Uganda’s First Oil: Why Final Investment Decision (FID) Has Delayed

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BY ALAN BAGUMA

With all the clamor around the impending production of oil in Uganda, a very commonly used acronym in general oil and gas-related discussion is “FID” (Final Investment Decision).

FID in this context generally means the decision made separately by each oil company to inject money into the project to commercialize the oil resource. FID considerations are not entirely identical for all such projects given the uniqueness of each, though some are generally cross-cutting.

Projections for post-FID investment in Uganda are in billions of United States dollars. As such, reaching FID inevitably requires detailed scrutiny of various aspects. To understand the reasons for delay in FID, it is of the essence to have a broad understanding of the general categories of considerations that feed into FID.

In the Ugandan context, the considerations for FID to be possible regarding the Tilenga and Kingfisher projects may be generally classified into three categories, namely technical, regulatory/permitting and commercial. Contractual aspects also arise out of technical and commercial considerations.

The technical considerations include completion of key milestones such as submission of Field Development Plans (FDPs) for approval prior to issuance of production licenses. These detail well drilling, production facilities, estimated production profiles, cost estimates, etc.

Currently, most FDPs for the two projects were approved by the end of 2016, eight production licenses were granted for Tilenga Project and one for Kingfisher project, with a few FDPs now pending approval.

Another concluded key milestone is the Front-End Engineering Design (FEED), which is the engineering study that details the technical specifications of each project and cost estimates for the same, so as to guide the engineering, procurement and construction (EPC) phase after FID.

Other technical aspects, overlapping with regulatory/permitting aspects, entail completion of a Resettlement Action Plan (RAP) and land acquisition.

Completion and approval of an Environmental Impact Assessment by National Environment Management Authority, which is complete for Tilenga and pending for Kingfisher, is also essential. The regulatory/permitting aspects generally encompass applying for and obtaining necessary permits/licenses as required by law for the construction and operations phases.

Under the category of commercial considerations, it must be established that the project makes financial sense for the individual oil companies, hence robust reviews of their financial models are conducted.

The projected internal rate of return, net present value and other factors undergo scrutiny, sensitivity analyses are conducted, and possible financial outcomes tested against varying assumptions input into the models.

Discussions are held with government regarding issues that the oil companies believe affect the economics of the project, including but not limited to tax/fiscal and other legal matters, interpretation of provisions of the production sharing agreements, alignment on modelling assumptions, among others. These discussions are usually protracted.

Related matters such as Tullow Oil Uganda’s farm down/transfer of 21.5 per cent of its 33.3 per cent participating interest in the Albertine Graben to Total and CNOOC Uganda, has seen prolonged discussion around payment of capital gains tax.

State participation through the back-in/entry of the Uganda National Oil Company Limited (UNOC) into the production sharing agreements and upstream joint venture to participate with the oil companies and manage the 15 per cent government interest, also requires careful discussion on complex commercial matters, before the entry of UNOC.

Contractual considerations flow from the commercial and technical aspects agreed and are also essential for ensuring market access.

Some of the major offtake related contracts to be finalized include a Tariff and Transportation agreement by which terms such as the tariff (price) of transportation of crude oil through the East Africa Crude Oil Pipeline (EACOP), are covered. This heavily interlinks with the midstream EACOP project which is critical for market access.

Currently, following the Intergovernmental Agreement on EACOP between Uganda and Tanzania in 2017, negotiations of the Host Government Agreement that shall manage the relationship between the oil companies and the governments of Uganda and Tanzania leading to the establishment of EACOP, are in advanced stages.

Another major offtake contract is the Crude Oil Supply Agreement by which 60,000 barrels of crude oil per day shall be supplied to the oil refinery to be established in Hoima. Technical workstreams are currently ongoing pursuant to a Project Framework agreement with the Albertine Graben Refinery Consortium in 2018.

Financing agreements with the lenders and investors regarding debt and equity have to be negotiated and financial close reached before FID. Construction contracts for the construction phase after FID also have to be in place.

A measured approach is therefore prudent to ensure that all parties benefit, come first oil. Substantial headway has been made in finalising many of the areas mentioned above and the target is for all boxes to be ticked to ensure first oil within the projected time frames.

Alan Baguma is a legal officer of the Uganda  National Oil Company Limited (UNOC).

Alan.Baguma@unoc.co.ug

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