After months of haggling with major oil prospecting firms, particularly Tullow Oil, the Uganda government has finally agreed to downsize oil production volumes from the earlier quoted 100,000 barrels per day (bpd) to the much lower figure of 20,000 bpd.

This is a major shift that runs contrary to the interests of the oil companies. Tullow Oil, whose investment in Uganda’s oil is already in excess of $800 million, is looking to start with 80,000 barrels in December this year. The company had hoped to raise the capacity to 200,000 barrels by 2015.

Tullow’s formula is aimed at recouping the billions of dollars’ worth of investments it will have put into the project in the shortest time possible. The company’s investment will include facilities, treating and transportation of oil and gas, improving roads, air transport, rail communication and drilling of more production wells.

However, the company’s proposal to increase production at the early stages has been turned down by the government, which has opted for caution. A UK-headquartered Irish firm, Tullow has applied for a production licence and duly submitted the required Field Development Plan. If granted, it will be the second oil production project that the Irish firm will undertake after Ghana, which has three billion barrels of confirmed oil and is expected to produce 120,000 barrels at peak, having started at 50,000 bpd last year.

Tullow is relatively new in the production arena, but has attracted other players like Total and the China National Offshore Oil Company (CNOOC) as partners in its Uganda operations. Uganda’s oil reserves are estimated at two billion barrels. Although the volumes are not anywhere near Nigeria’s recoverable deposits, estimated at over 30 billion barrels, and Saudi Arabia’s, which exceed 200 billion barrels, at today’s oil price of around $130 a barrel, it is quite enough to make a big difference to Uganda’s economy. The country expects to earn $2 billion a year at the peak of production.

But after pushing for scaled back production volumes, the Uganda government seems to have disappointed players in oil production. The decision is based on a study done in 2010 by the Ministry of Energy and Mineral Development titled, the development of an oil refinery in Uganda, which recommended that production be scaled down.

“A scientific study of the known reserves, which are 30 per cent of what has been explored so far, recommended that the country begins at 60,000 bpd and progressively increase this figure if more discoveries are made,” said Paul Mubiru, director for Energy and Mineral Development.

Inland refinery
In addition, the government study shows that it is viable to develop an oil refinery in Uganda, produce finished products and supply Ugandan and regional markets rather than construct a pipeline and export crude oil.

The refinery will now be built at Kabaale village in Hoima, western Uganda, in the Albertine Graben, where commercially viable oil reserves were discovered in 2006. Initially, the government was torn between refining the oil locally or building a pipeline and exporting crude. The latter is the preference of the prospecting firms, which want crude oil exported via pipeline to the coast of Mombasa.