VZCZCXRO2502
RR RUEHGI RUEHRN RUEHROV
DE RUEHKM #0366/01 0981155
ZNR UUUUU ZZH
R 081155Z APR 09
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 1311
INFO RUCNIAD/IGAD COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 KAMPALA 000366 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EPET ENRG EAID ECON KCOR PGOV UG
SUBJECT: UGANDA OIL: PLANS TAKING SHAPE, BUT PUBLIC REMAINS IN THE 
DARK 
 
REF:  A) 2008 KAMPALA 1648, B) 2008 KAMPALA 1100, C) 2008 KAMPALA 
413 
 
¶1. (SBU) Summary:  Uganda is proceeding with plans to develop its 
oil industry, with recent discoveries showing ever-larger 
recoverable reserves.  The public remains largely ignorant of the 
government's intentions, however, spurring widespread suspicion that 
officials are seeking to structure the regulatory framework so that 
corrupt insiders will benefit.  The lack of public information about 
the government's plans was apparent during a recent speaker-series 
visit to Kampala by University of Houston Law Center Professor 
Jacqueline Weaver.  While meetings with Ugandan officials show 
thinking in line with international best practices, the government 
remains frustratingly closed in its approach to drafting policies 
and laws.  Meanwhile, workshops and a public forum in which 
Professor Weaver participated demonstrated that while the public, 
parliament and media are interested in the sector, they need to 
continue educating themselves if they are to perform their watchdog 
roles.  End Summary. 
 
----------------------------------- 
BACK TO SCHOOL FOR OIL AND GAS 101 
----------------------------------- 
 
¶2. (U) Professor Weaver's Public Diplomacy-sponsored speaker visit 
occurred from March 16-20.  Its impetus was a request to the U.S. 
Mission by the new Chair of Parliament's Natural Resources 
Committee, Winifred Matsiko, to provide assistance in building 
Parliamentary capacity via a speaker program focused on Uganda's 
emerging oil industry.  Weaver's program was finalized after 
consultations with then-Minister of Energy Daudi Migereko, who has 
since been replaced by Hilary Onek, the former Minister of 
Agriculture.  The visit included the following events: 
 
-- A half-day seminar for Parliament's Natural Resources, Budget, 
Finance and National Economy Committees.  Attendance: approximately 
¶25. 
-- A full-day seminar for civil society and journalists. 
Attendance: approximately 120. 
-- A public forum, including government officials, civil society 
representatives, and oil company executives on the significance of 
oil for the future of Uganda.  Attendance: approximately 200. 
-- Meetings with the Ministry of Energy and Mineral Development; the 
Ministry of Finance, Planning and Economic Development; Tullow Oil; 
Neptune Oil, Tamoil, the World Conservation Society (a USAID 
grantee), and the Norwegian Embassy (which is funding a petroleum 
sector capacity-building program). 
--A press conference.  Attendance: 30. 
 
¶3. (U) During the events, Professor Weaver outlined oil revenue 
management frameworks and production sharing agreements, drawing on 
her 30 years of experience in the U.S., Russia, China, and 
elsewhere, working as a petroleum industry economist and law 
professor. 
 
-------------------------------------- 
BACKGROUND: THE GOOD, BAD, AND THE OIL 
-------------------------------------- 
 
¶4. (SBU) Exploration firms continue to make discoveries in Uganda of 
reserves large enough to utterly transform the country's economy. 
Both the firms and Government of Uganda (GOU) officials publicly 
state Uganda has recoverable reserves of at least one billion 
barrels, though some industry sources have stated privately that 
recoverable reserves could be between three and seven billion 
barrels.  With such sizeable deposits, Uganda will most likely 
become one of the top 50 producers in the world when peak production 
is achieved in four or five years and one of the top five or 10 oil 
producers in Africa.  With 150,000 to 200,000 barrels of oil per day 
produced at $60 per barrel, and with an expected 70% government take 
of profits, such production would deliver Uganda some $2 billion in 
revenue per year, according to Tullow Oil, one of four license 
holders in Uganda.  This revenue stream would be equal to Uganda's 
current total government income, and nearly equal to the entire 
government budget of $2.4 billion. 
 
