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Museveni’s failure in Uganda’s oil

In his interview with NBS television aired on May 11, President Yoweri Museveni revealed three things about Uganda’s oil sector that were depressing and illuminating. First, he said the reason Uganda has not moved fast towards production is because international oil companies (IOCs) want to “cheat” the country as they have done in many other African countries. So Uganda has had to be extremely careful not to fall in the same trap.

The interviewer, Canary Mugume, asked whether these delays do not risk making Uganda’s oil useless due to innovations in electronic cars (making them cheaper) and the dangers of hydrocarbons on climate change (that may lead the world to ban them). The president said that is not a big problem either because if oil becomes useless, the country would continue to survive as it has done before by relying on other resources such as agriculture.

Thirdly Museveni said he did not like the idea of a pipeline and would have preferred IOCs to refine all Uganda’s oil within Uganda and sell all of it to the countries of the East African region. Given that regional consumption of oil is about 200,000 barrels a day and growing, and given that production at that rate would allow optimal exploitation of Uganda’s oil, he does not see a need for a pipeline to the coast. However, he added, he accepted the idea of a pipeline only because it would benefit Tanzania.

These three statements revealed the crisis of Uganda’s oil sector and the mentality that has made it difficult to make progress. The president spoke about the interests of Uganda (as he sees them) and did not make the slightest reference to the interests of Uganda’s business partners, the IOCs. Yet it is the IOCs that have taken the risk to pay for the exploration and discovery of oil, and will risk investing in the production, transportation and marketing of this oil.

So we have a government in a business partnership with partners it sees as crooks. Second, it is blind to their interest in the joint venture. How can such an attitude produce a good business?

Why does Uganda have IOCs with their reputation of cheating poor countries at the forefront of her oil industry? Ideally, the country should have raised money, done her own oil exploration and discovery, produced and refined her oil and sold it to whomever it wished. It did not have this capacity. Like all other poor countries, it went to the international market looking for companies with the capacity. Contrary to the current self-assured pride of Ugandan officials, IOCs initially showed very little interest in the country’s oil. That is how small companies like Heritage and Tullow came to be the leading players in oil exploration in our country.

It is international oil practice in countries that have not produced oil before that small firms take the risk to do the exploration. When they discover oil, they sell to the big boys, and make a killing. If the small firms don’t discover oil, they lose money. The big boys (IOCs) come and do the production, transportation and selling – plus future explorations. This should alert us as to why it is self-defeating for Uganda to make laws that penalise those who sell oil licenses – it blocks the very investment in exploration we need.

The relationship between oil companies (who have the money and expertise to do oil exploration, production, transportation and marketing) and host governments (who own the resource on behalf of their citizens) is largely managed through Production Sharing Agreements (PSAs). If you want to know whether a country has been cheated or not, look at the PSA. In 2010 Museveni wrote to the IMF to study Uganda’s PSAs. The IMF study found that Uganda’s PSAs were among the best in the world.

The facts are as follows: average revenue share in new oil-producing countries is 48% and 52% in favour of IOCs. For mature oil-producing countries it is 70% for host countries and 30% for IOCs. In Uganda, the ratio is 78% in favour of our country. The claim by Museveni that oil companies want to cheat is based on petty disputes over tax. We have sacrificed our strategic aim (to produce oil) at the altar of petty tax claims. The IOCs have severally bent backwards to accommodate Uganda’s unrealistic demands in order to set the oil production ball rolling but our government has remained intransigent, seeing them as cheats.

Uganda and the IOCs are business partners. One party has money, technical knowhow and market connections to explore, discover, produce and market the oil. The other party is the owner of the resource. For the business to work, both parties must accommodate each other’s interest i.e. there must be a win-win result. But Uganda behaves as if the only interest that needs to be addressed is her own.

In the NBS Museveni never addressed himself to the interest of Uganda’s business partners (the IOCs) who have taken the risk, invested large sums of their money in our country’s oil sector and now need to get returns on their investment. Instead, he said if hydrocarbons die, Uganda would go on. Doesn’t Uganda owe these IOCs the responsibility to ensure they recoup their investment? Worse still, Museveni said he accepted the building of a pipeline purely because our neighbour, Tanzania would benefit from it, not because our nation’s business partners (the IOCs) need it.

I was depressed because Museveni came across in that interview as ignorant of basic oil industry issues, cavalier in his attitude towards the prospects of hydrocarbons becoming obsolete, insensitive to the interests of the IOCs Uganda literally begged to come invest in her oil industry, dismissive of the value of oil to our poor economy, and even oblivious of very many other (mostly Ugandan) players who had invested so much money in the hope of our country moving towards oil production and have now gone bankrupt.

It is commonsense that for any business partnership to work there has to be a spirit of give and take i.e. both sides have to try to accommodate each other’s interests. Uganda acts as if there is only one interest – her own. Second, Museveni should know the meaning of a trade-off. If delays to move towards oil production create a risk of oil becoming obsolete, then one has to discount some things to allow the country to make gains from her resource.

Uganda has made the perfect the enemy of the good. How can a country delay an investment of $15 billion to $18 billion in an economy of $30 billion because of a disagreement over $82 million or $183 million? We have done this while knowing that Uganda’s GDP would double in five to seven years if we moved to oil production. And worse still do this while risking the oil resource becoming useless? This is the height of insanity and it is sad our country has an opposition that is oblivious of the actual problems we face.

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Written by Andrew M. Mwenda (1)

Andrew M. Mwenda is currently the Managing Director of Independent Publications Limited, the publishers of The Independent, East Africa’s leading current affairs newsmagazine. An admirer of Socrates, Karl Popper and Frederick Von Hayek, he is an activist, a journalist, a columnist, a part time poet, a businessman and a social entrepreneur.

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