NEW DISCOVERIES CONFIRM UGANDA OIL POTENTIAL

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