Why it has taken Uganda forever to get its oil out of the ground?

By Sam Stewart Mutabazi

Oil is a big resource for countries that discover it. Nations that find oil take a short time to get it out of the ground and put it on the market because it’s a big relief to government treasury in form of ready cash inflows. Uganda discovered oil way back in 2006, and to date, commercial production is yet to commence. There has been back and forth discussions with oil companies on the best option about how the country can best get good returns from this important resource. Oil companies have pulled the government’s leg and have not been willing to go into full scale production as this doesn’t favor them.

Although government of Uganda rightly determined that its first line of call would be to establish a refinery as a way of promoting local content, the oil companies were never comfortable with this streak. Oil companies have been investing heavily into the budding industry right from exploration days without any returns. Even if business has changed hands over time with initial investors pulling out and selling their stake to new comers like CNOOC and Total, the levels of investment have been high and over a very long period of time.

The oil companies have shown their financial strength by continually investing their resources but with hope that, one time, they will cash in and recoup their capitals back together with good dividends. It could only be large enterprises that can afford to wait this long while investing in a business that doesn’t bring in returns for a period of over fifteen years. It only means that such companies are strategic and know that the wait is worth it for when they finally start earning, they shall be able to get back all they invested in addition to handsome rewards. The oil companies have been able to play the Game very well so far. They know precisely that Uganda doesn’t have the skills required and neither does it have the capacity to drill the oil without external support.

Companies that have the technological capability to drill oil are very few world-wide and sort of work on a cartel arrangement. They are oligopolistic in nature because they are very few. Therefore, they are aware that unless government of Uganda is not interested in getting the oil out of the ground, it has very limited choices on whom to choose to do the job. Uganda government has thus had to wait this long with hope that they shall get the best alternative offer by an investor that would be lenient towards their demand of ensuring the Uganda gets the best deal out of its oil. It has reached a time where Uganda finds itself boxed up.

The country has not been investing as heavily as the oil companies. The latter have invested on an understanding that government will pay back when finally oil starts to flow. This therefore means that the government is already heavily “indebted” even when production has not begun. Even if the oil was to stay in the ground, government of Uganda is obliged to pay back the costs that have so far been sunk by the oil companies. This puts the country in a precarious situation. By delaying the production, they are delaying to receive the much needed cash but they are also acquiring more debts since oil companies continue to put in more resources that they expect to recover when production starts. This means that the government is the loser either way. At this stage, it’s not even possible for government to make good it’s earlier threat that it it’s comfortable if it doesn’t get the oil out of the ground.

President Yoweri Museveni was quoted years back saying that he was relaxed with his oil not being harvested.  After all it has been in the ground for thousands of years. He said that it’s better for Uganda not to get the oil out than being paid chickenfeed by oil companies.  Right now, the oil companies are increasing pressure to expedite production because it’s been long overdue. What they are not sure about is how they can completely “kill” the idea of having a refinery in Uganda as the government’s first choice of preference. All indications show that if they were to have their way, all of Uganda’s oil would be exported in crude form as this would guarantee their unrestricted profitability. However they cannot downrightly pronounce this position because it would put them in bad light in the face of government and the people of Uganda as selfish and cannibalistic actors hell-bent of sucking a poor country’s blood to its marrow.

The oil companies must be scratching their heads to find the best way they can convince government that their proposal is a good alternative. Their situation is like where a thief who has already entered your house and starts negotiating with you about what to take and what to leave. What is not in question is that they thief will have to take some things from the house. The option available to the owner of the house is to plead with the thief not to take every thing. Logically however, the house owner will have to contend with the reality that the thief will have to go with at least some of the most prized possessions in the house no matter the pleadings of the owner.

This is the stage where Uganda is at the moment. It’s just a matter of time before the oil companies run out of patience as they tell government (house owner) that actually, they came into the oil business for nothing else but to make the most profits possible and nothing less than this. If anything is acting contrary to this interests of theirs, in this case the refinery, they will fight it to its logical conclusion even if it means bringing out their ugly true colors. It’s in the best interest of Uganda to get the oil on to the market even when the dividends to the country are minimal.

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