Delay in oil sector investments could weigh on economic growth -IMF officials warn gov’t

By George Mangula

A delay in Uganda’s oil sector investments could weigh on economic growth which is currently trending at 6 percent, International Monetary Fund (IMF) officials who recently visited the country have warned government.

The warning by the World Bank officials comes after tax negotiations between government, Tullow Oil, Total and CNOOC over farm-out of Tullow Oil’s oil blocks in the Albertine Graben hit a dead end in late August, forcing joint venture partners Total and CNOOC to pull out of the planned construction of US$3.5 billion oil pipeline to transport crude oil from Masindi to Tanga Port in Tanzania.

A series of transactions took place in 2010-2012 whereby Tullow acquired 100% of the three licences before farming down a third of the equity to both Total and CNOOC. The transaction was for a total consideration of US$2.9 billion and effectively unitised the basin equally between all three parties ahead the basin development.

In January 2017, Tullow announced that it had agreed a substantial farm-down of its assets in Uganda to Total. Under the Sale and Purchase Agreement, Tullow agreed to transfer 21.57% of its 33.33% interest in Exploration Areas 1, 1A, 2 and 3A in Uganda to Total for a total consideration of US$900 million. CNOOC Uganda Limited (CNOOC) subsequently exercised its pre-emption rights under the joint operating agreements to acquire 50% of the interests being transferred to Total on the same terms and conditions. 

In August 2019, Tullow announced that this farm-down was terminated, following the expiry of the Sale and Purchase Agreements (SPAs). The termination of the transaction was a result of being unable to agree all aspects of the tax treatment of the transaction with the Government of Uganda.
Tullow has now initiated a new sales process to reduce its 33.33% Operated stake in the Lake Albert project.

The pulling out by CNOOC and Total as joint venture partners in the construction of the oil pipeline meant the delay in the final investment decision (FID) that could have opened investments in the oil and gas sector.  Now all key players and subcontractors of the sector have to wait for what comes out of the next round of tax negotiations between government and Tullow oil as it tries to sell out to Total and CNOOC.

The Ugandan government estimates that there is about 6.5 billion barrels of oil in place, but recoverable oil is estimated to be between 1.8 and 2.2 billion barrels. Oil production is expected to reach heights of between 200,000 and 250,000 bpd based on current discoveries.

According to the government’s original road map, first oil was scheduled for 2020 but now it has been pushed to 2022, even though industry experts say the country could take more years before drilling its first commercial oil.

An International Monetary Fund (IMF) team, led by Axel Schimmelpfennig, visited Kampala from September 30 to October 4, 2019 to discuss Uganda’s economic outlook and the direction of macroeconomic policies.

At the conclusion of the IMF mission in Uganda, Schimmelpfennig said:  “Growth could remain at around 6 percent in 2019/20, if oil investments are not significantly delayed. The current account deficit widened to 11 percent of GDP in 2018/19 largely due to investment-related imports. The Ugandan shilling has remained broadly stable.”

Meanwhile, he said the government needs to identify concrete measures to offset revenue shortfalls in this year’s budget to safeguard its fiscal targets and prevent domestic arrears.

“The financial sector remains healthy, reinforced by Bank of Uganda’s strong supervision,” he said.

After last year’s strong performance in domestic revenue collection, execution of the current budget (fiscal year 2019/20) is challenging, said Schimmelpfennig, adding that, “delays in the implementation of some revenue measures and shortfalls in non-tax revenues are likely to widen the overall fiscal deficit.” The authorities need to adopt measures of around 1 percent of GDP to safeguard their budget targets and prevent a recurrence of domestic arrears, he said.

The official said government’s medium-term fiscal policy framework rests on the assumptions that oil sector investments proceed as planned, implementation of the domestic revenue mobilization strategy yields a half percent of GDP in additional revenue collection per year, and the government achieves improvements in public investment management, in particular in project selection, planning, and execution, to ensure that infrastructure investment yields the envisaged growth dividend.

“Bank of Uganda’s October 7 decision to lower its policy rate by 100 basis points to 9 percent was appropriate, with core inflation at 2.5 percent year-on-year in September and projected to stay below 5 percent over the next 12–18 months. The financial sector remains healthy based on the latest reported financial soundness indicators. The regulatory framework and Bank of Uganda’s strong supervision have been instrumental in this regard.”

“On the sidelines of the visit, the African Development Bank, the Government of Uganda, and the IMF co-organized a workshop to discuss balancing infrastructure and human capital investments. Participants agreed that achieving sustained high and inclusive growth will require a mix of physical and human capital investment that complement each other. In addition, allocating more resources to maintenance is essential to maximizing the return on infrastructure investment.

The IMF mission met with Governor Emmanuel Tumusiime-Mutebile, Permanent Secretary/Secretary to the Treasury Keith Muhakanizi, senior government officials, and private sector representatives.