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Cablegate: New Discoveries Confirm Uganda Oil Potential

VZCZCXRO4164
RR RUEHGI RUEHRN RUEHROV
DE RUEHKM #1648/01 3590537
ZNR UUUUU ZZH
R 240537Z DEC 08
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 1015
INFO RUCNIAD/IGAD COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 KAMPALA 001648

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EPET ENRG EAID PGOV UG
SUBJECT: NEW DISCOVERIES CONFIRM UGANDA OIL POTENTIAL

REF: A) KAMPALA 1100, B) KAMPALA 413, C) KAMPALA 393

1. (U) Summary: Oil companies in Uganda have announced new oil
discoveries in western Uganda which appear to guarantee that the
country will be able to sustain a commercial oil industry over the
long term. Industry executives, elated by the news, assert the find
will justify Uganda spending the billions of dollars necessary for
infrastructure investments to accommodate the industry. The new
finds show production potential at some 200,000 barrels of oil per
day (bpd), and oil firm executives believe Uganda has the potential
to export $5 billion worth of oil annually when full-scale
production begins in 2011. This would make oil the largest Ugandan
export by a factor of 20 and more than double current exports. The
potential creates massive challenges for the Government of Uganda
(GOU), which must immediately begin planning new infrastructure and
revenue management systems to handle incoming resources if it is to
avoid the "resource curse" witnessed in other developing economies.
End Summary.

------------------------------
A Top Sub-Saharan Oil Producer
------------------------------

2. (U) Heritage Oil and Tullow Oil announced in mid-December large
new oil discoveries in the Block One exploratory area, located at
the delta of the Victoria Nile on Lake Albert, western Uganda. Each
owning 50% of the equity in the block, Tullow and Heritage said the
finds confirm Uganda is capable of sustaining its oil industry over
the long term and can justify the billions of dollars oil companies
and the Government will have to invest in infrastructure
investments, including new roads, rail lines, and possibly an oil
refinery. "With many prospects still to drill in the Butiaba region
and across the basin, we are now certain that the commercial
threshold for development should be exceeded," Tullow Chief
Executive Aidan Heavey said in a statement.

3. (U) Tullow Oil Country Director Brian Glover announced on
December 13 that he believes Uganda has the potential to export $5
billion worth or 200,000 bpd of oil annually when full-scale
production begins in 2011. It is the largest estimate provided yet
of Uganda's oil potential. If it is accurate, oil revenues will
transform Uganda's economy, more than doubling total exports of $2
billion, and, according to Glover, creating jobs for 10,000
Ugandans. The finds, announced on December 11 and 16, mean Uganda
now has between 400 million and 500 million barrels of proven
reserves. Estimates of potential reserves run upward of one billion
barrels, an amount that could make Uganda one of the top three
sub-Saharan African oil producers, behind Angola and Nigeria.
Equatorial Guinea, the current third largest producer, has proven
reserves of 1.1 billion barrels of oil (bol). It earned $3.3
billion in exports in 2007.

4. (U) Oil firms have thus far invested $500 million in Ugandan oil
exploration in the five blocks that have been licensed to four firms
in the Albertine Graben, an ecologically sensitive region running
between Uganda and the Democratic Republic of Congo (Note: A
"graben" is a depressed segment of earth surrounded by two raised
faults. End note.).

5. (U) Before these new finds, Government and industry sources were
uncertain if Uganda had the volume of oil necessary to make the
industry profitable. Tullow Oil had already agreed to produce 4,000
bpd for an early production scheme that would begin in late 2009.
This oil production will go entirely into a topping plant which
would in turn supply heavy fuel oil for a 50-85 MW power plant for
Uganda's electricity grid. But firms were uncertain what would
happen with any oil beyond that amount. Because the oil is waxy and
is expensive to produce, transport and refine, industry sources said
only proven reserves of at least 400,000 million barrels, capable of
producing at least 40,000 bpd, would make the fields commercially
viable. Tullow oil believes the new discoveries of Block 1 and 2
(including the Buffalo, Warthog and Giraffe fields) hold at least
150,000 million barrels. Heritage Country Manager Bryan Westwood
says he is certain that the Kingfisher field in Block Three, drilled
in October, can also produce 40,000 to 50,000 bpd. "Other large
fields in the lake have not even been drilled yet," said Tullow's
Glover. Other oil company executives in Uganda were elated by the
recent discoveries. "This news is incredible. The field is proving
stronger than expected," says Marylin Hill, Country Manager of
Neptune Petroleum. "It's good to know now that we have good
reserves and we definitely have a sustainable industry." Tullow and
Heritage have drilled 17 consecutive successful exploratory wells to
date.

------------------------
Secrecy... and Headaches
------------------------

6. (SBU) To deal with this expected oil windfall, the Government of
Uganda is due to pass a Petroleum Act and a Revenue Management Act

KAMPALA 00001648 002 OF 003


in early 2009. The Cabinet has not shared drafts, however, with
either Parliament's Natural Resources Committee, industry, or civil
society, a cause of significant concern for those with an interest
in the industry. Minister of State for Energy and Mineral
Development Kamanda Bataringaya said the Revenue Management act will
include a "Heritage" or sovereign trust fund, which will disburse
oil revenues for current and future infrastructure and development
projects. The laws will also include provisions for a National Oil
and Gas Company, which some industry experts think is unnecessary,
and an oil and gas regulator. Officials state those bodies would be
established also in 2009. (Note: Ugandan officials, including
President Museveni, have visited Nigeria to study its oil sector,
paying close attention to the Nigerian National Petroleum Company
and its subsidiaries. End Note.)

