----- Forwarded Message -----
From: Ssemakula <james_ssemak...@yahoo.com>
To: buganda...@listserv.tamu.edu
Sent: Wednesday, October 12, 2011 8:31 PM
Subject: WIKILEAKS: Corruption in Uganda's nascent oil industry
Reference ID
Created
Released
Classification
Origin
09KAMPALA1356 2009-12-03 06:13 2011-08-30 01:44 CONFIDENTIAL Embassy
Kampala VZCZCXRO6030
RR RUEHRN RUEHROV
DE RUEHKM #1356/01 3370613
ZNY CCCCC ZZH
R 030613Z DEC 09
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 1987
INFO RUCNIAD/IGAD COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RUEHKI/AMEMBASSY KINSHASA 1002
RUEAIIA/CIA WASHINGTON DC
RHMFISS/HQ USAFRICOM STUTTGART GEThursday, 03 December 2009, 06:13
C O N F I D E N T I A L SECTION 01 OF 03 KAMPALA 001356
SIPDIS
EO 12958 DECL: 11/29/2019
TAGS PGOV, EPET, ECON, EINV, ENRG, KCOR, UG SUBJECT: UGANDA: CORRUPTION
ALLEGATIONS ACCOMPANY ARRIVAL OF MAJOR OIL FIRMS
REF: A. 08 KAMPALA 1648 B. KAMPALA 366
Classified By: Econ Officer Don Cordell for reasons 1.4 (b) and (d).
¶1. (C) Summary: ExxonMobil interest in Tullow Oil’s Ugandan operations, and
Italian oil
giant ENI’s attempt to purchase Heritage Oil’s local holdings, mark a clear
shift from
exploration to the beginnings of production. The remote location of Uganda’s
oil wells,
the difficult chemistry of the oil within, and President Museveni’s insistence
on
building a domestic refinery are pricing smaller firms like Heritage and Tullow
Oil
out of the Ugandan market. Unfortunately, major oil company interest in Uganda
also
triggered renewed corruption allegations as U.K.-based Tullow Oil suspects
Ugandan
leaders of conspiring with ENI
to strip Tullow of its most profitable oil exploration
license. Failing to resolve this issue could jeopardize Tullow’s standing in
Uganda and
set the stage for further oil sector corruption. End Summary.
---------------------------------------
The High Cost of Ugandan Oil Production
--------------------------------------- ¶2. (U) The estimated 1.5-2 billion
recoverable barrels of oil along the shores of Lake Albert in western Uganda
could transform Uganda into one of the world’s the top 50 oil producers,
surpassing other African oil nations like Gabon and Equatorial Guinea (ref. A).
Tullow Oil, which is currently the largest oil exploration company in Uganda,
estimates that non-revenue generating production could begin as early as summer
of 2010, with production gradually increasing to around 10,000 barrels per day
over the next three to six years. Tullow predicts a peak production rate of
around 150,000 barrels per day within ten years. ¶3. (U) A number of costly
challenges hamper Ugandan oil exploration and production. Oil companies
operating in western Uganda must navigate complicated land tenure and property
rights issues. Offshore production on
Lake Albert poses other cross-border problems as much of the oil beneath the
lake is likely on Congolese territory. Ecological and environmental concerns
add another complication, as the oil is located is one of ten most ecologically
biodiverse areas in the world. Protecting western Uganda’s extremely fragile
ecology - and burgeoning wildlife tourism industry - while drilling for oil
presents an enormous challenge for Uganda’s oil sector. ¶4. (U) Although
classified as “sweet” crude, the oil’s high wax content gives it the
consistency of shoe polish. An eventual export pipeline must therefore heat the
oil to keep it flowing. Industry experts estimate pipeline costs at $3-4
billion. Transporting oil from the fields to market will also require major
transportation infrastructure investments over the next five years in areas
such as road and rail construction and improvement. On-site infrastructure,
such as power production and waste management,
is also needed. ¶5. (SBU) President Museveni’s requirement for a domestic oil
refinery further increases production costs. Museveni believes value addition
is the only way to develop Uganda’s economy. The President also wants to reduce
Uganda’s reliance on fuel supply lines from Kenya and avoid a repeat - for
national security reasons - of the crippling fuel crisis that hit Uganda
following 2007/2008 elections in Kenya. Ugandan officials are eyeing a 200,000
barrel per day refinery. Oil company experts maintain that nothing larger than
a 50,000 barrel per day refinery - estimated at $5-6 billion - is economically
feasible. A smaller refinery could supply the oil demands of Uganda, Southern
Sudan, eastern Congo, and Rwanda and still leave the bulk of Ugandan oil for
export. The Ministry of Energy recently issued a tender for a refinery
feasibility study. The tender
is financed by the Norwegian
government. Two U.S. firms bid on the tender, but
neither made the Ministry’s short list.
