Identifier
Created
Classification
Origin
09KAMPALA366
2009-04-08 11:55:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kampala
Cable title:  

UGANDA OIL: PLANS TAKING SHAPE, BUT PUBLIC REMAINS IN THE

Tags:  EPET ENRG EAID ECON KCOR PGOV UG 
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VZCZCXRO2502
RR RUEHGI RUEHRN RUEHROV
DE RUEHKM #0366/01 0981155
ZNR UUUUU ZZH
R 081155Z APR 09
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 1311
INFO RUCNIAD/IGAD COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
UNCLAS SECTION 01 OF 03 KAMPALA 000366 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EPET ENRG EAID ECON KCOR PGOV UG
SUBJECT: UGANDA OIL: PLANS TAKING SHAPE, BUT PUBLIC REMAINS IN THE
DARK

REF: A) 2008 KAMPALA 1648, B) 2008 KAMPALA 1100, C) 2008 KAMPALA
413

UNCLAS SECTION 01 OF 03 KAMPALA 000366

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EPET ENRG EAID ECON KCOR PGOV UG
SUBJECT: UGANDA OIL: PLANS TAKING SHAPE, BUT PUBLIC REMAINS IN THE
DARK

REF: A) 2008 KAMPALA 1648, B) 2008 KAMPALA 1100, C) 2008 KAMPALA
413


1. (SBU) Summary: Uganda is proceeding with plans to develop its
oil industry, with recent discoveries showing ever-larger
recoverable reserves. The public remains largely ignorant of the
government's intentions, however, spurring widespread suspicion that
officials are seeking to structure the regulatory framework so that
corrupt insiders will benefit. The lack of public information about
the government's plans was apparent during a recent speaker-series
visit to Kampala by University of Houston Law Center Professor
Jacqueline Weaver. While meetings with Ugandan officials show
thinking in line with international best practices, the government
remains frustratingly closed in its approach to drafting policies
and laws. Meanwhile, workshops and a public forum in which
Professor Weaver participated demonstrated that while the public,
parliament and media are interested in the sector, they need to
continue educating themselves if they are to perform their watchdog
roles. End Summary.

--------------
BACK TO SCHOOL FOR OIL AND GAS 101
--------------


2. (U) Professor Weaver's Public Diplomacy-sponsored speaker visit
occurred from March 16-20. Its impetus was a request to the U.S.
Mission by the new Chair of Parliament's Natural Resources
Committee, Winifred Matsiko, to provide assistance in building
Parliamentary capacity via a speaker program focused on Uganda's
emerging oil industry. Weaver's program was finalized after
consultations with then-Minister of Energy Daudi Migereko, who has
since been replaced by Hilary Onek, the former Minister of
Agriculture. The visit included the following events:

-- A half-day seminar for Parliament's Natural Resources, Budget,
Finance and National Economy Committees. Attendance: approximately

25.
-- A full-day seminar for civil society and journalists.
Attendance: approximately 120.
-- A public forum, including government officials, civil society
representatives, and oil company executives on the significance of
oil for the future of Uganda. Attendance: approximately 200.

-- Meetings with the Ministry of Energy and Mineral Development; the
Ministry of Finance, Planning and Economic Development; Tullow Oil;
Neptune Oil, Tamoil, the World Conservation Society (a USAID
grantee),and the Norwegian Embassy (which is funding a petroleum
sector capacity-building program).
--A press conference. Attendance: 30.


3. (U) During the events, Professor Weaver outlined oil revenue
management frameworks and production sharing agreements, drawing on
her 30 years of experience in the U.S., Russia, China, and
elsewhere, working as a petroleum industry economist and law
professor.

--------------
BACKGROUND: THE GOOD, BAD, AND THE OIL
--------------


4. (SBU) Exploration firms continue to make discoveries in Uganda of
reserves large enough to utterly transform the country's economy.
Both the firms and Government of Uganda (GOU) officials publicly
state Uganda has recoverable reserves of at least one billion
barrels, though some industry sources have stated privately that
recoverable reserves could be between three and seven billion
barrels. With such sizeable deposits, Uganda will most likely
become one of the top 50 producers in the world when peak production
is achieved in four or five years and one of the top five or 10 oil
producers in Africa. With 150,000 to 200,000 barrels of oil per day
produced at $60 per barrel, and with an expected 70% government take
of profits, such production would deliver Uganda some $2 billion in
revenue per year, according to Tullow Oil, one of four license
holders in Uganda. This revenue stream would be equal to Uganda's
current total government income, and nearly equal to the entire
government budget of $2.4 billion.