¶5. (U) Oil's potential impacts -- both good and bad -- upon Uganda's 
economy and environment have energized many Ugandans who want the 
country to avoid the "resource curse."  Uganda's oil fields are 
co-located in or alongside Uganda's most popular national parks, 
where 40% of Africa's primate species and 51% of Africa's bird 
species are found, according to the Uganda Wildlife Society. 
Complicating matters, the oil is extremely waxy, requiring heated 
storage and transport if the oil is to remain liquid.  This requires 
extra power plants and equipment throughout the oil regions. 
Further, wells are located at shallow depths and will also have 
little flow pressure, meaning that firms will most likely have to 
use water injection technologies to force the oil out, which also 
has environmental impacts. 
 
 
KAMPALA 00000366  002 OF 003 
 
 
¶6. (U) Uganda's media and civil society are also increasingly 
concerned about the potential diversion of oil revenues or land 
seizures by well-connected insiders.  This environment of suspicion, 
coupled with the dearth of information provided by the government 
about the industry's development, has led to the circulation of 
rumors, repeated in the media, about increasing amounts of land 
speculation.  News reports appeared in February that the President's 
Special Presidential Brigade and a security firm linked to the 
President's younger brother had assumed control over large tracts of 
land in Amuru district, where some of the largest recent finds have 
occurred.  The GOU, local officials and oil firms have vigorously 
denied the allegations, which appear to be untrue. But in the 
absence of greater transparency from the government, conspiracy 
theories abound, unchecked. 
 
¶7. (U) Such reports underscore the high and rising expectation among 
the public that oil will bring windfall profits in the immediate 
future.  What the GOU and news reports often fail to make clear, 
however, is that significant amounts of oil will not be produced for 
several years, and only after an estimated $6-8 billion in new 
infrastructure is built.  (Note: Tullow Oil is obligated to carry 
out an Early Production Scheme (EPS) to produce some 4,000 barrels 
of oil per day this year or next, according to an MOU included in 
its exploration license.  Tullow is resisting implementation, 
however, arguing that it would not be an efficient use of funds, as 
the power plant and refinery involved would divert funds from other 
necessary infrastructure and will soon become redundant.  End 
note.) 
 
--------------------------------------------- 
GOU REASON FOR NOT SHARING INFO: "WE'RE SHY" 
--------------------------------------------- 
 
¶8. (SBU) The discovery of larger reserves along with increasing 
public interest in the industry is making GOU officials more rather 
than less secretive.  No government public information campaign on 
the sector exists and the GOU refuses to make the Production Sharing 
Agreements it has signed with the exploration firms public. 
 
¶9. (SBU) This trend toward secrecy was evident before and during 
Weaver's visit, particularly when Foreign Minister Samuel Kutesa 
called the Ambassador only days before Weaver was to arrive in 
Kampala to request postponement of her entire schedule of events. 
Kutesa justified his request by arguing that neither he nor the 
government could engage the public before the GOU had drafted the 
laws and defined its plans.  The Ambassador replied that the trip 
had been requested by Parliament and planned in tandem with the 
previous Minister of Energy.  He noted that a delay was not possible 
in any event, because invitations to various events had already been 
distributed.  All events took place as scheduled. 
 
¶10. (SBU) In the end, Weaver did meet with a range of GOU officials, 
though GOU participation in the U.S. Mission-sponsored public forum 
was minimal.  Despite much work to invite officials from the 
Ministry of Energy and Ministry of Finance, the Ministry of Energy 
invitee declined to participate or nominate a substitute; a Ministry 
of Finance official invited to the panel said he would participate 
but did not show due to a competing event.  Instead, Weaver, the 
Country Manager of Tullow Oil, a parliamentarian, and a 
representative of an environmental group spoke to the eager 200-plus 
person audience, including media, parliament, civil society and the 
diplomatic corps.  (Note: In fairness, the new Minister of Energy 
had been in the job for less than a month and said he would not be a 
position to participate substantively.  Also, the Minister of State 
for Minerals, who was observing the forum, did eventually identify 
himself and join the panel after about an hour.  End note.) 
 
