Alpha Oil was never “lucky,” says director; but mysteries remain

The co-owners’ application to form Alpha Oil was submitted in November 2005 and approved one month later

“How could you say we were ‘lucky?,’” complains Richard Kaijuka, referring to Oil in Uganda’s June 5 article, Dominion pull-out begs questions about mysterious Ugandan oil company.  “I can tell you that Alpha Oil [the mysterious company in question] did not make even one dollar out of this.”

Mr. Kaijuka does not contest any of the facts in the published story—which revealed that Alpha stood to take five percent of any profits from petroleum discovered in a Lake Edward Exploration Area—but, in an interview last week, he explained some of the background to the company.

Documents obtained from Uganda’s Registry of Companies show that Alpha was incorporated in 2005 by three entrepreneurs:  Mr. Kaijuka himself, who had formerly served as Minister for Energy and Mineral Development and later as a senior World Bank employee;  Abbas Mawanda, a well known Ugandan banker and, at the time, Managing Director of the Kisita Gold Mine in Mubende District, and Hennie Mulder, a South African citizen who, Mr. Kaijuka says, was a gold-mining associate of Mr. Mawanda’s. These three co-directors each put in 33 million Ugandan shillings (USD 18,500 at then exchange rates) as start-up capital.

They managed, says Mr. Kaijuka, to obtain from the government of Uganda an exploration licence for “the whole of Block 4,” covering those parts of Lake Edward that lie within Ugandan territory and a considerable portion of adjacent land in Rukungiri and Kanungu districts.

How?  Asked why the Ministry of Energy and Mineral Development, at that time headed by Daudi Migereko, should concede a licence over such a large area to a company with minimal registered capital and no oil exploration experience, Mr. Kaijuka replied that it was because Alpha “had the capacity to attract” qualified international investors.

“We were required to get technically competent, financially sound, proven [international] partners for us to proceed. We went out of our way to look—and landed on Dominion. Because we realised that we needed deep pockets to get into this business. On our own we couldn’t have done anything. So we had to team up with people who have the finance, who have the technology, who have the experience.  Hence—Dominion Uganda Ltd.”

Oil in Uganda pointed out that Dominion barely qualified as having “deep pockets” and a “proven” track record of exploration. Registered in the British Virgin Islands, a tax haven, it listed in 2006 on the London AIM (Alternative Investment Market) exchange—which allows share trading with few regulations and low capital requirements for young companies, in order to facilitate their growth.

After its AIM listing, Dominion’s ‘market value’—the total worth of all its shares— stood at 107 million pounds sterling (US$ 196 million at then exchange rates). If that were real money—money in the bank—it would have been enough to support an ‘exploration campaign.’  But in fact the company had little ready cash to invest.  Worse, according to a Financial Times report, subsequent “legal disputes between executive shareholders drained funds and confidence in Dominion.”  And during the European credit crisis of the late 2000s, the company struggled to raise capital to service its debts and to fund exploration in the East African blocks where it had acquired rights.

In this sense, Dominion was perhaps not a lucky choice of partner for Alpha Oil.

Yet, according to Mr. Kaijuka, Alpha had no choice.  “I was looking for anyone with risk capital,” he recalled.  “With Dominion, we just bumped into them, it’s not that they had any speciality.  But the big ones were just not interested.  I can tell you I even tried to persuade a big group like Petrobras in South America.  At that time they were just not interested.”

Alpha, Mr. Kaijuka went on to explain, agreed “to hand over the block [to Dominion] so that they could technically carry the job.”  A Uganda-registered subsidiary, Dominion Uganda Ltd., would bear all the costs of investment in exploration and keep 95 percent of any eventual profits, while Alpha would retain 5 percent of those profits. In effect, Alpha’s cut would be a reward for getting Dominion access to Uganda’s oilfields.

Alpha’s April, 2007 ‘Special Resolution’ to make a deal with Dominion

Alpha’s directors agreed to this strategy on April 27, 2007, authorising Mr. Kaijuka to make the deal with Dominion.  (See scanned document). He subsequently served for several months as Chairman of Dominion Uganda Ltd.

According to Petroleum Exploration and Production Department (PEPD) publications, the government signed a Production Sharing Agreement (PSA) with Dominion three months later, on July 27, 2007.

Mr. Kaijuka did not disclose the terms of this PSA, but his general line of argument was that it was satisfactory for Uganda because it brought in a new international investor willing to bear exploration costs.

But whilst Dominion and Alpha both clearly stood to gain, was this really a good deal for Uganda?

By mid 2007—despite Mr. Kaijuka’s description of the difficulty of attracting foreign investors—international oil companies had been exploring the Albertine Graben for more than a decade.

Heritage Oil and Gas entered at the beginning of 1997. Hardman Petroleum and Energy Africa entered in 2001. Tullow Oil bought Energy Africa’s stake in 2004, and Tower Resources (Neptune) entered the field in 2005.   These were at the time all, in oil industry terms, essentially ‘wildcat’ firms (Tullow has since grown much bigger): small explorers hoping to make big money in geographical and political frontiers where major oil companies feared to tread.

All except Tower Resources thrived in Uganda. Hardman made a breakthrough in 2005, in the Mputa-1 exploration well. The next year saw several discoveries in fields operated by Tullow (Mputa-2 and Nzizi-3), Hardman (Waraga-1) and Heritage (Kingfisher-1).

These discoveries put Uganda, literally, on the map of global oil reserves.  They also significantly ‘de-risked’ the Albertine Graben as an exploration area. Previously, the Graben had been considered ‘high risk’ because it was so far from international markets and there was no conclusive proof that it contained oil reservoirs.  But by 2007 the Graben’s petroleum potential, which PEPD staff had been proclaiming for years, was amply confirmed.

Uganda was therefore in a much stronger position to negotiate favourable terms with international oil companies, and to move up the oil industry ‘food chain’ from wildcatters like Dominion to better endowed companies.

Nevertheless, Mr. Kaijuka insisted that the arrangement with Dominion “was absolutely normal because they filled all the requirements.”

Mr. Kaijuka could not spare enough time to go into further details, so Oil in Uganda was unable to learn what royalty and profit arrangements were agreed between Dominon and the government of Uganda.

Nor could Mr. Kaijuka cast any light on the takeover of Dominion by Ophir earlier this year, and Ophir’s apparent decision to abandon the Lake Edward block.  He had no advance knowledge of this, he said, only learning of it from the newspapers. “I don’t even know when they pulled out.  I don’t know the end of the story. I myself am trying to find out. I did try to talk to them and I am in that process—saying why did you do that without telling us?”

This leaves Mr. Kaijuka feeling less than lucky. But had Dominion struck oil, his 18,500 dollar investment would likely have turned into a profit of many millions of dollars, and that’s the kind of opportunity very few Ugandans enjoy.

Report by NY