All eyes on the bottom line as Uganda forges ahead with oil pipeline plans
Investors and the governments of Uganda and Tanzania are trying to hammer out a deal for a 1445km pipeline that will transport crude for export from Uganda’s Lake Albert region to Tanzania’s Tanga port. The USD3.5 billion East African Crude Oil Pipeline (EACOP) is at the heart of Uganda’s oil industry development, and the central role of this piece of infrastructure makes it one of the most important indicators of regulatory and political risk for prospective investors in the region.
The key players/shareholders
Tullow
China National Offshore Oil Company (CNOOC)
Total
Government of Uganda/Uganda National Oil Company
Government of Tanzania/Tanzania Petroleum Development Corporation
The key issues
Taxation: Tullow has been negotiating a USD300 million capital gains tax with the Ugandan government after it farmed down its exploration rights to its JV partners CNOOC and Total for USD900 million in 2017. The UK firm says it has now reached a deal with the government and is in talks with its co-investors to review the arrangement. A source involved in the talks told us the back and forth discussions had delayed the farm-down, and that this in turn had a knock-on effect on upstream development. “The pipeline was on hold until an agreement was reached regarding the upstream investment. Parties wanted to resolve all issues hindering production before finalising plans with the pipeline,” the source said.
Viability: The investors have also held off on making a final investment decision over concerns about the viability of the project considering global oil prices, production costs/transit tariffs and the total amount of crude supply. For instance, Uganda is proposing to refine some of the crude for domestic use and is making a separate arrangement with other investors to build a local refinery, but EACOP foreign investors want all produced crude initially designated for export in order to make the pipeline operation more profitable.
Transparency: Once negotiations are complete, Uganda will be required to disclose the finer details of the revenue and contractual arrangements between the parties of EACOP, following Uganda’s recent joining of the Extractive Industries Transparency Initiative (EITI). Indeed, the country has taken steps to improve transparency since its Petroleum (Exploration, Development and Production) Act was enacted in 2013, establishing a regulator and instituting competitive bidding. However, there is some skepticism on the ground over Uganda’s commitment to transparency, especially considering a recently proposed law where the government sought powers to compulsorily expropriate land for infrastructural development in the event of a settlement dispute.[1]
Sidebar Talks: Uganda and Tanzania continue to hold their own negotiations about revenue sharing, corporate tax and local content.
Outlook
Stakeholders in the pipeline envisage a conclusion to negotiations by the end of this year, to enable the pipeline to begin construction early next. Now that the stumbling block around capital gains tax seems to have been addressed, the next hurdle to cross seems to be ensuring the right tariff regime is found. With Uganda planning on opening a second round of competitive bidding for exploration licenses in May, new industry players and greater oil production may ignite government’s drive for domestic refining capacity even further. Indeed, the EACOP would have capacity for 230,000 barrels of oil per day while Uganda’s recoverable oil reserves are about two billion barrels.
One risk that is somewhat attenuated is that of political risk over the medium term. Presidential elections in Tanzania and Uganda will be held in 2020 and 2021 respectively, and both Presidents John Magufuli and Yoweri Museveni will probably be re-elected given significant opposition weakness. This is reassuring for investors, wary about the instability risk that comes with a change in government. Tanzania’s Magufuli especially has taken a relatively aggressive stance towards investment, but his Ugandan counterpart has been more cooperative. Overall, the political risk mainly lies in the long term when the investment pays off and when both governments could be inclined to demand a greater share of the benefits.
[1]That bill was withdrawn in September 2018 due to public opposition, but the government will continue to explore ways to revise existing land legislation as it looks to remove any encumbrances along the route of what could be the longest heated pipeline in the world.
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