Inadequate infrastructure likely to delay Oil Production—the only hope for highly indebted Uganda

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The first drop of oil from Uganda’s albertine graben is still a mirage as the necessary infrastructure required to facilitate production and routing of the country’s new source of economic pride are yet to be put in place.

Uganda’s oil fields are being developed by Tullow Oil Plc Total SA and China National Offshore Oil Company (CNOOC).

The government of Uganda, where oil was discovered in 2006, said it expects to begin shipping crude within five years. To do that, it must overcome challenges facing other countries in the region like Mozambique and Tanzania, where a lack of finance and technical capacity to build multiple, capital-intensive infrastructure projects is delaying the start of natural-gas production.

“Everything being done in Uganda is for the first time ever, everything can be a risk,” said Will Hares, an analyst at Bloomberg Intelligence in London. “Timetables are prone to slipping, especially in frontier regions. All stakeholders would suffer from project delays.”

 Landlocked Uganda has an estimated 1.7 billion barrels of recoverable oil at fields in the Lake Albert basin that the government expects Tullow, Total and China’s Cnooc Ltd. to start pumping by 2021. The government has estimated it will receive $43 billion of revenue from the resource over 25 years.

-Work Beginning-

Developing the fields to commercial production requires about $8 billion, though engineering design work on the project has “yet to start,” said George Cazenove, a spokesman for Tullow. For production to begin in 2021, Tullow would have to make a final investment decision on the project by 2018, according to Cazenove. The crude would then need to be ferried along a yet-to-be constructed 1,400-kilometer (870-mile) pipeline to the Indian Ocean port of Tanga in neighboring Tanzania. The Ugandan government this week opened a tender for surveys of the route for the conduit.

Uganda expects the pipeline, which is backed by Total, to be completed in three years, according to Robert Kasande, the acting head of the state-run Petroleum Directorate. The government is considering building an airport in the oil region to speed up logistics, he said in an interview Nov. 10.

Total spokeswoman Ahlem Friga-Noy and Cnooc spokeswoman Aminah Bukenya didn’t respond to e-mailed requests for comment.

The development of Uganda’s oil industry has been slow when compared to other sub-Saharan African producers like Ghana, where output started three years after discoveries were made. The Ugandan government took 10 years to issue production licenses to Tullow and Total. In addition, in April it reversed a decision made eight months earlier to route the pipeline via Kenya, deciding to go via Tanzania instead. The challenges of coordinating the cross-border project between Uganda and Tanzania has “substantially raised the probability of a delay,” BMI Research said in an e-mailed note.

-Refinery Talks-

In July, Uganda also halted talks with Rostec State Corp. of Russia to build a $4 billion refinery, postponing the production of refined oil for two years until 2020.

“A multitude of projects that need to be completed significantly increases chances of development bottlenecks,” Jacques Nel, a senior economist at Paarl, South Africa-based NKC African Economics, said in an e-mailed response to questions. “The government has more to lose than oil companies regarding the risk of delayed oil production.”

There is the potential for further “politically driven delays” in Uganda should the government insist that oil production be preceded by the proposed 60,000 barrels-per-day refinery, said Clare Allenson, an Africa analyst at Eurasia Group. Uganda is targeting production of 200,000-300,000 barrels per day by 2021-22.

“Market realities will also likely contribute to delays,” with crude prices having dropped 45 percent in the past two years, she said.

Brent crude, the benchmark for more than half the world’s oil, traded at $44.55 a barrel on the London-based ICE Futures Europe exchange by 10:47 a.m. local time. West Texas Intermediate, the U.S. marker, traded at $43.18 in New York.

“Low oil prices will be a drag on project timelines as operators grapple with a difficult financing environment,” Allenson said.

-The economy- 

The Observer newspaper quoted Central Bank director for research Adam Mugume in June 2016 warning that the highly indebted nation may be compelled to ask for debt-forgiveness if its expected earnings from oil revenue do not trickle in by 2020.

Mugume said the country was “failing to generate enough dollars to finance the interest on debt.”

Uganda’s options were limited to either oil revenue coming on board or asking for debt relief. The worst scenario, he said, was the country could default on its debt obligations if oil does not come on board by at least 2020.

A country defaulting on its loan obligations has serious ramifications. Even before the request for forgiveness is handed in, the country will have to undergo a series of high interest rates of the private sector, which could hurt businesses.

Uganda, which has already been a beneficially of two debt reliefs from the IMF and the World Bank in the financial 1997/1998 and 2000/2001 has seen its debt grow to $9.1bn (Shs 29.9tn) – about 34 per cent of Gross Domestic Product (GDP) according to the observer.

“While some government officials say this debt is still sustainable because it is below the 50 per cent of the GDP threshold for East African countries, Uganda’s issue is that it has simply borrowed more than it can pay back” observer reported.

In the 2016/17 budget, finance minister Matia Kasaija announced that the country would pay a whopping Shs 6.7tn for debt financing. This money will be borrowed as Uganda may not be able to use taxes to pay it off.

The tax man, Uganda Revenue Authority is expected to collect Shs 12.9tn the next financial year that starts on July 1, which, clearly, is not enough to finance the Shs 26.3tn budget.

1 USD = 3588 Uganda shillings

Credit: Bloomberg, Observer