5. (U) Oil's potential impacts -- both good and bad -- upon Uganda's
economy and environment have energized many Ugandans who want the
country to avoid the "resource curse." Uganda's oil fields are
co-located in or alongside Uganda's most popular national parks,
where 40% of Africa's primate species and 51% of Africa's bird
species are found, according to the Uganda Wildlife Society.
Complicating matters, the oil is extremely waxy, requiring heated
storage and transport if the oil is to remain liquid. This requires
extra power plants and equipment throughout the oil regions.
Further, wells are located at shallow depths and will also have
little flow pressure, meaning that firms will most likely have to
use water injection technologies to force the oil out, which also
has environmental impacts.


KAMPALA 00000366 002 OF 003



6. (U) Uganda's media and civil society are also increasingly
concerned about the potential diversion of oil revenues or land
seizures by well-connected insiders. This environment of suspicion,
coupled with the dearth of information provided by the government
about the industry's development, has led to the circulation of
rumors, repeated in the media, about increasing amounts of land
speculation. News reports appeared in February that the President's
Special Presidential Brigade and a security firm linked to the
President's younger brother had assumed control over large tracts of
land in Amuru district, where some of the largest recent finds have
occurred. The GOU, local officials and oil firms have vigorously
denied the allegations, which appear to be untrue. But in the
absence of greater transparency from the government, conspiracy
theories abound, unchecked.


7. (U) Such reports underscore the high and rising expectation among
the public that oil will bring windfall profits in the immediate
future. What the GOU and news reports often fail to make clear,
however, is that significant amounts of oil will not be produced for
several years, and only after an estimated $6-8 billion in new
infrastructure is built. (Note: Tullow Oil is obligated to carry
out an Early Production Scheme (EPS) to produce some 4,000 barrels
of oil per day this year or next, according to an MOU included in
its exploration license. Tullow is resisting implementation,
however, arguing that it would not be an efficient use of funds, as
the power plant and refinery involved would divert funds from other
necessary infrastructure and will soon become redundant. End
note.)

--------------
GOU REASON FOR NOT SHARING INFO: "WE'RE SHY"
--------------


8. (SBU) The discovery of larger reserves along with increasing
public interest in the industry is making GOU officials more rather
than less secretive. No government public information campaign on
the sector exists and the GOU refuses to make the Production Sharing
Agreements it has signed with the exploration firms public.


9. (SBU) This trend toward secrecy was evident before and during
Weaver's visit, particularly when Foreign Minister Samuel Kutesa
called the Ambassador only days before Weaver was to arrive in
Kampala to request postponement of her entire schedule of events.
Kutesa justified his request by arguing that neither he nor the
government could engage the public before the GOU had drafted the
laws and defined its plans. The Ambassador replied that the trip
had been requested by Parliament and planned in tandem with the
previous Minister of Energy. He noted that a delay was not possible
in any event, because invitations to various events had already been
distributed. All events took place as scheduled.


10. (SBU) In the end, Weaver did meet with a range of GOU officials,
though GOU participation in the U.S. Mission-sponsored public forum
was minimal. Despite much work to invite officials from the
Ministry of Energy and Ministry of Finance, the Ministry of Energy
invitee declined to participate or nominate a substitute; a Ministry
of Finance official invited to the panel said he would participate
but did not show due to a competing event. Instead, Weaver, the
Country Manager of Tullow Oil, a parliamentarian, and a
representative of an environmental group spoke to the eager 200-plus
person audience, including media, parliament, civil society and the
diplomatic corps. (Note: In fairness, the new Minister of Energy
had been in the job for less than a month and said he would not be a
position to participate substantively. Also, the Minister of State
for Minerals, who was observing the forum, did eventually identify
himself and join the panel after about an hour. End note.)


