The Oil is here.... So what?

Oil, is this something new? Uganda could soon become an oil producing country. So what do we know about this oil. All we know is the speculation of the barrels of oil that Uganda is likely to produce and how Uganda could be get itself $2bn annually if the oil is produced. Uganda is still in the appraisal stage and has just been starting on the development stage.
Uganda could have around 600 – 10000 MMbbl potentially recoverable resources discovered so far. So what happens next after all these discoveries? We plan.......for the future as Uganda.

2008 world oil prices went to the $145 a barrel mark. What about that. So now back to the planning. When planning is made using the short term oil prices then it may keep on fluctuating and cause many budget cuts and hinder planning. Planning can be done at around the $50 a barrel instead of using $140 a barrel which is normally for a short time. According to Richmond Energy Consultants when oil prices are at $100 a barrel they are bound to come down and that the best way to plan is considering that throught the year the average oil price is $40 a barrel.

Oil exploration is a very expensive process and since new discoveries are being made then Uganda will have to delay production for some time.The companies that are running the Ugandan contracts are also small and will need to find additional capital to develop the oil discoveries made (Tullow, Heritage and Dominion). This however is a very complicated process because of the current financial crisis and the current low oil prices the companies will find it hard to secure investors. Tullow recently raised $2bn to start proper drilling and it has done this through borrowing. The other source can be for them to sell part or all their equity to companies with access to capital, raise equity from share holders and can also borrow from the World Bank. If Uganda sets up a national Oil company then the contracted companies should be able to borrow from it also.
Tullow has already invested $500m in the project. How about that investment even before the oil comes out of the ground. Recently Tullow Oil country director Brian Glover said that they had only completed 30% of the Job. Quite a long way to go then.

Uganda is believed to be negotiating the Production Sharing Contract although the terms of this agreement still remain unpublished. This would atleast give the government atleast 70% take although the costs of production would still be incurred by the oil companies. This kind of contract requires the country to have National Oil Company to run the oil project on behalf of the government. This sort of contract is used by atleast all the developing nations like Nigeria, Chad, India and Angola.
For production to start there would be need to have development sanction, contracts revealed export and construction of infrastructure. Uganda is yet to get through this stage. All the drilling structures set up in Uganda are onshore and to start offshore drilling will prove to be one of the greatest challenges. Offshore drilling is complicated as it can be expensive (about $12m) and having L. Albert being shared by two DRC and Uganda then this could wrangles unless an agreement is reached by the two countries. Drilling on the lake would have to get into DRC by about 400km. According to the IMF the reasons for the underperformance of oil exporters in the Sub-Saharan region will include the weak fiscal and monetary policies to manage oil revenue, exchange rate appreciation, and no accumulation of income generating assets and weak institutions and administration.

A pipeline cost would be atleast $1.7bn but with world steel prices going down then the pipeline cost is likely to be smaller than that. The pipeline would run from the Albertine to the coast of Mombasa. A refinery in Uganda would cost between $4 – 6bn, this cost is likely to get high as the operating costs will increase. The Uganda government will decide on the best option. It is important to take into consideration that this sector does not employ many people, the environment should be protected and that oil reserves can ran out. There is enough oil to do some damage or enough to do some good, Uganda needs to make proper choices and turn this resource into a blessing. If the process is accurate and transparent then Uganda would avert the theory around that this resource is a curse.