Kampala, UGANDA
Work on a multibillion-dollar Ugandan pipeline project has stalled in the wake of continued disagreements between the government and its three foreign partners, threatening the east African country’s hopes of becoming the world’s next oil producer.
France’s Total, UK-listed Tullow Oil and the China National Offshore Oil Corporation jointly control three oil blocks in Lake Albert, a giant stretch of water on Uganda’s border with the Democratic Republic of Congo.
Ugandan officials have long hoped that investment in Lake Albert — home to Africa’s fourth-largest oil reserves — would accelerate economic growth in the region from 2020.
But 13 years after the first discoveries were made, Total said it was stopping technical work on the oilfield and pipeline project following the collapse of a deal to buy additional equity from Tullow and the failure of talks with the Ugandan government to agree legal terms for the investment.
Oil executives said the decision to stop work had been discussed with the government but Uganda’s oil minister, Irene Muloni, said she had not been informed and denied the project had reached an impasse.
“They have not given any formal communication [of an intention to cease work],” Ms Muloni told the Financial Times.
“The discussions on the various issues are ongoing and we hope to reach an agreement very soon.”
The pause in activities after years of negotiations is the latest setback for a complex project whose upstream development costs are estimated at $10bn and which requires the construction of a 1,443km electrically heated pipeline — the longest in the world — to get the oil from landlocked Uganda to the Indian Ocean.
Tullow confirmed the commercial viability of the oil blocks in 2009 but a final investment decision has been delayed multiple times.
Total told the Financial Times that the partners could make no further progress until they had “a clear and stable legal framework and clarity on the project shareholders”.
“Consequently, we are obliged to scale down certain technical activities associated with the project, whilst keeping personnel mobilised to agree on [the] overall business framework,” a Total spokesperson said in a written response to questions.
Total and Cnooc had each agreed to acquire an additional 11 per cent in the project from Tullow in 2017 in a $900m deal.
That would have allowed the smaller Tullow to reduce the amount it needs to contribute to fund the project but the deal collapsed in August following a disagreement with the Ugandan government over taxes.
Tullow has said it will look for another buyer to reduce its stake from a third to 12 per cent. But this could be difficult, according to Jon Lawrence, an analyst with Wood Mackenzie's sub-Saharan Africa upstream team.
“Our view is that other buyers are likely to be dissuaded because a potential buyer knows that this deal is a challenge to close,” Mr Lawrence said.
Uganda and the partners disagree on other legal and tax points too, he said. “There is a fundamental capital gains tax issue on this project but also a raft of other issues [to be resolved] before an investment decision can be made.”
Tullow declined to comment on the decision by Total to scale down activities but said it remained confident Uganda would become an oil producer even though the final project decision had been delayed. Cnooc didn’t respond to request for comment.
Uganda is not alone in east Africa in struggling to realise its oil production ambitions. Kenya, Uganda, Tanzania and Mozambique have all made commercial hydrocarbon discoveries in the past decade and struggled to advance their respective projects quickly.
“If we look historically at the timelines that have been proposed on those projects there has been an over-optimism in the market both about the ease and time needed to develop east Africa’s big discoveries,” said Wood Mackenzie’s Mr Lawrence. “These are not simple developments . . . It’s a big ask for any new oil and gas producer to get all of the necessary elements in place.” - FT
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