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What the on-going clean energy drive means for Uganda’s yet to takeoff oil, gas industry?

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Added 5th August 2017 10:38 AM

This is not reputable even here in Uganda, especially if one is caught up in traffic jams during rush hour.

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Mike Ibrahim Okumu is a lecturer at the School of Economics, Makerere University

This is not reputable even here in Uganda, especially if one is caught up in traffic jams during rush hour.

By Mike Ibrahim Okumu

One of the repercussions of the Paris climate accord is that leading economies in Europe are looking at having no sales of new diesel and petrol cars by 2040.

Exhaust from cars running on petrol and diesel is believed to be associated with poor air quality as it increases the amount of carbon emissions which are partly being associated with respiratory ailments and climate change through, for example, unpredictable weather patterns.

This is not reputable even here in Uganda, especially if one is caught up in traffic jams during rush hour. Indeed, very soon respiratory ailments could be on the rise in Kampala and nearby towns. That aside, what are the implications for Uganda of the on-going debate to stop cars running on petrol and diesel in Europe?

First and foremost, car manufacturers such as Volvo have indicated making only fully electric or hybrid cars starting 2019. The fact that car manufacturers are opting for electric or hybrid cars suggests that banning of new diesel and petrol cars by 2040 is a credible threat which is a potentially contagious international policy agenda.

This, however, suggests that we might have already witnessed high oil (to mean crude oil) price regimes to the extent that the present day moderate prices could turn out to be seen as fairly good in the medium to long term. This is especially so as oil prices could be expected to fall in the medium to long term given the already growing hostile international policy agenda towards petrol and diesel fuels of which the transport sector consumes 64% of global oil.

Unfortunately, with over a century of oil exploration in Uganda, commercially viable oil quantities were only announced in 2006. As such, we would have expected expeditious oil production for domestic, regional and international markets even if it meant starting small with potential to scale up over time in order to catch up with the lost time. Indeed, before the end of 2009, there were pronouncements made and great optimism that Uganda was due to start production of diesel, paraffin and heavy fuel oils for domestic consumption.

However, we have been bogged down with bureaucratic procedures worsened by political suspicion of oil subsector activities. Political suspicion has led to creation of various select committees of Parliament, which may sometimes be in good faith, for example, that which investigated ministers for potential acts of corruption and that of the presidential handshake. Regrettably, whenever such select committees of Parliament are instituted, they lead to a slow down or total stoppage of activities. Indeed, the investigation of ministers for potential acts of corruption in the oil subsector delayed issuance of oil production licenses. As such, Ghana and Kenya, which discovered commercially viable oil stock after Uganda and also picked a leaf or two from Uganda as regards policy, the legal and regulatory framework suitable for oil production are already into production. Ghana is already shipping to international markets with Kenya equally ready to do the same.

The inability to have a balancing act between governance issues and actual oil production has led to unacceptable and unexplainable moving of oil production timelines. Indeed, 10 years after the discovery of commercially viable oil stock, we are not certain whether our oil will flow to the domestic, regional or international markets in the near future. This is indeed, playing out like the economy wide costly delays associated with the construction of the Bujagali Hydro Power project.

Furthermore, decisions regarding the construction of the oil refinery have stalled as an investor to partner with the Government is yet to be identified. Construction of the oil pipeline is merely on paper. There has been no compensation of the project affected persons where the oil pipeline is expected to be constructed and finally the financing for the oil pipeline construction has not yet been sorted out.

Worse still, under the current hostile international policy agenda towards diesel and petrol usage in cars inducing prospects of low oil demand and thus lower prices, suggests difficulty in identifying financiers for both the oil pipeline and refinery. Low oil prices imply longer pay back periods and compromised return on investment, which are key indicators that international financial markets partly look at to make project financing decisions. This suggests that now more than ever, oil related infrastructural investment ought to be envisaged as local and regional capital investments to be financed by locally and regionally mobilised resources. Local resource mobilisation could be by issuance of bonds to Ugandans both within and in the diaspora. While regional resources could be supported by negotiated bilaterals.

Besides, the Government might have to actually commit substantial finances into both the oil refinery and oil pipeline to perhaps be able to attract other investors. The aforementioned strategy is not new to Uganda as only until the Government committed $150m towards Bujagali hydro power project did investors come on board. Otherwise, we are bound to move in circles looking for potential investors in the oil subsector as is indeed being witnessed with the sourcing for oil refinery investors of which the Chinese interest is the latest to wane off.

Also, while it is important to have a clear policy, legal and regulatory framework for oil production, under the present day situation where the international political debate is turning against petrol and diesel cars; therefore, between now and 2040 is seeming the only window we have to explore and sell our oil resource at fairly decent prices. As such, whatever is delaying the production and export process ought to be sorted out expeditiously since we cannot afford to lose time any more. Otherwise we risk having oil onto the international market at prices that do not make it viable to produce or worse still be caught up with financing and repaying finance debt which had been pegged on oil exports.

Finally, even with over 10 years of planning for oil production post discovery of commercially viable oil stock, it is very unlikely that the ride will be smooth. As such, what is important at this point in time is to allow for learning by doing while oil production is on-going at least for the domestic market while targeting scaling up for regional and international markets. Furthermore, we strategically must have a balance between governance issues and real transformative economic programmes for the country. This is especially so as having a good policy, legal and regulatory framework without real oil production yields no good for Uganda’s economy in terms revenue collection and jobs creation.

The writer is a lecturer at the School of Economics, Makerere University

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