Uganda to Become Seventh-Largest Oil Producer in Africa
Uganda is to become the seventh-largest oil producer in Africa as financial investment decision marks a step forward towards the country’s oil production, Moody’s said in the latest commentary note.
According to the note, Uganda’s state-owned oil company and its partners reached a final investment decision (FID) on the Lake Albert oil development project, marking a step closer to the exploitation and commercialisation of the country’s estimated 1.4 billion barrels of recoverable oil reserves.
The project’s partners aim to start oil production in 2025 and reach an output of 230,000 barrels per day (bpd), which would make Uganda the seventh-largest oil producer in Africa.
Over the longer term, the ramp-up of oil production would support Uganda’s creditworthiness by promoting growth and fiscal revenue, provided the oil wealth is managed prudently.
The FID concluded between TotalEnergies SE (A1 stable), the China National Offshore Oil Corporation (A1 stable), the Uganda National Oil Company, and Tanzania’s (B2 stable) state oil company, commits the companies to invest around $10 billion in total (equivalent to nearly 25% of Uganda’s GDP) in the project.
The agreement encompasses the Tilenga and Kingfisher upstream oil projects as well as an export pipeline through Tanzania (the planned East Africa Crude Petroleum Pipeline, or EACPP) to connect the oil fields in landlocked Uganda with the Tanzanian Indian Ocean seaport of Tanga.
Although commercially viable oil reserves were first discovered in Uganda in 2006, progress on the project and the development of oil infrastructure have been beset by delays, reflecting protracted negotiations with international oil companies, initial disagreements over the export pipeline route and the slow process of land acquisition.
However, an agreement between the government and oil companies on a fiscal regime and an intergovernmental agreement reached in 2020 between Uganda and Tanzania on the EACPP project helped to pave the way for the FID.
Oil sector developments will support the medium-term growth outlook. Other large investments include the construction of oil roads, a planned 60,000 bpd oil refinery in the Hoima District in the west of the country and a pipeline connecting the refinery to the capital Kampala, which will increase both foreign direct investment and imports.
The onset of oil exports would help to narrow Uganda’s large structural current account deficit, which averaged around 6% of GDP between 2016 and 2020. Oil proceeds could eventually strengthen the government’s relatively low revenue.
According to IMF projections that assume oil production will start generating revenue in fiscal 2025 (which ends 30 June 2025), oil budget revenue (net of oil-related expenditure) will peak at around 2% of GDP in fiscal 2028 before gradually declining.
At present, overall government revenue as a percentage of GDP is among the lowest in Uganda’s B-rated peer group, at 13.2% of GDP in 2020 compared with the group median of 22.5% of GDP.
The discovery of hydrocarbon deposits has sparked debate within Uganda over the redistribution of oil wealth, and the government has created an oil fund to direct the proceeds to infrastructure projects.
The authorities intend to design, with the support of the IMF, a fiscal rule to manage future oil revenue. Uganda’s decision to formally join the Extractive Industries Transparency Initiative in August 2020 is an important step toward promoting transparency in the mining sector and the accountable management of petroleum resources.
Despite progress, the completion of oil infrastructure projects remains liable to implementation risks, as past delays indicate.
Further delays in the start of oil production would maintain wider external deficits over the longer term if debt – contracted mainly to finance oil-related projects – were not met by higher foreign exchange receipts and revenue generation capacity.
Moreover, Uganda’s oil resources are finite: at current levels, recoverable oil reserves would only support production for around 15 years according to World Bank estimates, a lower duration than those of major African producers.
Read: IMF Program for Uganda Will Address Fiscal Challenges, Liquidity Risk
Accelerating momentum behind the global transition to a lower-carbon economy also poses a long-term risk for oil and gas-reliant sovereigns, proportional to their economic, fiscal and external sector reliance on hydrocarbons. #Uganda to Become Seventh-Largest Oil Producer in Africa
