Small scale oil production may start in “one or two years”
The government is considering adapting power stations that now run on imported fuel so that they can burn Uganda’s crude oil instead, leading to small-scale oil production “within one or two years,” Petroleum Exploration and Production Department chief, Ernest Rubondo, tells Oil in Uganda in this exclusive interview.
Land is meanwhile being acquired for the oil refinery project, says Mr. Rubondo. The country, he adds, “will take a decision on the extent to which they want to participate [through the proposed National Oil Company] in the risk aspects of the business.”
The full text of the interview follows.
Oil in Uganda: After its long struggle to acquire geological and geophysical data, how comprehensive is the PEDP’s current knowledge of Uganda’s oil and gas potential? Is there further mapping to be done, and are there realistic prospects of findings in areas other than Albertine Graben?
Commissioner Rubondo: Well, the Department has been spearheading exploration in the country. We did the work before the oil companies came in and we progressed to the level where potential structures were identified. We undertook geological mapping, we undertook gravity-magnetic surveys and these demonstrated that the Albertine Graben has good potential for oil and gas development.
We also used that information to attract companies into the country– we call it promotion. That process was very successful because companies came into the country and they invested money for drilling especially and oil was found. The promotion effort of course was undertaken through preparation of material, going to international conferences to exhibit Uganda’s potential.
Our understanding of the potential is that even when the companies are working here, we work alongside them in the field; we have an obligation to monitor their work. The work they do is agreed with government–the agreed work programmes, and in implementing them and monitoring. We have people who monitor them on a 24-hour basis.
These people who monitor them are extremely well trained in oil and gas. The data that they acquire is also sent to the department on a daily basis. We check it, archive it and have it here in the petroleum data repository in the department and we keep going through it. It is that data that we use to establish Uganda’s petroleum potential and resources as known of now. But what you probably need to know is that there are some parts of Uganda that have not been explored yet and those could have resources yet to be established.
Oil companies are expected to share with the government any data they get from seismic and other surveys. Are they doing so, and what have you got from them, so far? By the way in the first place, why did government invite foreign/private companies to do exploration on its behalf rather than do it on its own?
Government had many powers to do oil exploration, however, there was funding shortage, the costs were too high and the government cannot afford the risks of exploration. Because you may drill a well but find nothing, so who will meet the costs? We therefore invited foreign companies to do the exploration and cater for own risks.
The government has a lot of things to do – build hospitals, make roads, so it is not normally advisable for governments to invest in risk aspects of oil exploration when it has those other options. That is why government did not spend money on that. Instead you attract companies which have risk capital to invest.
After the investment, it is now clear the risks are less and government is now in a better position to consider how much more it participates in this investment. But it is a risky venture and as you may know, Neptune Petroleum, which has been exploring in Area 5, has drilled its third well which has not been successful and they have spent in the range of US$50 million that has gone! That shows how risky the business can be because it is not recoverable if you do not find any resources. You can imagine, if the government of Uganda was choosing how to spend US50 million? It will either spend on this risky venture or spend on the burning issues like health and education!
Sharing of data: it is an obligation on the part of the companies to share seismic and any other data, first of all before they acquire seismic data, we agree that they are going to acquire this amount of seismic data in this place. When they start acquiring seismic data, the Department has people in the field monitoring the acquisition of seismic data, one that it is the seismic agreed to be acquired and two that the costs of acquiring it are indeed in line with what has been agreed.
The data that is acquired is sent to the Department on a daily basis and after the end of the survey that data is also sent here. When the companies are going to process and interpret the data, we sometimes send people to those centres where the data is being interpreted. But we also have capacity here to look at the data and interpret it. We may look quiet here but these offices are full of extremely well trained people on work stations.
What is the progress of oil exploration in new frontiers, like the Moroto–Kadam basin, outside the Albertine Graben?
The government did an aerial survey which indicated that there could be a sedimentary basin in the Kadam-Moroto basin and we intend to follow this up on the ground. Because normally what you see in the area, you have to come on the ground and follow up with the gravity-magnetic data. But the emphasis has been on the Albertine Graben which has the most prospective.
We have not seen any prospects in the Kidepo region, bordering South Sudan, yet.
When Uganda was signing production sharing agreements with exploration companies, they were not sure of how much oil was on the ground and were at their mercy. Does the now proven potential in the Albertine Graben make government more confident in reaching satisfactory agreements with the international oil companies?
