By Elias Biryabarema
KAMPALA, Sept 1 (Reuters) - Uganda expects to become an
oil-producing nation in 2011, but a protracted dispute with
British exploration firm Heritage Oil may delay production and
risks unsettling other investors.
With the potential to be a top 50 oil producer, Uganda
stands to reduce its budget dependence on foreign aid and
improve poor infrastructure.
East Africa's third largest economy is seen growing by 6.7
percent this year and 7 percent in 2011.
Here are some of the factors to watch:
Somali rebels killed 79 people in Kampala as they watched
the World Cup final on July 11 in revenge for the deployment of
Uganda replied by sending hundreds of additional troops to
Somalia to bolster the African Union's AMISOM mission, with
President Yoweri Museveni under pressure to act on al Shabaab as
the country looks towards presidential elections early next
The rebels have said they will strike Uganda again if it
does not withdraw its troops. Analysts and Western diplomats
warn that a military solution alone will fail.
What to watch:
-- More attacks. Does the deployment of additional Ugandan
troops to Somalia heighten the risk of another attack? Any
targeting of the oil sector could prove particularly damaging.
-- Any signs that the government is using the attacks as a
pretext to squeeze the opposition ahead of 2011 elections.
Uganda discovered oil along its border with the Democratic
Republic of Congo in 2006. Tullow Oil and Heritage Oil have
found up to 2 billion barrels of oil in the Albertine Rift
Basin. Reserves may be four times bigger.
Tullow Oil said development of its Ugandan oil fields would
be delayed due to a dispute over capital gains tax between the
government and Heritage Oil. Heritage said it had sold 50
percent stakes in Blocks 1 and 3A to Tullow Oil for $1.45
billion. Tullow deposited $405 million of the total with the
Ugandan government in an escrow account pending the resolution
of a tax dispute.
A completed deal would allow Tullow to start a $10 billion
project to develop Uganda's reserves. It plans to bring in
France's Total and China's CNOOC to fund infrastructure, which
could include a refinery and pipeline to the Kenyan coast.
Tullow had previously said it expected to start commercial
oil production by the fourth quarter of 2011, increasing output
to 200,000 bpd.
What to watch:
-- A prolonged wrangle between Heritage and the government
over tax on the Tullow sale. On Aug. 27, Energy Minister Hillary
Onek told Reuters Heritage's licence had expired in February.
Since Uganda had not received an application for a production
licence from any party within a 6 month period, he said, the
bloc had reverted to the government.
Onek said the government would consider any application when
it arrived. Heritage says it has been advised it does not owe
tax in Uganda. The company distributed the Ugandan sale proceeds
by paying shareholders a special dividend in late August.
Uganda's petroleum sector needs a heavy injection of capital
to get into the production phase. Investors will be looking for
government commitments on transparency and policy stability.
-- A personal intervention from Museveni who wants the final
say on all oil and gas deals. -- New regulations. The new law
overseeing Uganda's hydrocarbon sector is expected to be passed
by parliament in the second half of 2010. Remaining licences
could then be auctioned.
-- The impact of oil on the economy. Economic growth is
expected to continue. However, flows of petrodollars could
divert attention from other sectors and encourage corruption.
-- Impact of oil on the local currency. The sudden inflow of
petrodollars will strengthen the Uganda shilling, making other
exports less competitive in neighbouring markets.
-- Decline in donor dependence. Economists say the influx of
about $2 billion a year from oil will help the government plug
its fiscal deficit. This could diminish the leverage of donors.
-- Tension between government and Bunyoro Kingdom. Nearly all
the oil has been found in the Bunyoro Kingdom. The Banyoro want
a 10 percent cut of the petrodollars. An oil revenue-sharing
formula is in the making.
Uganda's economy has been buoyed by increasing exports,
especially food, to the neighbouring economies of South Sudan,
Rwanda, Democratic Republic of Congo and Kenya. The improved
export flows have helped strengthen Uganda's balance of
payments. The country registered a cross border (informal) trade
surplus of $1.3 billion in 2008 from $776 million in 2007,
according to the Uganda Bureau of Statistics (UBOS).
South Sudan, which emerged from a decades-long civil war in
2005, imported goods worth $910 million in 2009 compared to $465
million in 2007. Landlocked Uganda is heavily dependent on
imports from the Kenyan port of Mombasa.
What to watch:
-- South Sudan referendum on secession due in January 2011.
A yes vote is expected but if the result ignites a dispute with
Khartoum, or even a resumption of war, trade could be blocked.
It could also undermine the fragile peace in northern Uganda.
-- Putting in place a new constitution in Kenya. On Aug. 4,
Kenyans endorsed a new constitution. But now the horse-trading
begins on the appointment of new political posts and how to
implement sensitive new clauses such as land ownership.
-- ICC arrest warrants for key architects of Kenya's 2008
post-election violence. Fighting could break out if one ethnic
group feels singled out. The last bout of violence triggered a
spike in fuel and food prices as imports to Uganda were held up
in the Kenyan chaos.
Museveni will almost certainly stand for a fourth term in
elections in 2011, most likely against arch rival Kizza Besigye.
With the oil find, Museveni now has reason to cling onto
power. But the opposition is striving to present a more united
front, setting the scene for an electoral showdown that could
What to watch:
-- Can the opposition unite? Five of Uganda's opposition
parties have picked four candidates to vie for a single ticket
in the election.
-- Media and opposition crackdown. With oil revenues set to
surge, experts expect Museveni to become more intolerant of
dissent, critical media and strong opposition.
-- Foreign aid cut? Donors may cut aid in the next financial
year if the government does not curb corruption. Foreign aid
contributes 30 percent of annual budget. Substantial cuts could
stall key infrastructure projects.
(Editing by Richard Lough and Alison Williams)