Low global crude prices might hurt Uganda oil industry investment

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Pipeline under construction.

Unless world oil prices improve, Uganda might delay to make a Final Investment Decision (FID) for the East Africa Crude Oil Pipeline (EACOP).

The warning was sounded on Thursday by Cristal Advocates – an outstanding law firm in Uganda.

According to the firm’s research note argues that there is need for global oil prices to improve from their current historical lows for Uganda’s upstream industry to make $3.5b on FID to Tanzania.

“The economic impact of plummeting crude oil prices is complex and this will be the case for Uganda. While reduced prices can with time reduce or stabilise pump prices, International Oil Companies (IOCs) will only sanction the development of Uganda’s crude discoveries if the prices are high enough or projected to rise to such levels that will enable the project to meet commercial thresholds.”

For the first time in history, oil prices in the US turned negative a surplus of supply met little demand. This was brought about by less movements due to the current Covid-19 lockdown. The fall in oil prices came at a time when Uganda had made a major stride in its upstream oil industry.

Tullow Oil – a UK firm, last week announced that it had sold its entire stake in Uganda’s Lake Albert development project to Total E&P Uganda for $575m. This deal unlocks most barriers that kept Uganda’s oil industry in a deadlock for more than three years.

Tullow’s sale of its stakes has now given room to Total E&P Uganda and Cnooc to move forward to signing an FID that will see the development of many oil projects.

Summed up together, the cost of the development stage for Uganda’s oil industry is anywhere between $10 billion to $ 20 billion.

However, Cristal Advocates fears that the price of oil remain low for one to make a substantial investment, remain real.

“IOC’s are likely to sanction Uganda’s FID if the crude oil prices are high enough (or projected to rise in the foreseeable future to such levels) for the project to be economically feasible,” Cristal Advocates said.

The law firm says that to put price figures in perspective, the current rate remains below what would make sense to move towards making a colossal capital investment in Uganda.

“Uganda’s oil exploration, development and production costs are projected at about $28 per barrel of oil. This includes the cost for finding the oil, construction of the production facilities and the crude oil pipeline but excludes the royalties payable to the government as well as the investors return on investment”.

“It is, therefore, likely that the breakeven cost of production for Uganda’s crude oil is over $40 a barrel and it is a price above such levels that will fast- track the FID,” the research note pointed out.

Vehicles queue for fuel at a filling station in Uganda.

However, Cristal Advocates says like in all business, there is a silver lining from the drop in the global crude oil prices adding that this might be a good time for the oil companies to make key decisions.

The firms says the low oil prices present a rare opportunity for the oil companies to negotiate with their suppliers on the pricing of equipment.

“Low crude oil prices on a positive note provide an opportunity to the IOCs to put pressure on their suppliers to lock in cheaper construction and related contracts generating cost saving deals. This will enable a greater share of the wealth arising from the crude oil production to be distributed to all the stakeholders,” the note says.

In the retail market, Cristal Advocates does not believe there will be a significant change at the pump station.

“The pump prices of petroleum products are likely not to respond symmetrically with a fall in crude oil prices. This is largely because of the market power of refiners and traders in most of the world. Any changes in product prices will be minimal…”

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