First of all, not the entire Albertine Graben is completely risk free because as you have seen, we are talking about Neptune which has just had a third well where there is no discovery. So, there is still an element of risk–this oil and gas business is a risky business. Secondly, the confidence of governments in negotiating contracts has always been there. When government is negotiating with these companies, we stand strongly as a government, we consider the terms that are in the agreements and the companies also consider the benefits in those agreements. In the past, some companies came here and because of the things government wanted to put in the contracts, they left, they said they cannot get into agreements like that. We also expect that in future, it will still be the same: there may be companies that will come here and just fail to meet government’s expectations in the agreements. But when they fail, they will leave and [we will] get others.
But with regard to investment, government has money in its hands, it has choices on how it is going to spend this money and these choices are not taken by this Department but by the Ministry of Finance, parliament, cabinet. So, the country will take a decision on the extent to which they want to participate in the risk aspects of the business. And of course they will have to understand the risk and we shall explain to them very well. They know how much money they have, they will look at the opportunities they have of spending the money and they will decide.
What in practice will be the division of labour and duties between PEDP, the proposed National Petroleum Authority and the proposed National Oil Company?
That is very easy. The National Petroleum Authority, which is in the proposed law to be discussed by parliament, will regulate the sector – controlling how the companies work, assessing their cost to ensure that they are working in line with best practices. They will regulate the sector. The National Oil Company on the other hand will be responsible for the commercial aspects. Government has a stake in each of these licenses and this stake needs to be managed by an entity and it is the National Oil Company that will manage that entity.
Government also has the option to receive crude oil or cash. If it receives crude oil, the National Oil Company will be asked to manage that crude oil.
The Petroleum Exploration and Production Department, which will be in the Ministry responsible for oil, will take care of the policy aspects – regulation for the Authority the commercial aspects for the Company.
What does PEDP see as an appropriate timeline for oil and gas production in Uganda?
Well, the issue of when the oil is produced is more determined by, where will the oil go when it is produced? And the policy of government is to refine the oil in Uganda, to supply the country and neighbouring countries, the region. When there is excess, you consider exporting outside the region.
So, the key to when the oil will be produced is when the refinery will be in place. So I think, the more direct question is, when will the refinery be in place? I think the process has begun of finding partners to work on the refinery, acquiring the land, which is ongoing. But we expect that in three or four years’ time a refinery will be in place then production can start. We expect to have some small scale production that may go to power production because as you are aware, some power plants in the country are using heavy fuel oil which is imported. The experience in other parts of the world is that you could actually use crude oil in those plants. So that is the discussion that is ongoing so that you may have some early production of crude but little amounts to support power generation.
That could be in a short time of say one or two years. It would require changing the current generating plants from the use of heavy fuels to the use of crude oil.
How will gas and oil production in neigbouring countries–the prospect of discoveries in Kenya and Tanzania–affect Uganda’s oil and gas industry?
Well I don’t know why you concentrate on the challenges because when we start producing our oil, we shall also have opportunities. What you have referred to is what is happening in the neigbouring countries in regard to oil and gas. And for us, the development of the oil and gas sector is really guided by the oil and gas policy. So what the country is going to do with the oil which has been found is in accordance to the oil and gas policy, as I have told you refining is one of them. The other thing is that when the policy was put in place, licensing was stopped – we expect to take forward licensing in a competitive manner – subsequently – we are building those institutions that will manage and regulate the sector, will do the commercial and policy aspects.
Government is training people – capacity building to enable them participates in the oil and gas sector, so our development of the sector is not necessarily related to what is happening in the neighbouring countries yet. We understand it could and we keep listening and looking out for where could be synergies but at the moment the development of the oil and gas industry is in line with the oil and gas policy. The only relationship we thinking is that when the refinery is developed, some of the petroleum products produced will go to the neighbouring countries because they do not also produce and refine their own oil. There is also a possibility they could use our refinery to process their oil when they discover but we have not discussed about this prospect.
Do you have anything else to add about the oil and gas industry in regards to exploration?
Oil and gas are becoming an additional resource for the country. The country has many other resources as you are you aware. Oil and gas is a significant opportunity because it has the potential to contribute to the development of this country very efficiently, very significantly. The process so far has been taken forward well. Uganda’s experience in the sector is good because out of the 66 wells drilled, 58 have encountered oil which means that 90% of the wells have found oil – that is a record international because most countries it is about 10 percent.
The investment in the sector so far – about US$1.2 billion, the reserves found are 2.5 billion barrels which will means that our finding cost is less than a dollar a barrel compared to about five dollars in other countries – that is a cost-effective exploration effort. So, that is a good thing, the sector is beginning well.
There are challenges of capacity building, the sector has grown quickly and so, we need people quickly and we need people to participate in working in the sector but we also need entrepreneurs and commercial institutions. It represents a significant opportunity for this country.
Mr. Rubondo is a geophysicist by training, and has worked since 1990 with the Petroleum Exploration and Production Department, which he now heads as Commissioner. Interviewed by FW.