CROSSING THE UGANDAN BORDER: PETROLEUM EXPLORATION

C O N F I D E N T I A L SECTION 01 OF 02 KINSHASA 001639

SIPDIS

SIPDIS

E.O. 12958: DECL: 10/23/2016
TAGS: EPET ENRG ETRD EINV ECON CG
SUBJECT: CROSSING THE UGANDAN BORDER: PETROLEUM EXPLORATION

REF: A. KINSHASA 1364


B. KAMPALA 981

Classified By: EconOff W. Brafman for reasons 1.4 b/d.


1. (U) Summary. The GDRC and Cohydro, DRC's petroleum
parastatal, have signed a production sharing agreement with
two foreign petroleum companies for blocks on the DRC's Lake
Albert border with Uganda. These blocks are adjacent to
exploration blocks on the Ugandan side of the border.
However, the GDRC's final approval is pending. End summary.


2. (U) September 13, Canadian Heritage Oil (Heritage) and
U.K.- based Tullow Oil announced a production sharing
agreement with the GDRC for exploration rights to Blocks I
and II of the Graben Albertine reserve, which borders Uganda.
The blocks comprise roughly 4000 square miles and include
portions of Lake Albert and onshore areas. (Note: Graben
Albertine, with five blocks total, is part of the DRC's Rift
Region of potential petroleum reserves. The Rift's other area
consists of the three blocks of Graben Tanganyika, which
includes portions DRC's territorial waters in Lake Tanganyika
plus surrounding onshore areas bordering Burundi and
Tanzania. End note.) Tullow holds a 48.4 percent interest,
Heritage 39.6 and Coydro (the DRC's petroleum parastatal) 12
percent. Although this eastern Congo region is considered to
be one of the DRC's three potential petroleum zones (reftel
A),very little exploration has occurred to date.


3. (U) If exploration proceeds in DRC and Uganda, it would be
the region's first cross-border formal sector project.
Heritage's DRC blocks are adjacent to onshore/offshore
exploration blocks in Uganda held by Heritage, Tullow Oil and
Australian company Hardman Resources (reftel B). In press
reports, Heritage's then-CEO and Chairman was quoted as
saying that his company's strategy is to create a
cross-border "hydrocarbon province" with its blocks.

STUMBLING BLOCKS
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4. (SBU) The project is not yet certain, however, because the
World Bank (WB) and IMF have asked the GDRC to delay
approving any new extractive industry transactions at least
through the end of December 2006, when an elected government
will have been installed (reftel A). Hence, the necessary
presidential approval is still pending. Indeed, the Ministry
of Energy's Director of petroleum projects told EconOff that
the Minister of Finance approved the transaction over the
then-Minister of Energy's objection. (Note: The Energy
Vice-Minister, who belongs to a different political party
than his Minister, signed this deal while the former Minister
was campaigning for a National Assembly seat. End note.)


5. (SBU) The Ministry's petroleum project Director (Joseph
Pili-pili) said the agreement's second problem is that
Heritage did not agree to join the Ministry-organized
petroleum assessment consortium, formed between Fusion
Petroleum Technologies (Fusion) and energy companies
interested in investment potential in the DRC. Fusion, a
U.S. company, signed an agreement with the Ministry of Energy
in July 2005 to carry out a petroleum reserves' assessment
for the GDRC, with the goal of creating a reliable database.
Each consortium member must pay USD 500,000 for data access,
but Fusion will not begin research until it has about ten
members, giving it sufficient working capital. The Ministry
is pushing energy companies that enter into deals with the
GDRC to join the consortium, ostensibly so that research can
proceed as soon as possible.


6. (C) A third potential problem with the project could be
President Kabila's supposed view of Heritage. According to
Pili-pili, Heritage's founder, Tony Buckingham (also a
co-founder of the now-defunct Executive Outcomes),is a
suspected arms trafficker and friend of Ugandan President
Museveni's son. As a result, President Kabila reportedly put
a stop to negotiations with Heritage for Graben Albertine
blocks in 2001-2002. The GDRC then launched a tender offer
for the Albertine blocks. Heritage bid, and to respond to the
GDRC's continuing concerns about Heritage, Tullow was brought
into the deal. Pili-pili told EconOff that Tullow and
Heritage met all the DRC's legal conditions for entering into
the transaction and that, the President will therefore have
to approve it. However, it is not clear when this approval
might occur, given the IMF/WB request discussed above.


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COMMENT
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7. (U) If exploration on both sides results in a discovery of
recoverable reserves, the project could indeed lead the way
for the type of cross-border cooperation that the region
needs. Both governments would need to ensure that their
rights and duties are clear, however, or this project could
conversely become another point of cross-border contention.
End comment.
MEECE