Uganda's Oil to Bring in $2 Billion Per Year

Alpha · 2009-09-28T13:40:59+00:00

Uganda's Oil to Bring in $2 Billion Per Year SO far 800 million barrels of oil have been confirmed in Uganda, with an estimated total value of $50b. Ibrahim Kasita and Els De Temmerman interviewed Aidan Heavey, founder and chief executive officer of Tullow Oil, about the challenges and opportunities of the oil find for Uganda and East Africa. You have just completed drilling the Ngassa-2 well on the shores of Lake Albert. How much oil do you estimate is under the lake? Ngassa-2 is a huge structure. It runs out for about 150km2. We just drilled from the shoreline into the top of the structure and that gives an indication of what is there. We don't know exactly how much is there. It needs extra wells drilled out into the lake to establish the exact amount. But the range we are looking at is 100 million to 400 million barrels. That is only on the Ugandan side of the lake. So there could be as much oil on the Congolese side? We have no information at all on Congo in terms of seismic data or what the prospects are. But from your experience, when there is oil on one side of the lake, is there also oil on the other side? Absolutely. there should be oil on the Congo side. What is the total oil discovered so far in Uganda? There are 800 million barrels in what we call the discovered cash category. The potential, what we think is going to be found in the next few years, is about two billion barrels, which is quite a sizeable amount of oil from one small area. You have been talking with the Kinshasa government about getting the concession for the other side of Lake Albert as well. How far are those discussions? We have an agreement with the Congolese government, which we signed some years ago. It is just waiting to be ratified by the President (Joseph Kabila). That is taking quite a long time. Working into the lake is a very complicated and expensive exploration programme. It is important that we operate on the Congo side because we have a culture of being very strict on environmental and social issues. It is important that whoever is working on the other side of the lake has the same culture. If things go wrong, it would reflect on us. So we want to make sure that if we are getting involved in the Democratic Republic of Congo, we do it right. You said the agreement was signed some years ago. Why the delay? Our experience on the Ugandan side has proven that there is a lot of oil in the area. Once you take the risk out of something, like we did by spending money, a lot of other companies try to muscle in and get involved after the risks have been taken away. Is that happening in Congo? It is. Do you think the agreement will be ratified soon? It should. We now have the experience and we know the geology. It is a very sensitive area, both from an environmental and social point of view. It is important that all the communities on either side of the lake are treated exactly the same. From an environmental point of view. the last thing you want is pollution of such a beautiful area. If you had an oil spill in the lake, it would be a disaster for the villagers. You said Uganda has a potential of two billion barrels. How much does that represent in monetary terms? Of what we have discovered so far, the impact on Uganda would be about $2b a year in revenue. For how many years? Probably 20 to 30 years. The country now has an asset worth nearly $50b. But that is only part of the story. To develop the oil industry and get it moving, you need a huge service industry. This will generate an enormous amount of revenue and jobs. It will be transformational to the whole area. What kind of jobs? Jobs in the oil field itself, jobs in service companies, maintenance companies and all the support services. We reckon that when the oil production starts, there will be at least 10,000 jobs in the support industry. Oil production generates a whole industrial sector by itself, which can become a regional service sector. The initial success in Uganda is going to trigger further exploration which invariably will lead to further discoveries and keep up the production programme for decades. It is like chapter one of a book. If the geology behaves like it does elsewhere, the reserves will be replaced by subsequent finds that will occur throughout the decades ahead. How much have you so far invested in Uganda? We have invested about $500m. It sounds like a huge risk but the first investment is drilling exploration wells. When you succeed, you de-risk and you drill more and more wells. We accelerated the programme over the last four years to find out as quickly as possible what the basin had. That is why we spent a lot of money in the last two years. It has been a huge investment. You had some challenges drilling under Lake Albert. Ngassa-1 had to be abandoned. What was the problem? We are drilling in a sensitive environmental area. So you have to plan a well that is not going to interfere with the local environment. The Ngassa well had to be designed so that its footprint would be tiny. We had to make sure that there was no environmental impact on the lake. It is also an earthquake-prone area. There is a fault just past the shore line. The first time we tried, we drilled through that fault and that proved too problematic. So at the second location, we were successful and got to the bottom of the lake. Working in such areas is much more expensive than in other parts of the world. Question: Which