VZCZCXRO4164
RR RUEHGI RUEHRN RUEHROV
DE RUEHKM #1648/01 3590537
ZNR UUUUU ZZH
R 240537Z DEC 08
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 1015
INFO RUCNIAD/IGAD COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 KAMPALA 001648 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EPET ENRG EAID PGOV UG
SUBJECT:  NEW DISCOVERIES CONFIRM UGANDA OIL POTENTIAL 
 
REF:  A) KAMPALA 1100, B) KAMPALA 413, C) KAMPALA 393 
 
¶1.  (U) Summary:  Oil companies in Uganda have announced new oil 
discoveries in western Uganda which appear to guarantee that the 
country will be able to sustain a commercial oil industry over the 
long term.  Industry executives, elated by the news, assert the find 
will justify Uganda spending the billions of dollars necessary for 
infrastructure investments to accommodate the industry.  The new 
finds show production potential at some 200,000 barrels of oil per 
day (bpd), and oil firm executives believe Uganda has the potential 
to export $5 billion worth of oil annually when full-scale 
production begins in 2011.  This would make oil the largest Ugandan 
export by a factor of 20 and more than double current exports.  The 
potential creates massive challenges for the Government of Uganda 
(GOU), which must immediately begin planning new infrastructure and 
revenue management systems to handle incoming resources if it is to 
avoid the "resource curse" witnessed in other developing economies. 
End Summary. 
 
------------------------------ 
A Top Sub-Saharan Oil Producer 
------------------------------ 
 
¶2.  (U) Heritage Oil and Tullow Oil announced in mid-December large 
new oil discoveries in the Block One exploratory area, located at 
the delta of the Victoria Nile on Lake Albert, western Uganda.  Each 
owning 50% of the equity in the block, Tullow and Heritage said the 
finds confirm Uganda is capable of sustaining its oil industry over 
the long term and can justify the billions of dollars oil companies 
and the Government will have to invest in infrastructure 
investments, including new roads, rail lines, and possibly an oil 
refinery.  "With many prospects still to drill in the Butiaba region 
and across the basin, we are now certain that the commercial 
threshold for development should be exceeded," Tullow Chief 
Executive Aidan Heavey said in a statement. 
 
¶3. (U) Tullow Oil Country Director Brian Glover announced on 
December 13 that he believes Uganda has the potential to export $5 
billion worth or 200,000 bpd of oil annually when full-scale 
production begins in 2011.  It is the largest estimate provided yet 
of Uganda's oil potential.  If it is accurate, oil revenues will 
transform Uganda's economy, more than doubling total exports of $2 
billion, and, according to Glover, creating jobs for 10,000 
Ugandans.  The finds, announced on December 11 and 16, mean Uganda 
now has between 400 million and 500 million barrels of proven 
reserves.  Estimates of potential reserves run upward of one billion 
barrels, an amount that could make Uganda one of the top three 
sub-Saharan African oil producers, behind Angola and Nigeria. 
Equatorial Guinea, the current third largest producer, has proven 
reserves of 1.1 billion barrels of oil (bol).  It earned $3.3 
billion in exports in 2007. 
 
¶4. (U) Oil firms have thus far invested $500 million in Ugandan oil 
exploration in the five blocks that have been licensed to four firms 
in the Albertine Graben, an ecologically sensitive region running 
between Uganda and the Democratic Republic of Congo (Note:  A 
"graben" is a depressed segment of earth surrounded by two raised 
faults.  End note.). 
 
¶5.  (U) Before these new finds, Government and industry sources were 
uncertain if Uganda had the volume of oil necessary to make the 
industry profitable.  Tullow Oil had already agreed to produce 4,000 
bpd for an early production scheme that would begin in late 2009. 
This oil production will go entirely into a topping plant which 
would in turn supply heavy fuel oil for a 50-85 MW power plant for 
Uganda's electricity grid.  But firms were uncertain what would 
happen with any oil beyond that amount.  Because the oil is waxy and 
is expensive to produce, transport and refine, industry sources said 
only proven reserves of at least 400,000 million barrels, capable of 
producing at least 40,000 bpd, would make the fields commercially 
viable.  Tullow oil believes the new discoveries of Block 1 and 2 
(including the Buffalo, Warthog and Giraffe fields) hold at least 
150,000 million barrels.  Heritage Country Manager Bryan Westwood 
says he is certain that the Kingfisher field in Block Three, drilled 
in October, can also produce 40,000 to 50,000 bpd.  "Other large 
fields in the lake have not even been drilled yet," said Tullow's 
Glover.  Other oil company executives in Uganda were elated by the 
recent discoveries.  "This news is incredible.  The field is proving 
stronger than expected," says Marylin Hill, Country Manager of 
Neptune Petroleum.  "It's good to know now that we have good 
reserves and we definitely have a sustainable industry."  Tullow and 
Heritage have drilled 17 consecutive successful exploratory wells to 
date. 
 
------------------------ 
Secrecy... and Headaches 
------------------------ 
 
¶6.  (SBU) To deal with this expected oil windfall, the Government of 
Uganda is due to pass a Petroleum Act and a Revenue Management Act 
 
KAMPALA 00001648  002 OF 003 
 
 
in early 2009.  The Cabinet has not shared drafts, however, with 
either Parliament's Natural Resources Committee, industry, or civil 
society, a cause of significant concern for those with an interest 
in the industry.  Minister of State for Energy and Mineral 
Development Kamanda Bataringaya said the Revenue Management act will 
include a "Heritage" or sovereign trust fund, which will disburse 
oil revenues for current and future infrastructure and development 
projects.  The laws will also include provisions for a National Oil 
and Gas Company, which some industry experts think is unnecessary, 
and an oil and gas regulator.  Officials state those bodies would be 
established also in 2009.  (Note:  Ugandan officials, including 
President Museveni, have visited Nigeria to study its oil sector, 
paying close attention to the Nigerian National Petroleum Company 
and its subsidiaries.  End Note.) 
 