11. (SBU) Officials have shrugged off swelling public criticism of
the government's behavior, despite the fact that irate members of
Museveni's own ruling National Resistance Movement (NRM) party stood
up and called for "regime change" during Weaver's workshop, saying
the Cabinet must share more information. Kutesa, for his part, only
expressed surprise when the Ambassador noted that rumors were
circulating that wealthy government cronies were illegally acquiring
or purchasing land in the oil areas for themselves. "We're shy,"
said Laurence Kizza, the head of the Economic Affairs Department at
the Ministry of Finance, explaining why the GOU had so far done
little to inform the public about the sector. "But we will manage
them [the public], I assure you."

--------------
GOVERNMENT PLANS
--------------


12. (U) Meanwhile, plans for the industry are moving forward. The
Norwegian Government, which is funding a five-year capacity building
program in the revenue, resource and environmental management areas,

KAMPALA 00000366 003 OF 003


is currently conducting a nine-month feasibility study to help
Uganda examine the range of pipeline, refining, road, rail and barge
infrastructure options. GOU officials prefer to build a refinery to
process the crude at this point, but industry executives say the
government's options will be limited by what banks and
private-sector investors are willing to invest in. "In the end it
doesn't matter what the government wants," said Peter Kingston, the
CEO of Tower Resources, which owns Neptune Oil, one of the four oil
companies with licenses in Uganda. "The market will decide."


13. (U) On the revenue management side, Kizza said cabinet officials
are finalizing the principles of a revenue management law, which
they plan to present to Parliament in the last quarter of 2009. In
a meeting with Weaver and Econoff, Kizza said the GOU plans to
create a sovereign fund which will moderate revenue expenditure.
The Government plans to set aside most of the revenues for future
use, while it would use other amounts, 3-4% of GDP, to reduce the
amount that the government borrows and obtains in grants every year.
This would reduce government grants and loans from 8% of GDP to
4-5%, Kizza said. Unlike his counterparts at the Ministry of
Energy, Kizza said that the GOU would have no problem signing up to
the Extractive Industry Transparency Initiative, but added that the
GOU would only sign up after revenue management laws had been
passed.

--------------
COMMENT
--------------


14. (SBU) GOU officials involved in the sector display good
knowledge of the challenges ahead and say many of the right things
about transparency and accountability. Their failure to share
information or bring civil society into the process of developing
the legal framework at this time, however, reflects the lack of
respect that President Museveni and his advisors have for civil
society and consultative processes. This attitude is reflective of
President Museveni's highly personalized and highly centralized
leadership style, which creates an environment in which corruption
can flourish. The news is not all bad, however. Though Uganda's
parliamentarians from both sides of the aisle demonstrate they know
little about the petroleum industry, they deserve credit for
requesting the speaker program in the first place and for their
interest during the week. And though civil society and the media
have little expertise, their attendance in large numbers at all
events, with organizers having to bring in extra seating to
accommodate them, demonstrates the high level of interest in
Uganda's newfound oil. The heavy coverage of the events provided by
print and electronic media also went a long way in furthering public
awareness on these issues.


15. (SBU) With so many challenges remaining, current low oil prices
may be a temporary blessing for Uganda; they will ensure that
Uganda's oil, which will be relatively expensive to produce, will
remain in the ground for now and provide the country with some
breathing space for capacity building. In the long run, however,
parliament and civil society have their work cut out for them. Not
only will they have to begin focusing on the technical aspects of
structuring an oil industry, but they will have to learn how to do
the hard work of monitoring the revenues to keep rent seekers from
taking control. In this sense, oil is as much about governance as
it is about money, energy, and infrastructure for development. The
Weaver visit focused in particular on Parliament, media, and civil
society in order to help these players begin this long learning
process, and the debate and discussion the visit sparked were
clearly a mark of success in this regard. Post will continue to
catalyze the learning process here given the enormous stakes the oil
industry has for Uganda's economic and political development. Post
aims to continue responding to their requests for help as part of
our Mission's governance and transparency objectives.
BROWNING