Ugandan officials say fears that Kenya’s oil discovery might steal the regional limelight from Uganda are unfounded
When Kenyan Energy ministry officials showed journalists samples of oil discovered in Turkana County late last month, there were big ripples across the world, not least in Uganda.
While visibly excited officials described the find as “a promising first step” to the country’s oil-producing future and as the start of a multi-well exploratory drilling campaign to be undertaken over the next few years, industry analysts in Uganda are wary of the impact the discovery might have on Uganda’s own oil development timeline.
Publicly, government officials are adamant that there will be ‘zero’ impact.
Speaking at a recent media briefing on developments in the oil sector, top officials at the Ministry of Energy and Mineral Development, said whereas they understood the excitement of their Kenyan counterparts, the discovery was just “the first step in a long and tortuous journey.”
But given that Kenya’s oil sector is at a more advanced stage in terms of regulatory framework; with a refinery at Mombasa; an oil pipeline to Eldoret and another planned from Lamu Port to South Sudan and Somalia; railway and other infrastructure already in place; the worry that Kenya could upstage Uganda’s frontline status in oil development in Eastern Africa, is showing through the polite statements.
While Uganda’s oil industry has made remarkable strides in the past decade, a regulatory framework is yet to be set up, with negotiations for the development of an oil refinery still in early stages. Also, there is a legitimate worry that Ugandans could hit the panic button and hurriedly put in place weak oil management laws that would further disadvantage the country’s interests.
But asked if Uganda should be worried about being overtaken by its neighbor, Dozith Abeinomugisha, principal geologist in the Energy ministry, said Kenya had not even established if its oil deposits were commercially viable. It is common, he said, for a preliminary discovery to be abandoned because it does not amount to anything commercially viable on further tests.
“I think Kenya is now at the stage we were at about 10 years ago,” Abeinomugisha said.
“It is still a long way off because a lot of work has to be done to ensure commercial viability of their oil deposits. When that is ascertained, exploration and eventually production can then start. That process takes many years.”
London-based Tullow, which made the Kenyan discovery, is the lead developer in Uganda’s oil-rich Lake Albert Basin, but recently sold 66.6% of its assets in a farm-down worth US$2.9b to French oil company Total and the Chinese National Offshore Oil Corporation PLC (CNOOC). The trio has been granted licenses to develop EA1, EA2, and Kinywataba prospect/Kingfisher fields respectively, all of which are believed to contain about 2.5 billion barrels of crude oil. Commercial production for HFO power generation is set to start next year, and full-scale oil production in 2016.
A deficiency for Uganda is that without a regulatory and legal framework in place, the oil industry was managed by presidential directive until February, when the government was forced by a resolution of Parliament to table three oil bills after allegations of corruption and mismanagement in the sector. The bills are now undergoing scrutiny by the Natural Resources Committee. The Committee is reportedly consulting experts and civil society groups in and out of Uganda to ensure that the country’s short and long term interests are not jeopardized.
Analysts worry that the law-making process could be compromised in the need to outrun the Kenyans. But MP Michael Kafabusa Werikhe, who chairs the Parliamentary ad-hoc committee on the oil sector, told The Independent on April 6 that there was “no chance” that Parliament would be rushed to enact weak oil laws.
“We are not in any panic because as far as we are concerned Ugandans need good laws whether Kenya has discovered oil or not, Werihke said. “In any case Kenya still has a very long way to go and it will be many years before they establish that their reserves are commercially viable.”
Officials said in many countries where new oil deposits have been discovered, the timeline for exploration and production is somewhat generic. For instance, reports said the next step - a complete drilling of Ngamia-1 exploration to a depth of 2,700m to ascertain the quality and quantity of the oil reserves and whether the oil is commercially viable - might take Kenya not less than five years.
Irene Batebe, the Petroleum officer in charge of refining, said Uganda plans to build its own refinery near the oil fields in Hoima within the next three years, with an initial capacity of 20,000 barrels per day.
