Pipeline impasse delays production in Uganda

By Eric Watkins
What’s going on in Uganda these days? For months, we heard nothing but exciting news about the country’s oil prospects. Then, suddenly, everything came to a screeching halt when Heritage Oil decided to sell its stakes in two blocks.

The sale initially was made to Eni SPA, but Tullow Oil – Heritage’s erstwhile partner in the two blocks – exercised its right of pre-emption and decided to pick up the stakes. Its plan was to farm them out to Total SA and CNOOC.

But the plans of mice and men often do go awry, as the poet said, and in this case Tullow’s plans went right off-track when the government of Uganda decided to block them. The problem? Money.

Kampala insisted that it was owed a substantial amount of money in the form of capital gains tax – a tax that Heritage did not -- and does not -- feel responsible for paying. As a result, there’s been a stand-off, with less news emerging about oil and more about lawsuits and arbitration in foreign courts.

Now, we learn that another problem has crept up to impede development in Uganda – the lack of infrastructure. That view emerged earlier this week at an investors’ conference held by Tullow’s Uganda manager Brian Glover.

Glover was quite clear in announcing that Tullow Oil’s exploration efforts have been “phenomenally successful.” But he was no less clear in saying that poor infrastructure in the region meant a delay in producing the country’s oil.

For infrastructure, we really should substitute the word ?pipeline’ for that has been a sticking point between the two sides for a long time now. In the view of Tullow, Uganda would do well to construct a pipeline through Kenya to transport its crude oil to markets.

But that’s not the view of Uganda’s government which sees more potential upside for the country in constructing an oil refinery that would process the country’s newly found oil into products for the region.

Yet, something else has to be remembered.

Prior to Tullow’s exploration success, efforts were underway to develop a pipeline between Kenya and Uganda. That pipeline was to have carried oil products from Kenya to Uganda.

But Tullow’s success has put paid to that idea. With an estimated 2.5 billion bbl of recoverable oil, Uganda now has no need of a pipeline coming into the country with products.

Still, Kenya and the earlier pipeline project cannot simply be dismissed out of hand. After all, if Uganda wants to move its oil to market – whether in the form of crude or products – it most likely will require transit rights all the way through Kenya, right down to the Port of Mombasa.

That’s clearly a job for regional oil diplomacy, as Tullow’s Glover pointed out in his investors’ conference. "This is not just a Ugandan project. This is an east African project," Glover said, adding that “without the supply chain in place, we are not going to be able to get this done.”

For supply chain, read pipeline.

Contact Eric Watkins at hippalus@yahoo.com
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