7. (SBU) Another key challenge is planning infrastructure when
financing has become more difficult due to the falling prices of oil
and the global credit crunch, executives state. Tullow told GOU
officials on December 22 that it needs to renegotiate its MOU with
the government to build the topping plant to refine just 4,000 bdp,
as the plan is not profitable at current prices. In addition,
Ugandan officials and industry are squaring off over Uganda's desire
to build a large refinery to process up to 100,000 bpd and export
products all over the region. Tullow's Glover, when asked about
this plan, laughed. "A refinery of that sort is going to take a
long, long, long, long time," he said. Oil companies believe Uganda
should invest in roads, rail and perhaps a pipeline network to
export the crude and import refined product.

----------------------------
Stalled Cooperation with DRC
----------------------------

8. (U) Meanwhile, Uganda and the DRC have made only modest progress
towards implementing an agreement reached in June 2008 to physically
demarcate the border. That agreement, which also called for joint
revenue sharing of common oil fields, was seen as a breakthrough in
relations between the two countries. (Note: The joint demarcation
team got off to a slow start, and is highly dependent on outside
expertise, slowing progress. End Note.) Tullow and Heritage
purchased exploration rights from DRC for 6,000 square kilometers of
land, but the agreement remains in doubt because DRC officials
refuse to provide a drilling license. Tullow and Heritage say DRC
officials sold off the same area to other firms. Instability in the
area also makes exploration there difficult at this time. In August
2007, DRC soldiers fired on a Heritage boat conducting seismic
testing on Lake Albert, killing a British employee. DRC officials
claimed Heritage security guards had fired first and that the boat
had entered DRC territorial waters.

--------------------------------------------- ---
Assistance and Advice -- Solicited and Otherwise
--------------------------------------------- ---

9. (U) A number of foreign donors, non-governmental organizations
and others are gearing up to provide assistance to the GOU. The
largest of these is the Government of Norway (GON), which will
conclude a three-year $2.8 million assistance program in June 2009
to assist the GOU with energy sector resource, revenue and
environmental management. Norwegian energy experts currently work
inside the Ministry of Energy, and had a strong hand in the writing
of Uganda's Oil and Gas Strategy, approved by the Cabinet in early
2008, and in the draft legislation soon to go to Parliament. The
laws, calling for a national oil company and a trust fund for
infrastructure and social investment, mimic much of the structure
that exists in Norway. The GON is planning a new five-year, $7.75
million grant beginning in 2009.

10. (U) The U.S. Mission has followed the energy sector closely,
with assistance focusing upon Lake Albert security and environmental
impacts mitigation. The Department of Defense is developing a
$150,000 program beginning in 2009 to train the Ugandan military to
enhance security on Lake Albert. USAID provided the
non-governmental organization (NGO) Wildlife Conservation Society
with a $5.1 million grant which focuses, among other environmental
issues, upon mitigating the environmental impacts and building
capacity among with local environmental groups. Post has also
requested an oil revenue management expert to conduct a speaking
tour.

11. (U) Beyond this assistance, the World Bank has urged the GOU to
sign on to the Extractive Industry Transparency Initiative (EITI), a
non-binding program that has much support among civil society. The
GOU has thus far refused to sign on to EITI, however, saying only
that it agrees with the principles of EITI and that these principles
will be incorporated into future domestic laws. Other NGOs focusing
on the oil sector include the African Institute for Energy
Governance, Transparency International and International Alert.

-------

KAMPALA 00001648 003 OF 003


Comment
-------

12. (SBU) The recent discoveries heighten expectations while at the
same time deepening the challenges presented to Uganda as an
incipient oil producer. First, the Government needs to develop its
new revenue management and legal structure to handle a massive
influx of oil dollars. The fact that oil bills remain cloaked in
secrecy bodes ill for a country known for high levels of corruption
and mismanagement. Whether oil becomes a spur for sustainable,
equitable economic growth or a "resource curse" hinges on decisions
that will be made in the near future. The implications for the
country's development are huge.

13. (SBU) Further, the GOU -- which already lacks the capacity to
build infrastructure to maintain decaying roads and an insufficient
electrical system -- will need to build yet more infrastructure
immediately in western Uganda just to accommodate the oil industry.
It must do this while finding a way to protect an extremely
sensitive ecosystem, where many of Uganda's national parks lie.
Beyond this, if the GOU plans to build a refinery, as officials have
stated, planning, bidding and arrangements for financing will have
to begin now, even though the environment for such a project will be
more difficult due to the slump in oil prices and the dismal global
financial climate. Moreover, the actions of corrupt government
officials, already implicated in a scandal to steal a plot of land
from an American citizen to be used for Uganda's main pipeline
terminal, has caused the project's commencement to be delayed by
over one year at great cost. End Comment.

BROWNING

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