Several people have asked me what the economic prospects are for Uganda given that the country was counting on oil and oil is selling at a very low price now. In fact on Wed. Jan. 20, 2015 it even touched $26.55 (Western Texas Oil which is closer to Brent Crude which will be the one Uganda sells).
The prospects for Uganda are dire at the moment. The main reason being that there is no refinery or pipeline. Hind sight always has a 20/20 vision.
About 5 years ago, Heritage Oil and Tullow had proposed building a refinery in Uganda to process 20,000 barrels a day. The government of Uganda wanted a refinery that could process 100,000 barrels a day. Five years later an agreement was reached to build a refinery that could process 60,000 barrels a day. As it stands now, there is no refinery. So much for being greedy and Heritage Oil exited Uganda.
The Russian company which won the contract to build the refinery that could process 60,000 barrels a day has not yet even started. Likely construction to commence in 2017 and likely completion 2020 – 2021 with production commencing 2022.
This on one hand is good because the oil prices will have recovered by then. We can be sure of this. This business is cyclical. We also have to look at another thing. With no pipeline, moving the crude oil poses a problem. That crude has to be moved through a pipeline to ports to load onto ocean tankers. It can also be moved by truck tankers to the ports.
The dangers of moving crude oil in truck tankers or railway tankers are immense. All you need is one road accident and the thing blows up. You then have to evacuate the entire area and put out the fires. Sure, you can move it via railway. Those who do not know, we had a small city in Quebec Canada go up in flames and 47 people were incinerated. http://www.cbc.ca/news/canada/montreal/lac-megantic-settlement-united-states-1.3264325
Back to the oil price. There are many factors I have even touched on before.
1) Far too much oil has been discovered in the last 10 years. What has happened in the last 5 years is cheap ways of extracting it. Something called FRACKING which I have previously written about and will rewrite about it next week for Uganda. Cheap extraction puts a challenge to new African countries which have come into oil.
2) Economies of Scale: The big oil companies have been at this for a very long time. They have found a way to minimize costs in exploration, extraction, processing and overhead (administrative costs). Think about this this way. Uganda has Tea Ladies, Secretaries and Receptionists. What for? All your employees can make their own tea and coffee or just put coffee stations in the cafeterias so that people can help themselves. In this age, everyone can take their own calls and write their own project reports and prepare their own presentations.
3) When countries like Saudi Arabia, China, Russia, USA, Canada, Iran, etc..can put out 500,000 to millions of barrels onto the market then you have to ask yourself what the competitive advantage of Uganda will be putting out 60,000 barrels per day. In addition, these countries can ship their oil anywhere on the globe much more cheaply than Uganda can.
The trend for oil is not looking very good for Uganda right now. A picture speaks a million words. Look at the attached chart. It is the weekly chart for the oil. July / Aug 2014, you see the down trend.
The trend has been down no matter which way you look at it. Meanwhile, Uganda is still negotiating contracts. You will remember that Uganda has not settled the case they won against Tullow (one of their biggest explorers) and last year Total took Uganda to arbitration, which will cost a lot and also take time.
Now with these non transparent contracts which you only find out that you were involved in the Dutch Sandwich, how then do you expect to rip from the oil? Your costs are far too high and in this business, transparency helps. Good luck Uganda.
Martha Leah Nangalama
The author is an IT analyst for an oil company. All my opinions are mine and mine alone. They do not reflect on any employer or organisation I am affiliated with.
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