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Posted on Sustainabilitank.info on February 1st, 2010
by Pincas Jawetz (pj@sustainabilitank.info)

Foreign Drillers Rush at Uganda’s Promising Oil Reserves.

By GUY CHAZAN in London And NICHOLAS BARIYO in Kampala, Uganda

 online.wsj.com/article/SB10001424…

A skirmish over an oil field on the shores of Africa’s Lake Albert highlights Big Oil’s intense interest in Uganda—a rising star of African energy. Tullow Oil is competing with Eni, Total and Cnooc to secure an oilfield stake owned by partner Heritage.

The battle centers on the Ugandan assets of Heritage Oil PLC, a small U.K.-based explorer, which is selling its stakes in the much-coveted Lake Albert Rift Basin. The area has yielded some of sub-Saharan Africa’s largest onshore oil discoveries of recent years.

Big energy companies like Italy’s Eni SpA, France’s Total SA and China National Offshore Oil Co. all are vying for access to Uganda’s oil wealth. Uganda’s onshore oil is particularly appealing because it is relatively inexpensive to produce. That sets it apart from other frontier provinces, like the deep waters off Brazil’s coast and the Arctic Ocean, where the majors require an oil price of around $60 a barrel just to break even.

Initially, Eni looked to be the likely winner, announcing in November that it was buying Heritage’s stakes for $1.5 billion in cash and assets. But Tullow Oil PLC, Heritage’s partner in the oil field, exercised its contractual right to block the sale and acquire the stakes itself at the same price. Tullow’s purchase, however, is subject to approval by the Ugandan government. The initial reaction was negative, with the country’s energy minister saying the government didn’t want one company to end up with control of the whole oil field and would prevent the sale if necessary. Heritage and Tullow share ownership of two blocks in the oil field, while Tullow owns all of a third. Acquiring Heritage’s stakes would give Tullow full ownership of all three blocks, covering 10,000 square kilometers—about one-third the size of Belgium.

The government’s position appeared to soften after Tullow Chief Executive Aidan Heavey met with Ugandan President Yoweri Museveni in Kampala recently. Tullow said that once in full possession of the oil field it would sell half to either Cnooc or Total to help finance the construction of a refinery and a 1,300-kilometer pipeline that would carry Uganda’s oil to world markets.

Such an arrangement would allow Tullow to control who it works with as well as concentrate on its core activities—exploring for and pumping oil, rather than refining and transporting it to market.

Tullow also announced plans last Wednesday to raise around $1.6 billion in a rights issue to help it develop Uganda’s oil.

Tullow now is the favorite to take the Heritage stakes, with Cnooc edging out Total as Tullow’s most-likely partner, a person familiar with the matter said. Mr. Museveni met with Cnooc executives in Kampala last week and is expected to meet them again this week to finalize details, the person said. Cnooc and Total declined to comment.

Eni hasn’t given up, however, and last week sweetened its package. The company’s CEO, Paolo Scaroni, said in a newspaper interview that Eni would not only develop the Lake Albert field and build a refinery and pipeline to the Indian Ocean, but also would construct an electricity plant in Uganda and upgrade a railway line from Kampala to the Kenyan port of Mombasa. He said Eni would invest $13 billion in the “integrated development plan.” Eni declined to comment for this article.

Tullow declined to comment on Eni’s new offer.

What has attracted companies like Eni to Uganda is the one billion barrels of crude already discovered in the Lake Albert Rift Basin, a vast, oil-rich area close to Uganda’s border with Congo to the west, and the huge untapped potential of the region. Tullow estimates that about 1.5 billion barrels, roughly the same amount as Yemen’s oil reserves, remain to be discovered in the basin.

Uganda also is seen as more stable politically than many of its neighbors, though the north of the country is wracked by armed conflict between the army and a rebel group, the Lord’s Resistance Army, that has displaced hundreds of thousands of people.

Some of the most promising prospects are in Lake Albert itself, however, and will require offshore drilling using floating platforms. Industry experts have said there could be large amounts of oil on the Congo side of the lake, which remains largely unexplored.

Uganda plans to produce around 150,000 barrels of oil a day in four to six years, most of which will be exported. For comparison, that is slightly less than the output of Brunei. The steady revenue stream from oil could radically change the fortunes of the east African country, one of the world’s poorest.

“It doesn’t move the needle in terms of global oil supply, but it’s one of the few countries that will see growth in the coming years in a world of shrinking opportunity,” said Bob McKnight, an oil expert at consulting firm PFC Energy.

Tullow and Heritage have had an almost unbroken run of successes since they started drilling for oil in the Lake Albert area five years ago, with most of their wells encountering crude. Tullow’s share price nearly doubled last year on the back of the discoveries.

Write to Guy Chazan at  guy.chazan at wsj.com and Nicholas Bariyoat  nicholas.bariyo at dowjones.com

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