Govt sets terms for oil companies

Feb 17, 2010

The Government has set tough conditions for new companies intending to invest in the oil production in the country.

By Mary Karugaba & Micha Grieser

The Government has set tough conditions for new companies intending to invest in the oil production in the country.

The permanent secretary of the Ministry of Energy, Kabagambe Kaliisa, told the natural resources committee yesterday that for a company to be approved by the Government, it must have a capital base of at least $24b (sh48 trillion).

“Since the investment required in the short to long-term (2010-2020) is $8b, a company with a market capitalisation of three times the size of the required investment would be credible,” he said.

He explained that the oil and gas operations are moving into the development and production phases. “Therefore, the type of companies required to carry these activities forward need to have the necessary risk capital and access to project finance for both the short and long-term investment.”

Kabagambe added that the companies must have good operator experience, not only in exploration and production of gas and oil but also in refining, pipeline development and operations.

There was also need for licensing and maintaining several oil companies to avoid monopoly, he stressed. In addition, the companies must be agreeable to the Government’s current development strategies which include early commercialisation of the resources, value addition, training of Ugandans and paying taxes.

“In order to approve the transactions, the Government ought to consider its best interest to propel the industry further,” he said.

Kabagambe was appearing before the committee to explain the current transactions between the oil companies in Uganda.

He said 15 oil and gas fields have been explored since 2006, with an exceptionally high drilling success of 94%. He said a reserve of two billion barrels of oil is in place, worth $50b.

He explained that the oil reservoirs have to be tested and appraised. Power generation and transmission facilities may cost $300m, oil processing and transportation equipment another $1.5b, refinery development $2b, further drilling $200m and expanded storage and pipeline infrastructure $4b, he estimated.

“Therefore, when a bigger player expresses interest in joining the petroleum industry, it signifies benefits to the country,” he said.

Kabagambe informed the committee that Tullow does not have the required capacity and has decided to invite partners.

He said French Total and the Chinese state-owned oil company, CNOOC, are being evaluated to partner with Tullow. “In recognising the need to avoid a monopoly, Tullow has presented their plan to partner with both Total and CNOOC,” he told the MPs.

“However, the Government has asked Tullow to reconsider its proposal of operating two out of the three exploration areas instead of each partner operating an exploration area.” Tullow was asked to submit joint operating and sales agreements with Total and CNOOC.

The Government recently announced that it had approved the deal for Tullow to take over the 50% share of its partner, Heritage, in two blocks in the Lake Albert region at $1.5b. The decision ended a bid by Italian company Eni to buy Heritage’s stake.

The PS said the transaction will be subject to a capital gains tax of $300m (sh6b) to $400m (sh8b).

The committee, however, expressed anger over the fact that the oil production sharing agreements had not been made public.

“Our hands are tied. All these issues need to be discussed after we have read the oil agreements,” MP Beatrice Anywar said.

Her colleague, Anifa Kawooya, said the Government should not delay the production process, saying billions were being lost as a result.

Fred Kabanda, the ministry principal geologist, declined to comment on when production will commence but said Tullow plans to start selling crude oil mid this year, especially to cement industries.

The officials also announced that a national oil company will be formed to increase national participation and accelerate knowledge transfer.

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