Is Uganda oil production still a viable venture? What are the alternatives?

By Doris Acheng

On January 18, the world woke up to the cheapest premium crude oil the world had seen in about a decade or so. 

By the start of the trading day, the price of premium crude oil per barrel was at an all-time low of approximately $27, but has since gone back up to $29 per barrel as at the close of  January 19. This is in comparison to the $47 and $102 a barrel of crude oil was fetching exactly this time last year and in 2014 respectively.

Unfortunately, this downward trend in oil and gas prices has been a constant feature of the previous year that has unfortunately been carried forward to the current year with prices further plummeting to disturbing levels — levels that are increasingly raising questions as to the current profitability of the oil and gas business worldwide.

For aspiring oil and gas producing countries such as Uganda and for the oil production industry bigwigs in the country, such as Tullow Oil, CNOOC and Total currently camped at the country's oil rich Albertine region, the current trend raises the question as to how viable it is to invest in the capital intensive oil drilling and production given the dwindling prices.

The financial viability of any venture, with the oil and gas business not being an exception largely depends on the anticipated return on investment, as well as the amount of time it takes an investment to break even or in other words to reach an equilibrium point between expenses and revenues the point at which profitability begins.

The current nose dive in the price of crude oil has two implications on the viability of oil and gas production in Uganda. First, it impacts on the projected earnings revenues, implying that the oil producers, and in turn Uganda will earn less than anticipated, which is then again, an aspect of the volatile business world.

The greater downside though would be a situation where the meagre earnings cease to justify the high capital investment required for the venture, a situation that could be triggered by subpar market rates and that might be significantly detrimental for the sector's future growth.

Hence, in light of the heavy ramifications of cheap oil on Uganda's oil and gas sector, the best is to hope that somehow, the price of crude oil per barrel manages to wiggle itself up to a more acceptable level, especially given the high hopes everyone has for the sector. Otherwise, it is prudent that contingency plans are put in place.

With the most viable contingency plan being ensuring that Uganda does not fall victim of the Dutch disease- which is in lay man's terms the tendency to completely ignore all other sectors and for an economy to entirely depend on the oil sector- as is the case with Nigeria whose agricultural sector has altogether died, thus creating a situation of an unhealthy overreliance on a volatile resource.

Hence, the role of agriculture in both enhancing Uganda's economy and protecting the economy from external shocks cannot be placed on the back bench in favor of the volatile oil and gas sector. It is and always will be the backbone of Uganda, and increasing its contribution to the national coffers should hence take center stage with deliberate efforts directed at modernizing the sector and making it more profitable.

Of course, It would be imprudent to downplay the potential and substantive contribution of the oil and gas sector to Uganda's economy. In a similar way, it would likewise be imprudent to put one's eggs in one very unreliable and volatile basket.

The writer is a freelance writer