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

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 Weaver's program was finalized after consultations with then-Minister of Energy Daudi Migereko, who has since been replaced by Hilary Onek, the former Minister of Agriculture.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