other countries in Africa do you operate in? Answer: We operate in 16 African countries. Ghana and Uganda have been the two biggest investment areas in the last few years. But we also have major operations in Mauritania, Senegal, Ivory Coast, Sierra Leone, Liberia, Cameroon, Equatorial Guinea, Angola, Congo Brazzaville, Gabon, Namibia, Tanzania and Madagascar. Compared to those countries, is Uganda's oil discovery important? The discoveries here, when on production, will put Uganda in the top 50 oil producers in the world. In Ghana we found one billion barrels in one single location. The potential in the Ghanaian basin is probably five billion. It will be bigger than Gabon and Equatorial Guinea; and it is getting close to Angola. The difference is that in Ghana, all the oil is offshore, in deep water. Tankers will come up and take the crude oil that will be sold at the international market. But they also have a lot of gas. We are now in the process of piping the gas to the shoreline. It is going to be processed in Ghana and used for power generation. Uganda is landlocked. President Museveni wants to refine the oil to meet the needs of Uganda and the region. Is a refinery cost-effective? We are at the stage of evaluating all the options with the Government. Part of that evaluation is to look at the fields. There are a number of different fields, with different depth and quality. A huge amount of work needs to be done to evaluate how these fields can best be developed and how to get the most value out of them. One option is a refinery. There are different types of refineries, with different costs involved. The different types of crude oil that you put in, gives you different quality of products that come out. There is also the environmental impact of a refinery. The bigger the refinery, the bigger the environmental impact. The idea of Uganda having a refinery absolutely makes common sense. The only issue is the size and type of refinery. But it is early days. The great thing in Uganda is that this, hopefully, will be the first time oil exploitation will be done properly: proper studies, proper evaluation and the right systems put in place. There seems to be more oil than Uganda and the region need. So some oil will need to be exported. There is a huge amount of oil. That will require for some of the oil to be exported outside the Ugandan market. If you put a refinery, you will have to export some of the refined products. There are different types of refined products, such as diesel, heavy fuel oil, paraffin, petrol, jet fuel and by-products. You have to find a market for those products. To get it there, it requires transport and transport costs. If you want to export all the products from one refinery, you would require six to seven pipelines. All these things have to be analysed so that people understand what exactly the implications are. Would it not make more business sense for the Congolese government to team up with Uganda so that they share the cost? We have discovered enough oil for Uganda to go alone. Congo is not needed right now to produce the oil from Lake Albert. But from a regional point of view, it makes sense that the oil is produced through one system because it is more cost-effective. For reasons of better planning, from an environmental point of view, it all makes more sense. Can Uganda afford a refinery of its own? To find out the cost of a refinery, you have to look at the type of products you need. What sort of fuels are needed locally? The most fuels people need are diesel, heavy fuel oil for power generation, and kerosene. But they are only some of the by-products of the refinery. What do you do with all the rest? However, I am reluctant for Tullow Oil to talk about this. Our role is to go in, take licences in particular areas and find oil. We need to establish how much oil there is, how we can develop it, how we can produce it efficiently, safely and without any environmental impact, making sure that local and social issues are addressed. We give all the options. In Uganda today, there is a lot of guess work. People throw in all kind of ideas: whether it should be exported, refined or partly refined. But to date, there has been no proper evaluation of whether a refinery will work, whether a pipeline will work, where the pipeline will go. These studies need to be done first. Would it make sense for the oil wells in Southern Sudan to be connected to Uganda? It might make sense if you had a central hub for distribution in Uganda and have other countries linked to that central hub. That would be a cost-effective way of doing it. It would be great to have the cooperation between all the countries in the region through a central hub. That is one option. That would require the various governments talking to each other and putting together a central hub. If that is the way the governments want to go, we will work with that. In most countries in Africa, oil has proven to be a curse. Don't forget that oil was found in Africa back in the 1970s and 1980s. In those days, there were very little controls and regulations. Most of the contracts were in favour of the foreign companies. There was little regulation in relation to transparency, environmental and social issues. Quite frankly, some of the things that happened in the past were a disgrace. The oil companies have a lot to answer for. Nigeria is a classic example. The oil companies got it wrong. And there was greed, as simple as that. They cut corners. They did not do a proper