Uganda the key in East Africa’s oil-driven energy revolution – By Hannah Waddilove, AKE Group

An oil rig is readied for production in Uganda’s Lake Albert

But political instability and poor regulation could herald appearance of ‘resource curse.’

In January 2009 Heritage Oil, in partnership with Tullow Oil, announced that exploration on concessions in the Lake Albert Basin in Uganda contained over 2bln barrels in reserves, far outstripping the commercial viability threshold. The Lake Albert find has enhanced foreign investor confidence in eastern Africa’s energy potential, while for Uganda, it promises to boost its heavily aid-dependent economy.

Despite the euphoria, prospects for Uganda’s oil industry are off to a rocky start. With a frail regulatory environment, oil politics disrupting Uganda’s parliament, and insecurity (both internal and external) threatening the oil-rich border regions, investors are warned that Uganda is showing signs of the so-called “˜resource curse’, with ensuing political and security risks.

Border insecurity

When Museveni was recently criticised for spending around $US780m on six SU-30 MK2 Russian-made fighter jets, depleting national reserves, he claimed that the purchases were critical to secure oil investments, citing “˜unfriendly neighbours’.

An increasing number of attacks by armed gangs around the Uganda-DRC border do present potential problems for the industry; the border cuts straight through Lake Albert while its shores on both sides run along the Albertine Rift where the majority of the oil has been found. Sporadic skirmishes between Uganda and DRC government forces, militias, and local people have erupted in the Lake Albert area since Heritage hit oil there in 2006. Over 100 people have been kidnapped in this area in attacks linked to fights over ransoms, minerals and oil. The most recent attack on the border town Mutungo on 2 August by the Mai-Mai militia displaced 70,000 residents.

The most persistent oil security problems however are likely to be internal. Several land disputes have already been sparked in the oil-rich Bunyoro region by the activities of land speculators, with complaints by farmers that compensation for the destruction of crops was insufficient (after the government lowered the rates earlier this year) or were not paid at all. Public anger and anti-government riots are on the rise in Uganda, and disputes between landowners, IOCs and the government are likely to intermittently spill over into violence.

Oil politics

Uganda is not set to produce oil until 2015, and yet the limitations of its frail regulatory environment, compounded by the Ugandan government’s inexperience, are already apparent. The on-going dispute regarding Heritage’s supposed capital gains tax debt to the government is indicative of this. This sporadic tax demand reflects governmental disarray, as well as irritation over a deal that saw President Museveni trumped by corporate know-how. Existing income and tax laws are clearly inadequate for Uganda’s burgeoning oil industry and the government is increasingly demonstrating that it does not understand the unique nature of the sector.

Recent claims that Tullow Oil made corrupt payments of US$22.59mn to Uganda’s Foreign Minister, Sam Kahamba Kutesa, and other state officials have been discredited. However, the fact that the allegations were tabled by parliament on 10 October, in a clear aggressive attempt to discredit Tullow, proves that murky oil politics are already posing a threat to Uganda’s industry. In a state of upheaval, parliament subsequently suspended the deal and placed a moratorium on approving oil deals until new transparency laws were passed. This series of events places a question mark over the sanctity of contracts.

New laws have been drafted but not passed and are likely to be subject to Uganda’s trademark legislative delays. Despite this, it is possible that the US$2.9bln agreement that will enable French Total and Chinese CNOOC to obtain Tullow’s 33 per cent stake in Blocks 1, 2, and 3A has gone through, with confusing reports coming out of Uganda’s parliament but no local media coverage. If the deal has been approved behind closed doors, the ruling party will meet with strong parliamentary opposition, likely to cause further disruptions to the industry. A local activist group has also already filed a suit against the government and Tullow oil at the constitutional court, deeming a premature go-ahead of the deal a legal violation.

Political intervention in commercial transactions is already a reality in Uganda. Museveni has also started to demand changes to the three main production sharing agreements. In September he attempted to eradicate a “˜stabilisation clause’, so as to allow the companies to be taxed more heavily in the future. Tullow reportedly offered to uphold stricter environmental standards but stood firm over the risk premium. Museveni is already playing a risky game with the oil companies; across the border in the DRC, political intervention in negotiations has all but frozen work on oil production.

Eastern Africa stands on the cusp of an oil-driven energy revolution and Uganda holds a key position in the regional domestic energy market. But its volatile politics and frail regulation make it primed for the “˜resource curse’. Museveni’s oil motto of “˜Norway not Nigeria’ is not convincing. The absence of an oil-specific revenue framework and oil deals shrouded in secrecy raises the prospect that Uganda is ill-prepared for this ‘revolution.’ Managing revenues and local populations in ways that exacerbate internal insecurity, coupled with a failure to develop a transparent, accountable sector are likely for the short term and present challenges to energy security for Uganda’s burgeoning oil sector.

Hannah Waddilove is the sub-Saharan Africa analyst for AKE Group, a political and security risk firm based in London.

An earlier version of this article was originally published in the Energy Supplement of the Aberdeen Press and Journal, www.pandjenergy.co.uk

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