Global Insight Perspective | |
Significance | Uganda will become an oil exporting country based on the early success of its drilling campaign. |
Implications | The country has a major decision to make between building a commercial-sized refinery or a new pipeline to the coast of Kenya; either choice will cost hundreds of millions of dollars. |
Outlook | Uganda will look to build on its recent drilling results to get a better understanding of its crude reserves, but its early success has led to huge interest from oil companies looking to acquire acreage. |
Uganda to Show Off its Oil Future
The Commonwealth heads of government summit is to take place at the end of the week in the Ugandan capital, Kampala. It is the first time the country has hosted such a prestigious event. Uganda is receiving significantly more attention now than it has in the past, mainly because of the announcement from President Yoweri Museveni that the country will be producing oil by 2009. This has led to huge levels of optimism, but crucial decisions will now have to be made about Uganda's oil future. In particular, Uganda is landlocked so will need to make a decision over whether to build a pipeline to the Kenyan coast or to construct a new refinery. Both scenarios will require investment totalling hundreds of millions of dollars. The size of the country's reserves are as yet unknown, but a reasonable current estimate is 250 million barrels, which will increase considerably when further exploration is carried out.
Over the last two years, an extensive drilling campaign has been carried out in western Uganda, which has produced encouraging results. Tullow Oil and Heritage Oil have been prospecting around the Lake Albert region. Tullow owns 100% of the licence in Block 2 and has a 50% stake in neighbouring Blocks 1 and 3A, while Heritage holds the remaining 50% stake in the latter two blocks. Exploration work continues and Tullow Oil, in a company release, has announced that "the Ngassa-1 exploration well in Block 2 Uganda commenced drilling on 17 November 2007. The well is being drilled by the Nabors 221 rig and will test the high-impact Ngassa prospect, which is located beneath Lake Albert". The well has a planned length of 4,900 metres and is expected to take approximately 110 days to reach the primary target and therefore results are unlikely to be known much before the end of the first quarter of 2008. John Morley, Tullow's general manager in Uganda, said that the Ngassa prospect could be even larger than the recent Mahogany discovery in Ghana, which probably contains 600-900 million barrels of oil. The company also plans to drill the Kingfisher-2 well early next year.
Refinery or Pipeline
Uganda's oil is good quality light (between 30° and 32° API) and sweet, with a low gas-oil ratio, but it has some associated wax. This is problematic because any new pipeline built to export the crude would need to be heated, making it a more expensive proposition. The other option, which is preferred by politicians, is to build a commercial-sized refinery, thus adding value to the country's oil. There are already plans in place to build a mini-refinery to produce diesel, kerosene, and heavy oil, which should be ready in 2009, but this will be a simple topping plant. Reuben Kashambuzi, the commissioner for the Petroleum Exploration and Production Department, has said that the government would like to construct a refinery with a capacity of around 150,000 barrels per day (b/d). The problem with this idea is that it is not yet known whether Uganda will be able to produce at such a level.
The government spends US$400 million on importing refined products each year and, with a commercial refinery, would be able to reduce this figure, especially given that Uganda's domestic demand is only 13,650 b/d, and service the whole of East Africa’s fuel needs. However, Dr Keith Myers, a founding partner of Richmond Energy Partners, in an interview with domestic newspaper The Monitor, said that the oil companies operating in the country would prefer "an export option as it is more flexible," and that it would permit them to "get a global price for the oil." Tullow Oil, leading the exploration efforts in the country, has already suggested that it might reduce its stake in Uganda in order to bring in a partner to help finance the construction of a new pipeline to Mombasa (Kenya), which is the company's preferred option.
Outlook and Implications
As political leaders congregate at the Commonwealth meeting this weekend, Uganda's government will no doubt boast of its oil future, which it will hope will attract significant investment into other sectors of the economy. While first oil is expected in 2009, production will be limited to a modest amount of only a few thousand b/d. Significant production is not expected to start until around 2015, which will allow further prospecting to be carried out and the crucial export decisions to be taken.
In the short term, no further oil blocks will be auctioned until new oil and gas legislation has been approved by parliament, which should happen in early 2008. There has been considerable interest in Uganda's acreage since Tullow and Heritage discovered hydrocarbons at a series of wells. Although there have so far been no reports of the supermajors being linked with exploration in the country, NOCs from Asia are believed to be interested in acquiring acreage. Meanwhile, Minister of State for Energy Simon D'Ujanga has stated that Uganda will also launch its own NOC: NatOil. The future is bright for Uganda and, as more wells are drilled over the next six months, the Albertine Graben region is likely to be shown to hold vast reserves of oil. Uganda's neighbouring countries will be hoping this leads to greater interest in prospecting throughout the region, making East Africa the next big play.