job locally. The world has changed a lot. Today, oil companies have to be transparent. They have to consider environmental and social issues. The terms now are very much in favour of the governments. The system of regulations has changed dramatically. From Tullow's point of view, we started off with a small project in Senegal and we got very much involved with the local communities and the government. We view the business as a family business - not just the Tullow staff but also the local communities and the government. We work very closely with them. We are involved in two huge projects, in Uganda and Ghana. It is important for us and our reputation that these prove to be the opposite of what people think; that these are examples of how it should be done. The NGOs talk about the curse of oil. But oil is a commodity, just like bananas. It is absolute nonsense to talk about the curse of oil. Why not talk about the curse of bananas or the curse of aid? Basically, what the NGOs are saying is: the government cannot handle the revenue that is been given to it. Could you give an example in Africa where the oil revenue has been used to benefit all the people? Look at countries that have discovered oil recently. Ghana will have its own gas infrastructure in place. The government has already planned how the revenue is going to be spent. I constantly hear people talk about the curse of oil. Nobody talks about the successes of oil. Everybody knows about Nigeria. But there are other countries where it is working quite well, such as Ivory Coast, Gabon or Ghana. There is a completely different environment for oil production in Africa today. For oil revenues to be used well, there is need for transparency. Can you be transparent about your contract in Uganda? The contracts companies have are on the stock exchanges and have become public knowledge. You have public information on every contract, and ours is not different. The deals have been published. There are IMF reports about it. Actually, the contracts here in Uganda are the best in the world for the Government. In what sense? Only one country in sub-Saharan Africa has better terms than Uganda and that is Angola. For every 10 barrels of oil, the government gets eight, which is 80%. It is unprecedented for a new country in the business. In Ghana, it is 60%. The oil in Uganda is waxy. Exporting it is expensive since the pipeline has to be heated. Would it then be cheaper to transport refined oil? You can move waxy oil. The technology is there. It is just a little more expensive. Even removing the wax during the refinery process will cost money. The solutions are there. It is just money. The area we are working in is 1,200km from a port. We have terms that are very much in favour of the government. It is expensive to work with waxy crude. But we still pay 100% of all the costs. All the risk money is provided by us. The economics are quite tough. Our business is exploration first. And after we have spent the exploration money, we have to get the banks in to help finance the development stage. It is a big challenge. So you need to get involved in what happens with the oil afterwards because you need your money back. You need the money back and you need to have the commercial side. It needs to be evaluated properly. You may have a long wish list but unless you can finance it, it is useless. You have to look at what is technically possible and what is financeable. At the end of the day, everything boils down to money. When you are looking for money to develop the oil, it is easier in places like Ghana. You have offshore oil, fixed costs, ships come up, take the crude oil and you get paid there and then. It is easy for banks to finance. Our $3b project in Ghana will be on stream next year and we got $2b from the banks six months ago, at a time when all the banks were in turmoil. When you have a difficult project like in Uganda, you have to make sure everything is done properly. In order to borrow money, it has to be a contract that is commercial. And in the current climate, the big financial institutions insist on transparency and all the documentation being available. Uganda should consider what is technically and financially possible but also what is politically possible, such as where to build the pipeline. Every project has political angles and needs political stability. To get money from the banks, we have to make sure the projects we are involved in are as attractive as possible. There is goodwill in place between the governments in the region to treat this as one regional project. They discussed it many times at the level of heads of State. So oil could be a factor of regional stability? Kenya, for example, might not easily go to war over a tiny island if huge economic interests are at stake? This could be a great regional project. It could be a project that brings stability to the whole area. But again, it has to be done properly. We found the oil; that is the easy bit. The next bit it to develop it. The technical solutions are there, whether the oil is waxy or not. The big problem is: how do you finance it? how do you get money from the banks? And that depends on the stability of the project, including the political stability. http://www.tradingmarkets.com/.site/news/Stock%20News/2549487/

Thread starter Alpha
Start date Sep 28, 2009

Alpha

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Uganda's Oil to Bring in $2 Billion Per Year

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