Bottom Line: The earliest we can expect commercial output from Uganda is 2016 as production stalls over tax questions and local refining uncertainty.
Analysis: Uganda made its first big find in 2006, but development to the production stage here has lagged far behind some of the other emerging East and West African favorites, particularly Angola and Ghana, and potentially Kenya, where things will move faster once commercial viability is established. Uganda has 3.5 billion barrels of crude oil, but getting it out of the ground is proving difficult. Right now, Uganda uses tankers to get its fuel to Kenya’s port of Mombasa but a new local refinery in Uganda is supposed to resolve this with a 30,000 barrel per day capacity. However, the refinery—intended to be a public-private partnership with neighboring countries—is experiencing some difficulties. The majors operating in Uganda (Total, CNOOC and Tullow) aren’t keen on the refinery (at least on this scale) and Total and CNOOC have agreed to build a smaller one, but overall would rather pipe through Kenya’s coast. Production sharing agreements and the tax regime are also uncertain.
Recommendation: For instance, Uganda attracted investments worth $1.7 billion in 2012 thanks to heavy investments by oil exploring companies from the UK, France and China. But the Ugandan government can be whimsical with its oil. Recall the 2010 legal battle that began when the Ugandan government demanded more than $400 million in capital gains tax after Heritage Oil sold its assets to Tullow in a $1.45 billion deal. Last month, Tullow won a battle in a British court against Heritage over the tax payable. The court ruled in favor of Tullow’s indemnity claim for $313 million and dismissed Heritage’s counterclaim.) But the case has caused significant development delays and makes investors wary.