Home Climate Change Uganda’s oil projects at risk of becoming white elephants

Uganda’s oil projects at risk of becoming white elephants

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The Kingfisher oilfields are being developed by TotalEnergies, which owns 56.67 per cent shares, Cnooc (28.33 per cent), and the Uganda National Oil Company (UNOC), which has a 15 per cent stake.
The Kingfisher oilfields are being developed by TotalEnergies, which owns 56.67 per cent shares, Cnooc (28.33 per cent), and the Uganda National Oil Company (UNOC), which has a 15 per cent stake.

Following the October 7 suspension of China Offshore Oil Corporation’s (Cnooc) operations by the Petroleum Authority of Uganda (PAU) due to safety concerns, experts have warned that Uganda’s oil and gas projects risk becoming “white elephants”.

When oil exploration in Uganda started as far back as 1913, it seemed to be a noble and good strategy to boost the country’s economic development, but the sector has since been hit by various setbacks, including poor planning, corruption and ineffective consultancy. Now more than a century since the first exploration activity in the country, Uganda is yet to see its first drop of oil.

And as the world rapidly transitions to green energy sources to curtail the current climate crisis, which is primarily driven by the burning of fossil fuels, chances of Uganda benefitting from its oil and gas are dimming.  

“The Petroleum Authority of Uganda has learnt of a fatal incident within the Kingfisher project area that occurred today 6th October 2023. This regrettable incident follows several safety incidents that this authority has previously brought to the attention of Cnooc Uganda Limited,” Ernest Rubondo, the executive director of PAU, said in a letter to the Chinese oil giant.

The said fatal incident, according to sources at the site, involved a road accident where one person was knocked dead by a truck belonging to Excel Company, one of the companies subcontracted by Cnooc for site clearance and construction of well pads.

And yet, such accidents and not new, according to Dickens Kamugisha, the executive director of Africa Institute for Energy Governance (Afiego).

“What we can learn from the Kingfisher incidents is that the Chinese are using incompetent personnel in the projects they are involved with in Uganda,” he says. “What we should be asking ourselves now is what the future is for all the projects that are being handled by the Chinese. They always have issues and take forever to complete, including projects such as the Isimba Dam, Karuma Dam and the airport.”

Mr Kamugisha says that Uganda is susceptible to making poor decisions because the country is currently heavily indebted – and the recently-passed anti-homosexuality act has only made matters worse as international funders such as the International Monetary Fund (IMF) have now withheld funding to the country.

This, he says, has made Uganda desperate, which makes it take whatever deal it can get from the Chinese who are incompetent but willing to invest in the country’s oil projects.

The Kingfisher oilfields are being developed by TotalEnergies, which owns 56.67 per cent shares, Cnooc (28.33 per cent), and the Uganda National Oil Company (UNOC), which has a 15 per cent stake. Cnooc is the operator of the fields, and oil drilling began in January this year.

Unlike the Kingfisher operations, fatal accidents have not yet been reported at the Tilenga oilfields that are operated by TotalEnergies, the French oil major – and the oil company’s operations have not been suspended before.

The Kingfisher oilfields are being developed by TotalEnergies, which owns 56.67 per cent shares, Cnooc (28.33 per cent), and the Uganda National Oil Company (UNOC), which has a 15 per cent stake

However, there have been reports of animals being knocked dead by TotalEnergies’ trucks that use the roads that cut through Murchison Falls National Park and experts have warned that oil activities are significantly destabilizing biodiversity in Uganda’s oldest and largest nature reserve that spans more than 4,000 square kilometres.    

“Just one incident like that leads to the suspension of operations. Such instances are frequent but they mostly go unnoticed,” one of the employees of Cnooc who works at the Kingfisher oilfields told The EastAfrican on condition of anonymity due to the sensitivity of the matter.

By the time of filing this story, Cnooc’s operations had not yet resumed, which left many companies counting loses. 15 companies currently work in the Kingfisher oilfields, including Cnooc and other subcontractors who provide employment to about 1,000 people – directly and indirectly. 

The oil companies are required to protect their employees against work-related hazards such as contracting diseases and suffering injuries – but Cnooc seems to be repeatedly breaching that law because Uganda seems to be trapped after several financial institutions recently ruled out funding the country’s oil projects due to associated risks and pressure from climate activists.

“Uganda has set a deadline of 2025 to begin commercial oil production so the country is racing against time, which makes it end up making bad decisions,” Mr Kamugisha said.

Stranded assets?

Other oil-related projects, such as the East African Crude Oil Pipeline (Eacop) and the Hoima International Airport have also stalled due to lack of funding, which makes willing funders like the Chinese not to be diligent enough while executing the projects because they know that Uganda has limited options for funding, Mr Kamugisha said.