-------------------------
Enter Major Oil Companies
------------------------- ¶6. (SBU) The smaller international oil companies
active in Uganda - Tullow, Heritage, Dominion, and Neptune - have already spent
a combined $800 million on exploration in Uganda. The price tag and technical
requirements of an eventual pipeline ($3-4 billion), refinery ($5-6 billion),
KAMPALA 00001356 002 OF 003
transportation network improvements, and as yet unspecified on-site
infrastructure are well beyond these companies’ means. In September, Tullow and
Heritage offered to sell portions of their Ugandan holdings. Neptune and
Dominion are still in the early exploration phases, but will likely follow suit
if their efforts yield similarly encouraging results. ¶7. (C) ExxonMobil, ENI,
French firm Total, and the Chinese National Offshore Oil Corporation (CNOOC)
have expressed interest in Tullow and Heritage. Executives from
ExxonMobil visited Uganda on November 18-19, and met with Ambassador Lanier,
Mission Officers, the Ministry of Energy and Mineral Development (MEMD),
Uganda’s Petroleum Exploration and Production Department (PEPD), and Tullow.
Having partnered with ExxonMobil in Ghana, Tullow is anxious to join with
ExxonMobil in Uganda as Tullow views ExxonMobil as the most technically
capable, financial secure, and professionally responsible major bidder.
ExxonMobil representatives who traveled to Kampala said they were “very
impressed” with both the Ugandan government oil representatives and the
potential of Tullow’s finds.
------------------------
Enter Major Oil Intrigue
------------------------ ¶8. (C) On 23 November, just days after ExxonMobil’s
departure, local media reported Heritage Oil’s intention to sell its Ugandan
assets to Italian oil giant ENI for $1.35 billion. Heritage shares 50% of two
exploration blocks along the shores of Lake Albert
with Tullow. News of the sale clearly caught some senior Ugandan officials -
including Energy Minister Hillary Onek - by surprise. Other officials, such as
MEMD Undersecretary for Finance William Apuuli, appeared intricately aware of
the deal when asked by EconOff. ¶9. (C) It is doubtful whether Heritage can
sell its holdings without Tullow’s prior approval. Tullow claims that
contractual agreements give it right of first refusal over any sale of
Heritage’s stake in prospecting blocks owned jointly by Tullow and Heritage.
Tullow’s position is weakened, however, by another surprise development -
Uganda’s decision to strip Tullow’s offshore exploration rights. In addition to
the two blocks Tullow splits 50-50 with Heritage, Tullow owns 100% of a third
block covering most all of Lake Albert. Tullow announced a major offshore
discovery in this block in September, and oil experts believe most of Uganda’s
oil reserves are located offshore.
Tullow’s exploration license, however, expired on October 31. On November 20,
after weeks of negotiations, Uganda extended Tullow’s license for another two
years, but
for onshore holdings only. Omitted from
the extension is reference to any of Tullow’s offshore holdings in Lake
Albert. ¶10. (C) On November 24, Tullow’s Head of External Relations Andy
Demetriou told EconOff that Tullow believes ENI made personal payments to
President Museveni and Ministry of Energy officials in return for Tullow’s
offshore exploration rights. Demetriou accused ENI of using similar tactics in
the Democratic Republic of Congo (DRC) to acquire exploration licenses on the
Congolese side of Lake Albert allegedly already purchased by Tullow. The
purchase of Heritage’s holdings may be the first step toward enabling ENI to
scoop up the offshore rights denied to Tullow. If the Heritage deal falls
through, ENI’s interest in Uganda will likely also evaporate. ¶11.
(U) On December 2, local media reported that the Uganda Revenue Authority will
acquire $375 to $675 million in capital gains taxes from the Heritage-ENI sale.
According to ENI’s website, CEO Paolo Scaroni met with President Museveni on
August 13 to confirm “the company’s strong intention to create a new and
lasting partnership with Uganda.” Scaroni told the Dow Jones newswire on
December 1 that there are “some obstacles” to the Heritage sale, but that
Tullow cannot exercise its pre-emptive rights without approval from the Ugandan
government. According to an unnamed Ugandan presidency official cited in the
Dow Jones report, the Ugandan government “wants the $1.35 billion deal to sail
through and will do what it can to ensure that United Kingdom based Tullow
doesn’t scupper it.” ¶12. (C) Tullow leadership has told the Ambassador and
EmbOffs that the company has not paid any bribes or made “contributions” to
Ugandan officials despite
numerous complaints from some of those officials about Tullow “not helping
them.” Tullow officials believe their refusal to pay off Government of Uganda
leadership is the source of their
KAMPALA 00001356 003 OF 003
current difficulties with ENI and offshore licenses.
--------------------------------------------- -------------
Comment: Sweet Priorities, Light Details, Crude Corruption
--------------------------------------------- ------------- ¶13. (C) Rising
political and financial attention to Ugandan oil is apparently leading
President Museveni and other senior Ugandan officials to pay more attention to
the opinions of international experts. With oil scheduled to start flowing as
early as 2010, the continued absence of a comprehensive legal framework
governing oil reserves and revenues is of increasing concern (ref. B). Uganda’s
National Oil and Gas Policy provides a basic framework, but is noticeably short
on detail. Uganda’s draft
Petroleum Law is designed to fill in missing details on oil production and
revenue management, but Cabinet has yet to submit the legislation to Parliament
and the bill may now not be completed until mid-2010 at the earliest. The draft
Petroleum Law does not address oil-related corruption. Tullow’s standing in
Uganda, and ExxonMobil interest in partnering
with Tullow, may hinge on the recovery
of Tullow’s offshore rights and forestalling the Heritage-ENI sale.
Allegations of back-room deals between Ugandan leaders and a major oil giant do
not bode well for the future management of Uganda’s oil resources. LANIER
James Ssemakula
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