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Financial Times: Exploration: Oil find raises stakes on Congo border

By William Wallis
Published: November 20 2007 06:27 | Last updated: November 20 2007 06:27

It does not look much like oil. Even in the tropical heat it is about as liquid as beeswax. But that is a problem Fred Khalisa, permanent secretary at Uganda’s ministry of mines and energy, would rather have than not.

Until relatively recently, Mr Khalisa was the Ugandan government’s only oilman. He has spent much of his career seeking to validate the years of training he received, mapping prospective areas and galvanising interest from oil exploration companies.

So when Ireland’s Tullow Oil struck lucky in January last year it was a personal victory as well as a potentially historic moment for Uganda’s landlocked and hitherto aid-dependent economy.

Six wells drilled around the shores of Lake Albert in the west of the country have since resulted in oil flows, making it possible that production will start as early as 2009.

Initially, this will be just 4,000 barrels a day.

But Tullow, and Canada’s Heritage Oil, have between them discovered reserves of at least 300m barrels, according to Mr Khalisa.

The companies’ own publicly-declared estimates, based on proven discoveries, are more conservative.

But if initial findings from seismic surveys hold up as they drill deeper into Lake Albert next year, Mr Khalisa anticipates these rising to 1bn barrels or more.

“They are discovering more reserves all the time,” he says.

While Uganda may remain a minnow among African producers and full production is not expected before 2015, the impact of oil could eventually be profound.

“We need to create an oil fund and determine up front what areas of investment oil revenue should go to – whether to infrastructure or education – so people don’t think it’s there for eating,” says Mr Khalisa.

There is also the delicate matter of the oil’s location.

Its existence in Uganda was first traced in the 1920s when EJ Wayland, a British geologist, mapped a series of seepages along the banks of Lake Albert.

Further studies were carried out in the decades afterwards.

But interest tailed off when Royal Dutch Shell discovered Nigeria’s vast reserves in 1956. Only in the past five years has serious exploration resumed in Uganda.

The discoveries have raised the stakes since in a region prone to Eldorado-style myths of spades and buckets yielding fortunes in gold and gems, and oil so abundant it bubbles to the surface of streams.

Uganda and the neighbouring Democratic Republic of Congo have fought two wars in the past decade, partly over Congo’s resources. Their common border runs through the middle of lake Albert, and potentially through its deeper, hidden lakes of oil.

Tension between the two countries, and between local ethnic groups vying for control of territory, could yet complicate efforts to start production.

Halfway through this year, Congolese troops opened fire on one of Heritage’s exploration vessels, killing a geologist and causing the company’s share price to plummet in Toronto.

There were several further outbreaks of deadly violence around a disputed island before President Yoweri Museveni met Joseph Kaila, his Congolese counterpart, in September.

They agreed to set up a border commission, as well as to work on improving military communications on the ground.

Mr Khalisa says the Ugandan government has been sharing information since about the geology of the prospective areas.

On its side of the border, the Kinshasa government has licensed several blocks – including to Tullow and Heritage.

But exploration has been held up by attempts to wrest ever-larger sums of money from the companies, according to sources in the industry.

“We need to manage people’s expectations,” says Mr Khalisa, speaking more broadly about the exuberance prompted by the discoveries. “People are already starting to head to areas where there is oil, and land prices are appreciating in anticipation of a boom,” he says.

The Ugandan government has negotiated production-sharing contracts now with four companies overall, giving it up to 70 per cent of eventual revenues.

Based on optimistic scenarios and an oil price of $50 (USh85,275), this means, according to UBS, the London-based investment bank, that discoveries made so far are potentially worth more than $3bn to the companies.

But not everyone is so sure.

Keith Myers, a consultant with London-based Richmond Energy, has cautioned that it is too early to be certain of significant quantities of commercially recoverable oil in the Albertine basin.

He has also drawn attention to two physical constraints to development there. One is the remote location and the paucity of existing infrastructure. The other is the waxy nature of the oil, as revealed by the jar on Mr Khalisa’s desk.

If it were to be exported for sale on global markets it would require the construction of a heated pipeline running 1200kms to Mombassa, at a potential cost of billions of dollars.

John Morley, Tullow’s country manager in Uganda, says such a project would be commercially viable only if the country was producing 350,000 to 400,000 b/d – for now a remote prospect.

But with every new find, he adds, it is becoming easier to raise funding for further exploration. And there are more immediate benefits for Uganda.

Tullow plans to set up a mobile mini-refinery – or topping plant – by Lake Albert to start processing diesel, kerosene and heavy fuel oil when the first production comes on stream.

This will help reduce Uganda’s fuel import bill currently running at $400m plus a year.

The fuel oil will also drive a planned 85mw power plant to supply electricity to the struggling national grid. “Even 30,000 barrels day would be better than waiting for a World Bank project that never comes,” says Mr Khalisa.

Copyright The Financial Times Limited 2007 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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