¶11. (SBU) Officials have shrugged off swelling public criticism of 
the government's behavior, despite the fact that irate members of 
Museveni's own ruling National Resistance Movement (NRM) party stood 
up and called for "regime change" during Weaver's workshop, saying 
the Cabinet must share more information.  Kutesa, for his part, only 
expressed surprise when the Ambassador noted that rumors were 
circulating that wealthy government cronies were illegally acquiring 
or purchasing land in the oil areas for themselves.  "We're shy," 
said Laurence Kizza, the head of the Economic Affairs Department at 
the Ministry of Finance, explaining why the GOU had so far done 
little to inform the public about the sector. "But we will manage 
them [the public], I assure you." 
 
---------------- 
GOVERNMENT PLANS 
---------------- 
 
¶12. (U) Meanwhile, plans for the industry are moving forward.  The 
Norwegian Government, which is funding a five-year capacity building 
program in the revenue, resource and environmental management areas, 
 
KAMPALA 00000366  003 OF 003 
 
 
is currently conducting a nine-month feasibility study to help 
Uganda examine the range of pipeline, refining, road, rail and barge 
infrastructure options.  GOU officials prefer to build a refinery to 
process the crude at this point, but industry executives say the 
government's options will be limited by what banks and 
private-sector investors are willing to invest in.  "In the end it 
doesn't matter what the government wants," said Peter Kingston, the 
CEO of Tower Resources, which owns Neptune Oil, one of the four oil 
companies with licenses in Uganda.  "The market will decide." 
 
¶13. (U) On the revenue management side, Kizza said cabinet officials 
are finalizing the principles of a revenue management law, which 
they plan to present to Parliament in the last quarter of 2009.  In 
a meeting with Weaver and Econoff, Kizza said the GOU plans to 
create a sovereign fund which will moderate revenue expenditure. 
The Government plans to set aside most of the revenues for future 
use, while it would use other amounts, 3-4% of GDP, to reduce the 
amount that the government borrows and obtains in grants every year. 
 This would reduce government grants and loans from 8% of GDP to 
4-5%, Kizza said.  Unlike his counterparts at the Ministry of 
Energy, Kizza said that the GOU would have no problem signing up to 
the Extractive Industry Transparency Initiative, but added that the 
GOU would only sign up after revenue management laws had been 
passed. 
 
------- 
COMMENT 
------- 
 
¶14. (SBU) GOU officials involved in the sector display good 
knowledge of the challenges ahead and say many of the right things 
about transparency and accountability.  Their failure to share 
information or bring civil society into the process of developing 
the legal framework at this time, however, reflects the lack of 
respect that President Museveni and his advisors have for civil 
society and consultative processes.  This attitude is reflective of 
President Museveni's highly personalized and highly centralized 
leadership style, which creates an environment in which corruption 
can flourish.  The news is not all bad, however.  Though Uganda's 
parliamentarians from both sides of the aisle demonstrate they know 
little about the petroleum industry, they deserve credit for 
requesting the speaker program in the first place and for their 
interest during the week.  And though civil society and the media 
have little expertise, their attendance in large numbers at all 
events, with organizers having to bring in extra seating to 
accommodate them, demonstrates the high level of interest in 
Uganda's newfound oil.  The heavy coverage of the events provided by 
print and electronic media also went a long way in furthering public 
awareness on these issues. 
 
¶15.  (SBU) With so many challenges remaining, current low oil prices 
may be a temporary blessing for Uganda; they will ensure that 
Uganda's oil, which will be relatively expensive to produce, will 
remain in the ground for now and provide the country with some 
breathing space for capacity building.  In the long run, however, 
parliament and civil society have their work cut out for them.  Not 
only will they have to begin focusing on the technical aspects of 
structuring an oil industry, but they will have to learn how to do 
the hard work of monitoring the revenues to keep rent seekers from 
taking control.  In this sense, oil is as much about governance as 
it is about money, energy, and infrastructure for development.  The 
Weaver visit focused in particular on Parliament, media, and civil 
society in order to help these players begin this long learning 
process, and the debate and discussion the visit sparked were 
clearly a mark of success in this regard.  Post will continue to 
catalyze the learning process here given the enormous stakes the oil 
industry has for Uganda's economic and political development. Post 
aims to continue responding to their requests for help as part of 
our Mission's governance and transparency objectives. 
BROWNING