Friday, December 15, 2017
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My President Magufuli, This is why Uganda oil not on Idd Amin’s top priority

Hoima-Tanga oil pipeline

By Hussein Lumumba Amin

Ndugu John Magufuli, the President of the United Republic of Tanzania, I am told that in your honourable speech last week during the launching of construction works at Mutukula border post for the Uganda-Tanzania pipeline, you claimed that “Amin did nothing about Uganda’s oil”.

At this point I am caught between keeping quiet or speaking out now when it is too late for you anyway.

But as they say, remaining silent can sometimes mean siding with what is said.

I am not sure if in your assessments of the project you are looking exclusively at the pipeline, or if you have been presented with an extensive overall feasibility study of Uganda’s oil and it’s prospects today.

So with all due respect (and I genuinely respect all leaders who do not joke with corruption), here is a quick explanation that might give you some insight into what this oil might actually mean for Uganda in real economic terms.

But also for Tanzania since there will come a time when you will probably have an obsolete pipeline lying idle across your country.

So here is a brief exposé that I wrote in 2016 (which was also published in Uganda’s New Vision newspaper most probably for educational purposes). It was entitled  “Why Amin Didn’t Exploit Uganda’s Oil”.

I stated therein that we needed to understand the reality regarding Uganda’s oil reserves which are estimated at a mere 5 billion barrels. And from that, only a fifth of it (1 billion barrels) is extractable.

As of Friday, December 16, 2016, the Crude Oil Price was at $51 .90 per barrel.

So if we sold all the 1 billion barrels of extractable oil at that price, the total income would be $51 billion US Dollars.

Saudi Arabia for example, earned $200 billion dollars from oil in 2015. This means that Uganda’s entire oil reserves revenue is only a quarter of what the Saudi’s make from their oil in just one year.

And while the total oil revenue might be a huge amount to an individual, it is only equivalent to five years of our own national budget which stands at almost $10 billion USD for the 2016/2017 financial year.

Meaning that every five to six years, Uganda depletes the equivalent of all it’s oil in terms of revenue from the resource.

Remember that the oil production agreements give the oil companies around 60 to 70% of that total oil revenue as well.

That amounts to approximately $30 billion USD that deducted from the $51 billion total.

As well managed businesses they first want to recoup any investment they made in the project. Last August, the Energy ministry announced that “the oil companies will initially invest around $10 billion USD to undertake the drilling of about 500 wells and construction of associated infrastructure, before the country can see first commercial production by 2020.”

The other major cost to deduct from the $51 billion US Dollars total revenue is the $5 billion US Dollars for building the Uganda-Tanzania pipeline, and another $5 billion to build a refinery and its pipeline from Hoima in Western Uganda upto the capital Kampala.

If we make a simple calculation of the above amounts, we have an estimated $40 billion dollars already gone from the $51 billion total.

Further more, I estimate that probably another billion dollars is spent in advance expenditure like the relocation/compensation of populations. There is also purchases and procurements like the Sukhoi fighter jets, plus countless other projects where every three months our parliament is approving loans in the hundreds of millions of dollars each.

These loans are based on the premise that we will soon have oil to repay them plus any accrued interest.

According to Global Witness, some of the environmental hazards that come with oil exploration activities include destruction of animal habitats, water contamination, generation of waste; air pollution as a result of flaring of crude oil; and danger to wildlife. The benefits will therefore also go to protecting the surrounding populations and the environment.

Remember that land compensation features as part of the oil production costs.

The refinery alone requires more than 29sq km of community land from 13 villages. The acquisition affects 1,221 households with a total population of 7,118 people.

Moving these families required appropriate compensation and relocation into newly built housing. If we add the road networks leading to and from the oil wells plus storage facilities in Kampala for the refined products, the cost is probably another billion dollars.

This leaves Uganda with barely any profits from the  $51 billion total oil revenue for

that sum is based on the assumption that the price per barrel doesn’t collapse again as it did early this year when it reached $30 per barrel.

At that rate, we would be producing oil at a total loss and would already now be owing the production companies money instead.

In his speech on January 26th 2016, Mr. Yoweri Museveni explained that: “When oil comes out, we shall have our own totally independent financial base. Even when oil price is down at $50 per barrel, we shall have an additional $2.5b new money. And when oil prices improve, we shall have at least $4b.”

If we reverse engineer the business maths, it simply means that one is investing $45 billion US Dollars in oil and will get a maximum $4 billion US Dollars profit only.

This is not even half the annual budget of Uganda for 2016/2017.

And what if oil prices fall?

In any case, when we hear people saying that revenue from oil has already been depleted even before the product came out of the ground, this whole calculation clearly exposes the sad reality.

People wonder why didn’t President Idi Amin exploit Uganda’s oil?

In the 1970’s, the average price per barrel was even lower than todays rate, an average $12 dollars a barrel between 1973 and 1979. Therefore oil production would have been an even bigger loss for Uganda.

My late father’s final decision was that it was better we left the oil where it is was.

An article in the Daily Monitor newspaper published on Monday 7th March 2016, and titled “Discovery of oil in Uganda ” says : “By the 1930s, geologists, engineers and other mineral experts had carried out test drills particularly in the Albertine region. The first Petroleum Act was enacted in 1957, after confirming that the deposits were substantial and might in some years to come be commercially viable. As of then the oil was safer in the ground.”

It therefore seems to me that everyone who had the bigger perspective in mind saw that it made sense to leave the oil where it was.It has been reported that Uganda is going to pay Tanzania $12.20 US Dollars for every barrel of oil that passes through the pipeline.

If we say that half of the 1 billion barrels of extractable oil are going through the pipeline and the other half to the refinery, that means Uganda will pay a total $6.1billion US Dollars to Tanzania.

This is an extra cost to the ones earlier explained here. It actually is now possible to say that any oil that passes in that pipeline makes the oil operation a net financial loss to Uganda.

My advice last year was that in order to make the most out of a project that is already underway, we are better off forgeting the Uganda-Tanzania pipeline (It will soon become obsolete anyway), and instead focus exclusively on the refinery.

At least we will immediately save the $5 billion US dollars pipeline construction cost plus the $6.1 billion payable to Tanzania.

We will then simultaneously gain more from the oil refinery which will be adding value to the entire extracted oil reserves by making highly commercial products like petrol, diesel, kerosene, and others for the local, regional, and continental markets.

In real terms this simple advice means that rather than getting only the $4 billion which is Mr. Museveni’s projection of Uganda’s earnings from oil (if the international oil price is at $50 US dollars a barrel),

Uganda will now be able to earn anywhere upwards of $25 billion US dollars (with oil at the same international price), and this we can achieve through the refinery process and any onward transactions including taxation.

The writer is the son of the former President of Uganda, Idd Amin.

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