The oil development companies have also dismissed fears that the Kenyan discovery, and its plan for a refinery at Lamu, undermined the viability of Uganda’s refinery because transporting crude to Mombasa would make more business sense.
Tullow Uganda Corporate Affairs Manager Jimmy Kiberu said there was no reason for Ugandans to panic as its oil resources were at a far more advanced stage of development than Kenya’s.
“This discovery (in Kenya) will have no effect on our work programme in Uganda where we continue to explore and appraise in the Lake Albert Basin,” he said.
“We are also working with the government on a range of development options. We have found 1.1bollion barrels of oil in the Lake Albert Basin and believe that there is another 1.4 billion barrels to find – this is a commercial development and remains a key resource within Uganda and the region.”
From the onset, President Yoweri Museveni has been emphatic in stating that a refinery in Uganda was non-negotiable. In November 2010, a feasibility study by UK energy firm Foster Wheeler AG showed that an oil refinery with a capacity of up to 150,000 barrels per day was more feasible than a pipeline to Mombasa, a distance of 1,400 km from the oil fields.
Batebe said land estimated at 29 square kilometers in Buseruka sub-county, Hoima District, was being surveyed to set up the US$1.4 billion refinery under a public-private partnership.
Unlike other regions on the continent that have several refineries, East Africa has only one at Mombasa, which produces way below its 70,000 barrels per day (bpd) capacity, in a region whose total demand is estimated at 164,000 bpd.
Most of the petroleum products consumed in the region (petrol, diesel and kerosene) are imported as finished products to cater for the rising regional demand for fuel. A refinery in Uganda, a country centrally located in the region, has the potential to meet that demand - locally and regionally.
But there is another reason. Uganda consumes about 20,000 bpd, with petroleum products transported by road from Kenya, which makes fuel very expensive in Uganda. Frequent disruptions to supply that affect business and social life strengthen the argument for a local refinery. Batebe said refinery’s capacity will be increased in a phased manner from 20,000 bpd until it reaches its maximum capacity of 180,000 bpd, as demand increases.
Batebe said that growing demand for electricity raised the potential of using any gas discoveries for electricity generation, since modern refineries have their own power generating units and could supply some of it to the national grid.
Tullow, which purposely partnered with CNOOC because of the Chinese company’s expertise in the refining infrastructure, does not appear to be prepared to change its mind about the refinery project despite the new developments across the border.
Phasing the refinery
“We are working with the GoU on a range of development options which will deliver long term value to Uganda. It is too early to speculate final development scenario,” Kiberu said.
“Tullow’s view is that the optimal use of the country’s resources would be served by a phased approach with the upstream being developed in parallel with the market; first feeding small-scale power and industrial markets, then a refinery designed to meet the country’s needs, and crude export to allow the full potential of Uganda’s upstream resource to be realised.”
Uganda’s worries will also be tempered by the fact that over the past few years, the country has worked with East African Community counterparts to agree on joint development of oil resources. Ainemugisha said it may even be logistically easier for Kenya and South Sudan to transport their crude to Uganda’s refinery than to Mombasa.
However, Kiberu suggested that the Kenyan prospect was still long-term though initial results were a “promising first step” for Kenya and an excellent start to the company’s major exploration campaign in the East African rift basins.
“This is a good start and an exciting signal but that’s it,” he said.
The Kenyan discovery was the result of an 8-year search for oil and gas in the country’s entire sedimentary basin, spearheaded by oil giant Tullow, and other major global players including Petrobras , Total , Apache, and others. Earlier attempts by many international firms from China, Australia and UK to find the resource in the vast country proved futile.
It is not surprising that the Kenyan oil is similar to Uganda’s, as the Basin where the Ngamia discovery was made is similar in size and geological make-up to the 9,000 square kilometre Lake Albert Rift basin in Uganda. The crude also looks similar - waxy and with a similar pour-point. However, a lot more drilling will have to be done before comprehensive comparisons can be made.