more than an area of 100 by 100 metres, while a production facility may require 1 square kilometre of land. If the sites will be near settlements or in people's land, the necessary compensation will be made," Migereko says.

    Hardman Resources: Oil in Uganda
    Hardman Resources: Oil in Uganda

    Political dimension to possible oil conflict (Back to top)
    By now, it is common knowledge that the prospect of oil has forged a powerful nexus of interests in Uganda. Apart from claims of Bunyoro to benefit from oil, many of the regions from the Albertine region also say while the oil may be exploited in Bunyoro, it also exists from their areas. People in Tooro kingdom; Kasese and Bundibugyo districts, as well as western Lango and western Acholi areas have also been quick to claim oil benefits.

    Other than the regional or tribal sentiments on oil, many commentators have always believed that the oil confirmation is set to bring a more volatile political situation in Uganda.

    There are fears that the current government leadership may be reluctant to get out of power in order to oversee and benefit from oil prospects, while there are strong concerns that armed rebellion is set to increase in Uganda now that there is a bigger "national cake" to fight for. As a matter of fact, the ADF rebels have resumed attacks from neighboring Democratic Republic of Congo, with the government saying other rebels like the People's Redemption Army are also organized to destabilize Uganda from the DRC.

    It is for this reason that some people have sighted that the transformation of Uganda into an oil economy may strain the polity of Uganda, which has witnessed civil war after civil war since gaining independence in 1962.

    But the major issue is that of sharing of costs and benefits of oil development, which is key in all oil producing countries. In Uganda, this is not even close to being addressed.

    "From our point of view, economic reconstruction in the Great Lakes can only take place in a beneficial manner if it comes from the bottom up, deriving from local economic activities and interests. This does not preclude the exploitation of the region's natural resources; it means that the local population should be enabled to take decisions about such exploitation and should enjoy its fruits. What is clear is that if oil exploration is ever to proceed there must be another way, than armed conflict, to include the expression of local interests," says a Pole Institute study on the prospects of oil in the Great Lakes region.

    Oil may lead to neglect of sectors like Agriculture (Back to top)
    For some people, like the leader of the opposition, Prof. Ogenga Latigo, the agriculture sector might be neglected following the exploitation of oil.

    Prof. Ogenga Latigo says the discovery of oil is likely to see Uganda starting to import food. He says in countries like Nigeria, Ghana and Malaysia, agricultural sectors collapsed after the countries started focusing on oil production. Prof. Latigo wants government to put in place mitigating measures to avoid such scenarios once the country starts depending on the lucrative oil business.

    The Prime Minister Prof. Apollo Nsibambi says Latigo is right, but government will systematically plan and avoid such neglect of some sectors from happening.

    He says a big percentage of Ugandans and the economy depend on agriculture and therefore the government cannot allow the exploitation of oil to overshadow agriculture.

    Bunyoro's interests in oil (Back to top)

    H.R.H. Solomon Gafabusa Iguru I, 27th Omukama (king) of Bunyoro-Kitara
    H.R.H. Solomon Gafabusa Iguru I
    27th Omukama (king) of Bunyoro-Kitara

    The kingdom's minister of Mining and Industry, George Kyaligonza early August left on a tour of several oil producing countries including Norway, Russia, Britain, Nigeria, Chad and Angola. According to a press statement he issued before leaving, the visit was intended to give him an insight on operations of the oil industry and how local communities benefit from oil revenues among other reasons.

    The minister says that the oil companies are expected to practice high social responsibility. Migereko says that the companies are working with local councils in the area to employ local people in the oil sites, with over 400 employed during seismic surveys in the last six months. He says 50-100 people have been employed during exploration drillings so far.

    "Local companies that provide services such as catering, clearing and forwarding, providers of heavy machinery, chartered fights and security continue to benefit through provision of services during exploration programmes," Migereko says.

    "There has also been extension of infrastructure such as roads and communication as well as provision of clean water from boreholes to the communities where exploration is being undertaken," he adds.

    Hardman Resources: Oil in Uganda, Drilling Manager meets with local communities
    Hardman Resources: Oil in Uganda
    Drilling Manager meets with local communities

    People can provide services to the oil sector (Back to top)
    The Woman MP for Hoima district, Beatrice Byenkya says that while the oil may present good prospects to the people of the region, the people of Bunyoro should continue their usual tasks and income generating activities instead of expecting to get money from oil.

    She warns people in the area of the likely impoverishment they will face if Banyoro become lazy expecting that they will be looked after by money from oil proceeds.

    Byenka calls upon all people in the area to engage in productive ventures where they can earn an income, especially supplying food and other items to tourists who visit the region and to people who will be working on the oil projects.

    The Second Deputy Prime Minister and Minister of Public service, Henry Muganwa Kajura also says people in Bunyoro kingdom should instead start business ventures that will benefit from the oil exploitation set to start in the area.

    Kajura says that while he supports demands by Bunyoro kingdom to be given a percentage of the oil revenues, he believes the local people can benefit more from the presence of oil in the area by starting up service businesses to serve the oil sector.

    Kajura says people can start housing, catering and other services that will be needed by people who will be working at the oil refinery.

    "Even the local people can benefit if they target the business that this oil will come with. You can grow food which will be bought by people working on oil," he says.

    Kajura says that he will work with other ministers from Bunyoro to ensure that people affected by the oil exploration and exploitation, including the Bunyoro Kitara kingdom, are adequately compensated by government as provided by the constitution.

    He says that the 1995 Uganda constitution provides that people in an area where a rich natural resource is found should be given some of the revenue from the resource and all people affected by the resources' exploitation should be adequately compensated. All these are plans and agitations that many are hoping will be fulfilled for Uganda to benefit from oil.

    Also read: Company Profiles: Heritage Oil Corporation Holding Ugandas Oil Dream

    Related links:

  • Uganda's latest exploration successes could be positive sign
  • Uganda in high hopes for oil production
  • Heritage Oil Signs PSA for Blocks in Democratic Republic Congo
  • Hardman upbeat over Ugandan well
  • Uganda's latest exploration successes could be positive sign
  • Good Oil Conference

  • By Gerald Rulekere
    more from author >>
    First published: September 15, 2006
    To learn more about Ultimate Media Consult go to www.ultimatemediaconsult.com.

    Gerald Rulekere is a Journalist and member of Ultimate Media Consult. He has written and published extensively on business and gender issues and been writing for Ultimate Media Consult (U) Ltd for the last two years. A professional and graduate journalist, Rulekere is always looking for an opportunity to better his writing especially for international media.