The airport, which was supposed to open for operations in 2021 and facilitate oil projects, for instance, has since stalled, and the oil-related equipment that had been planned to be imported through the airport has since been shipped by road from the Kenyan port of Mombasa.

The contractor, a joint venture of Shikun and Binui and Colas Limited, had promised to hand over the airport by June this year, claiming that it was 91 per cent complete. Sources in Hoima say that the majority of the workers have since been laid off.

Other oil-related projects, such as the East African Crude Oil Pipeline (Eacop) and the Hoima International Airport have also stalled due to lack of funding

The handover was again pushed to October this year following the government’s delay to allocate the remaining Ush126 billion which is required to complete the remaining tasks, most importantly the construction of the control tower. But the October handover is also yet to pass.

Even as commercial production is planned for 2025, the Eacop, which has been touted as the project that will unlock East Africa’s future by taking Uganda’s oil to the rest of the world, has not even taken off. The over 1,400-kilometre pipeline is planned to run from Lake Albert in western Uganda through Tanzania to the Indian Ocean port of Tanga.

According to project proponents, the Foreign Direct Investment (FDI) of approximately $4 billion associated with the construction of the pipeline represents one of the largest ever inward investments into Uganda and Tanzania.

But with the current delays, experts think that Uganda’s $10 billion oil projects could end up unprofitable even when they become operational as the value of the country’s oil has been plummeting in the last decade.

“The value of Uganda’s oil reserves has already fallen by approximately 70 per cent since 2013. This value is expected to fall even further as the world transitions into a low-carbon economy,” says Charity Migwi, a climate activist from global grassroots climate change movement 350.org.

She goes on: “This means that the debt-stricken country risks having stranded assets, especially after waiving taxes for the project developers. For how long do you think oil will remain profitable for Uganda? The EACOP project is projected to have a 25-year lifespan.”

Considering the 10-year tax holiday, reduced withholding tax, and no VAT on project imported materials as provided by the Eacop Special Provisions Act 2021, the government of Uganda is less likely to profit from the project for a long time, Ms Migwi says.

Also, the more Uganda’s oil project delay and as the world transitions to renewable energy to avert the negative impacts of climate change, Uganda’s oil will be in less demand and therefore, less profitable.

“This will be at the expense of local communities in Uganda who have lost their land with little to no compensation, not to mention other direct and indirect socio-economic costs and the impacts of environmental degradation, while TotalEnergies announces massive profits yearly,” she says.

Talking of compensation, locals who were evicted to give way to oil projects complained that they were undercompensated, with an acre going for about Ush3.5 million (about $1,000).

The Ministry of Energy had argued that since these areas were mostly occupied by the Alur and Lugbar who had no attachment to the land because they had come to Hoima from northern Uganda as labourers in sugar and tea plantations.

In fact, compensation had earlier been set at Ush200,000 per acre (about $56 as of June 2017), but was later increased to between Ush3.5-4.5 million (about $1,000-1,300 at the time) following interventions of civil society organisations and human rights defenders.

The issues surrounding compensation have also led to delays in Uganda’s oil projects, such as Eacop, creating a potential risk of the projects stalling.

A century of waiting for oil money

Oil exploration in Uganda started way back in 1913, when William Brittlebank acquired the first oil license to explore crude oil in the Albertine region.

But significant oil exploration in the country started in the 1920s when John Wayland, then a government geologist, made the first ground breaking oil discovery. Wayland documented up to 52 oil and gas seeps in the region. His discovery, however, did not reveal the existence of commercializable oil but aroused great interest in Uganda’s petroleum.

Then, in 1938, the African-European Investment Company, a South African company, carried out preliminary well-drilling in the area but also got the same results: zero commercial oil.

Exploration efforts were scaled down in 1939 due to World War II, but there was renewed interest in the 1980s and 1990s until commercial deposits were discovered in 2006 – but the country is still waiting for its first drop.

This kind of delay puts Uganda at risk of earning so little from its oil now that the world is first transitioning to renewable energy sources to curtail the dire impacts of the climate crisis, which is primarily cause by the burning of fossil fuels. This, according to experts, calls for Uganda to refocus its energy investments towards renewable energy.

Ms Migwi of 350.org argues that with an abundance of renewable energy potential in Africa that could offer off-grid solutions to local communities, thereby meeting their energy needs in a clean and affordable way, Uganda could do better by advancing the renewable energy sector will create an opportunity for quality local jobs that are sustainable.

Furthermore, agriculture is the backbone of most East African countries, including Uganda. Less climatic impacts caused by projects like Eacop will mean sustainable food production and economic growth for farmers. The sensitive ecosystems that Eacop will go through, such as the Murchison Falls, has been a great tourist attraction site, accounting for about seven per cent of Uganda’s GDP and creating over 600,00 jobs.

“There are a lot of different options that offer more benefits than the Eacop project would ever reap for both the economies of Uganda and Tanzania,” she says.

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