UK firm wins Ugandan oil contract

FROM THE ECONOMIST INTELLIGENCE UNIT

Tullow Oil has won the battle to buy Heritage’s holdings in western Uganda, despite strong competition from Italy’s ENI. Attention will now switch to developing the finds.

After two months of intense lobbying and speculation, UK-listed Tullow Oil has won the battle to buy Heritage Oil’s holdings in the Albertine basin in western Uganda. Following several large discoveries that have firmed up Uganda’s prospects–reserve estimates now vary between 1bn and 2bn barrels–the focus has begun to shift from exploration to extraction, and companies with more downstream experience are moving in. Tullow and Heritage owned the three blocks with confirmed reserves, and in November 2009 Heritage accepted a US$1.5bn offer from ENI–backed by the Italian state–for its 50% share in blocks 1 and 3A. However, Tullow, which shares exploration rights with Heritage, claimed that it had the option of first refusal on the Heritage share, and matched ENI’s offer. In late January 2010 shareholders in Heritage accepted both offers, and it was left to the Ugandan government to decide which bid would be successful.

ENI appeared to be in a strong position; it has more experience of bringing oil to market and its know-how gained as an operator and pipeline builder in difficult markets likeKazakhstan would be useful, as the Ugandan discovery is 1,300 km from the nearest port in Kenya. Moreover, Tullow has little experience beyond exploration and its bid would create a monopoly in the sector. This viewpoint appeared to be confirmed when the energy minister, Hillary Onek, sent a letter to Tullow indicating the government’s approval of ENI’s bid on the grounds that it would prevent a monopoly and criticising Tullow for not delivering on plans for early production. However, this view was quickly rebutted by two other ministers, who made it clear that no such approval had been given. High-level anger at the letter, and the subsequent backing of Tullow’s bid, raised questions about Mr Onek’s motivation, and led to some calls for his actions to be investigated by the inspector-general of government.

Perhaps unnerved by claims that revoking Tullow’s pre-emptive right would undermine the investment climate–and encouraged by the company’s plans to bring in a partner to develop the finds–the minister of state for mineral development, Peter Lokeris, stated in February that the government approved Tullow’s bid, adding that Kampala respected “the sanctity of the law”. Attention will now switch to developing the finds, which are likely to include building a refinery in Uganda and a pipeline to the Indian Ocean port in Mombasa, Kenya–investments that are expected to cost around US$10bn. Tullow has not been idle; it raised £925m (US$1.4bn) in a share placing on the UK stockmarket at the end of January and has been courted by potential partners, including the state-owned China National Offshore Oil Company (CNOOC) and French oil giant Total. CNOOC is the current favourite; it was involved in last-minute lobbying of Uganda’s president, Yoweri Museveni, to ensure that Tullow’s bid would be successful, and the government may favour it as a partner, as it is cash-rich, has access to cheap resources and is willing to operate in security-sensitive areas. Nonetheless, Tullow will try to put a partner in place sooner rather than later; it expects production to start in 2010, beginning with a modest 500‑ 1,000 barrels/day (b/d) for local use, before increasing to 150,000 b/d by 2015.

More broadly, interest in Uganda’s emerging oil sector is expected to drive up investment in 2010, following a slump last year. According to the Uganda Investment Authority (UIA), the value of licensed projects fell 35% to US$1.6bn in 2009 following the global credit crunch. Local investment accounted for US$655m in 2009, while foreign investment amounted to just under US$1bn, with the UK, China, India, Russia and Kenya being the biggest sources. Most of the investment was in manufacturing, worth US$577m, followed by finance, insurance, real estate and business services (with US$309m), and agriculture (US$203m). There will be a recovery in 2010, and the UIA expects investment to nearly double to US$3bn, with strong interest in infrastructure, heavy equipment and services to support oil production. The completion of an industrial and business park in Kampala will also spur interest, and companies will look to use Uganda to tap into the business potential of fast-growing markets in southern Sudan, Rwanda and the Democratic Republic of Congo.