¶7.  (SBU) Another key challenge is planning infrastructure when 
financing has become more difficult due to the falling prices of oil 
and the global credit crunch, executives state.  Tullow told GOU 
officials on December 22 that it needs to renegotiate its MOU with 
the government to build the topping plant to refine just 4,000 bdp, 
as the plan is not profitable at current prices.  In addition, 
Ugandan officials and industry are squaring off over Uganda's desire 
to build a large refinery to process up to 100,000 bpd and export 
products all over the region.  Tullow's Glover, when asked about 
this plan, laughed.  "A refinery of that sort is going to take a 
long, long, long, long time," he said.  Oil companies believe Uganda 
should invest in roads, rail and perhaps a pipeline network to 
export the crude and import refined product. 
 
---------------------------- 
Stalled Cooperation with DRC 
---------------------------- 
 
¶8.  (U) Meanwhile, Uganda and the DRC have made only modest progress 
towards implementing an agreement reached in June 2008 to physically 
demarcate the border.  That agreement, which also called for joint 
revenue sharing of common oil fields, was seen as a breakthrough in 
relations between the two countries.  (Note:  The joint demarcation 
team got off to a slow start, and is highly dependent on outside 
expertise, slowing progress.  End Note.)  Tullow and Heritage 
purchased exploration rights from DRC for 6,000 square kilometers of 
land, but the agreement remains in doubt because DRC officials 
refuse to provide a drilling license.  Tullow and Heritage say DRC 
officials sold off the same area to other firms.  Instability in the 
area also makes exploration there difficult at this time.  In August 
2007, DRC soldiers fired on a Heritage boat conducting seismic 
testing on Lake Albert, killing a British employee.  DRC officials 
claimed Heritage security guards had fired first and that the boat 
had entered DRC territorial waters. 
 
--------------------------------------------- --- 
Assistance and Advice -- Solicited and Otherwise 
--------------------------------------------- --- 
 
¶9.  (U) A number of foreign donors, non-governmental organizations 
and others are gearing up to provide assistance to the GOU.  The 
largest of these is the Government of Norway (GON), which will 
conclude a three-year $2.8 million assistance program in June 2009 
to assist the GOU with energy sector resource, revenue and 
environmental management.  Norwegian energy experts currently work 
inside the Ministry of Energy, and had a strong hand in the writing 
of Uganda's Oil and Gas Strategy, approved by the Cabinet in early 
2008, and in the draft legislation soon to go to Parliament.  The 
laws, calling for a national oil company and a trust fund for 
infrastructure and social investment, mimic much of the structure 
that exists in Norway.  The GON is planning a new five-year, $7.75 
million grant beginning in 2009. 
 
¶10.  (U) The U.S. Mission has followed the energy sector closely, 
with assistance focusing upon Lake Albert security and environmental 
impacts mitigation.  The Department of Defense is developing a 
$150,000 program beginning in 2009 to train the Ugandan military to 
enhance security on Lake Albert.  USAID provided the 
non-governmental organization (NGO) Wildlife Conservation Society 
with a $5.1 million grant which focuses, among other environmental 
issues, upon mitigating the environmental impacts and building 
capacity among with local environmental groups.  Post has also 
requested an oil revenue management expert to conduct a speaking 
tour. 
 
¶11.  (U) Beyond this assistance, the World Bank has urged the GOU to 
sign on to the Extractive Industry Transparency Initiative (EITI), a 
non-binding program that has much support among civil society.   The 
GOU has thus far refused to sign on to EITI, however, saying only 
that it agrees with the principles of EITI and that these principles 
will be incorporated into future domestic laws.  Other NGOs focusing 
on the oil sector include the African Institute for Energy 
Governance, Transparency International and International Alert. 
 
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KAMPALA 00001648  003 OF 003 
 
 
Comment 
------- 
 
¶12.  (SBU) The recent discoveries heighten expectations while at the 
same time deepening the challenges presented to Uganda as an 
incipient oil producer.  First, the Government needs to develop its 
new revenue management and legal structure to handle a massive 
influx of oil dollars.  The fact that oil bills remain cloaked in 
secrecy bodes ill for a country known for high levels of corruption 
and mismanagement.  Whether oil becomes a spur for sustainable, 
equitable economic growth or a "resource curse" hinges on decisions 
that will be made in the near future.  The implications for the 
country's development are huge. 
 
¶13.  (SBU) Further, the GOU -- which already lacks the capacity to 
build infrastructure to maintain decaying roads and an insufficient 
electrical system -- will need to build yet more infrastructure 
immediately in western Uganda just to accommodate the oil industry. 
It must do this while finding a way to protect an extremely 
sensitive ecosystem, where many of Uganda's national parks lie. 
Beyond this, if the GOU plans to build a refinery, as officials have 
stated, planning, bidding and arrangements for financing will have 
to begin now, even though the environment for such a project will be 
more difficult due to the slump in oil prices and the dismal global 
financial climate.  Moreover, the actions of corrupt government 
officials, already implicated in a scandal to steal a plot of land 
from an American citizen to be used for Uganda's main pipeline 
terminal, has caused the project's commencement to be delayed by 
over one year at great cost.  End Comment. 
 
BROWNING