20100120
allafrica

Kampala — UGANDA'S oil and gas industry is poised to attract $10b as the sector moves from the exploration to development stage. Two billion barrels of crude oil have been confirmed in Lake Albert basin.

Tullow and Heritage have invested over $700m in the basin in drilling 27 oil wells of which 25 have confirmed commercially-viable hydrocarbons. This success story is turning the area into a new oil hotspot and attracting considerable interest from oil giants that are short of exploration opportunities elsewhere.

In a bid to recoup its investment in anticipation of a much higher return on investment, Heritage in December entered into a deal to sell its stake to Italian oil giant Eni for $1.5b.

Eni would pay $1.35b upfront and a further $150m in cash or a stake in a producing oil field of a similar value within two years, subject to approval by the Ugandan Government. But Tullow, which jointly owns block 1 and 3A in a 50-50% joint venture with Heritage, offered to buy out its partner, since it had the first option to buy in case Heritage wants to sell - what is called pre-emptive right.

The firm secured the money to match Eni's offer and will enter into a sale and purchase agreement with Heritage for the proposed oil fields, awaiting government's approval.

The decision to pre-empt the sale of Heritage Oil's Ugandan deposit assets to Eni is intended to secure the firm's position among the giants of the oil world, having grown up from its humble beginnings a quarter of a century ago.

Aidan Heavey, the Tullow chief executive officer, in telephone interview said the firm intends to spend $10b in the next five years.

"Since we have pre-empted the Heritage-Eni deal, we are in position to work with the Government of Uganda in the next three weeks in a transparent manner to deliver a refinery, pipelines and power generation facilities and various infrastructure," he said.

"We commenced a transparent and auditable partnering process six months ago and have attracted major oil companies who could bring significant benefits to Uganda to meet their ambitious plans for the sector."

Heavey said Tullow is committed to retaining a material stake in Uganda and to continue to invest for the long term. As we enter the development phase, we are working closely with the Ugandan government to introduce mutually beneficial partner with downstream expertise who is aligned with this long term approach.

"The process will enable two or more like-minded partners to deliver a faster, more comprehensive upstream and downstream (pipelines and refinery) development," he said.

"We have made it clear that we intend to farmdown our assets swiftly to an experienced and credible partner. The commitment is that we will have a number of different companies and we expect at least two different companies."

The energy ministry awarded Foster Wheeler Energy Ltd, a UK-based firm, a contract to carryout a feasibility study for the construction and development of an oil refinery in Uganda.

The refinery development programme will go through five stages; feasibility study, project promotion and attracting developers and the front-end engineering design. Other stages are engineering procurement and construction and commission and operation of the refinery.

The Tullow boss said: "We are not anti-refinery. Refining oil in Uganda is a good thing and that is why we needed some company with the experience."

"Once the government has decided, we shall deliver the refinery because we have a strong and long-standing relationship with the government and we will always work with them to achieve the best outcome for Uganda," he said.

But the agreement will allow the firm to retain control of Uganda's precious oil assets and put itself into a position to strike up a lucrative partnership with an international oil major, very probably Exxon-Mobil.

"Government is very supportive because it sees that this is an opportunity to pick and choose an operator in a transparent manner."

He pointed out that next year will attract a lot of activities as the development stage of Uganda's oil industry kick-starts.

"Before you even start seeing the oil itself, there will be investments in the infrastructure like railways, roads, piplelines and refinery," Heavey said.

"This will require a huge service industry. This will generate jobs in the oil fields, jobs in shipping, maintenance and all support, construction industries."

The sale dwarfs the other landmark deals in the company's history - namely buying Hardman Resources for £581m in 2007; acquiring Africa Energy for $570m in 2004; and taking over a package of BP's North Sea gas fields for £200m in 2000. All these deals and an aggressive programme of exploration have contributed to the firm reporting record profits in the past few years.

Since Tullow was founded in 1985 by chief executive Aiden Heavey, now aged 56, it has grown exponentially; the company now employs over 540 people in 23 countries, is in the FTSE 100 and has a market cap of £10.8bn.

Analysts say that The fields are a good buy. Although there are just 800m barrels in the easy-to-extract "discoverable cash" category, the true potential of the Ugandan side of Lake Albert is nearer 2bn barrels, making it one of the top 50 oil producers in the world.

When running at full capacity, the site could add as much as $2bn a year to Tullow's top line for as long as three decades, although it will have to share this with a partner, probably ExxonMobil. Tullow is playing a clever political game by offering to list shares in the oil field in Uganda.

However, both Heritage and Tullow make their names by finding new oil patches, selling them on to bigger oil companies when their development gets costly and complex, and using the cash to find new oil patches.

In Uganda, where the two companies are the biggest operators, they have come to the point when they need to sell all or part of their stakes as their ventures on the shores of Lake Albert move from exploration to development.

Neither has the money, expertise or the interest to build a refinery to satisfy the small local market, rehabilitate the railway that will transport oil initially, or build the pipeline that will become the more permanent export route out of Uganda.

Tullow in the past five years has been one of the industry's most successful oil explorers, and yet it cannot develop its big discoveries in Ghana and Uganda. Therefore, finding a buyer for its Ugandan assets will be critical.

Uganda's oil and gas has attracted a significant amount of interest from major international and national oil companies. Sources indicate that some of the big companies eying for the hydrocarbon include France's Total, American giant ExxonMobil and the state-owned China National Oil Company.

Also the Libyans through their investment arm, Libya Africa Investments Portfolio (LAP) have expressed interest in financing the refinery upto a tune of about $1b should Uganda decide to go with this decision. The Iranians last year, at the visit of President Museveni to Iran, indicated their willingness to finance the whole chain. Government officials have visited countries to study and gain skills in oil management.