Uganda’s next big step toward oil production

TotalEnergies and its partners make FID on Tilenga field and EACOP pipeline

WHAT: The French major and its partners are ready to proceed with the $10bn Lake Albert Development Project.

WHY: The FID moves Uganda one step closer to becoming an oil producer.

WHAT NEXT: ESG activists may be emboldened to urge more banks to avoid EACOP, even though their campaigns are not the only source of pressure on the pipeline’s budget.

Ugandan authorities first learned that their country was home to commercially viable hydrocarbon reserves more than 15 years ago, when Australia’s Hardman Resources – later acquired by Tullow Oil (UK/Ireland) – discovered crude oil at its fields near Lake Albert. These reserves amount to around 6.5bn barrels of oil in place (OIP), including around 1.4bn barrels of recoverable crude. Commercialising them has been a slow process, however.

This is partly because of technical delays, such as the fact that the waxy nature of crude from the Lake Albert sites led project engineers to opt for using a heated pipeline for transport. It is also related to the fact that disputes between Tullow, its partner Heritage Oil (UK) and the Ugandan government over taxation complicated the first attempts to bring new investors on board and then derailed later efforts to transfer the fields over to new operators in the hope of speeding up work.

Nevertheless, Uganda’s government has made significant progress during the past two years. In the spring of 2020, it struck a deal worth $575mn with France’s TotalEnergies and China National Offshore Oil Corp. (CNOOC) on the acquisition of Tullow’s fields. That deal provided for the French major to assume control of Blocks 1 and 2, which held the Tilenga field, while China National Offshore Oil Corp. (CNOOC) took control of Blocks 1A and 3A, which held Kingfisher

In the spring of 2021, it signed a package of agreements with TotalEnergies, CNOOC and the government of Tanzania on the construction of the East Africa Crude Oil Pipeline (EACOP). Those documents outlined plans for the construction of a 1,445-km heated pipeline, the longest of its kind in the world, capable of pumping 216,000 barrels per day (bpd) of crude from Hoima in western Uganda to the port of Tanga on Tanzania’s Indian Ocean coast.

Then in November 2021, CNOOC took the step of making a final investment decision (FID) on Kingfisher, which will eventually yield more than 40,000 bpd of oil.

FID stage

Now, as of February 1, 2022, TotalEnergies has joined its partners in reaching the FID stage on Tilenga.

This is a considerably larger field, as it is slated to produce about 204,000 bpd of crude from about 400 wells drilled from more than 30 pads. It will provide most of the throughput for the EACOP link, and as such, the decision to proceed with work at Tilenga has freed the French major and its partners in the EACOP consortium – CNOOC, Uganda National Oil Co. (UNOC) and Tanzania Petroleum Development Corp. (TPDC) – to make an FID of their own.

In other words, both the upstream and the midstream projects– described collectively in a statement issued by TotalEnergies on February 1 as the Lake Albert Development Project – are now in motion. CNOOC and Total Energies have opted to move ahead with work at their sites near Lake Albert, and both are ready to team up with the national oil companies (NOCs) of Uganda and Tanzania to push forward to build the pipeline that will handle production from their fields.

This development has been hailed by Uganda’s Minister of Energy and Mineral Development Ruth Nankabirwa, who said on February 1 that the signing of documents with TotalEnergies and its partners would help improve the economy. The projects will create up to 160,000 new jobs, while also pushing upstream development work forward, she said.

“This historic occasion now puts us on the path to achieving first oil in 2025, as agreed in April 2021,” she commented. She was speaking at a signing ceremony attended by Ugandan President Yoweri Museveni, Tanzanian Vice-President Philip Mpango and TotalEnergies CEO Patrick Pouyanné, as well as representatives of UNOC, TPDC and CNOOC.

The deal is good news for the host countries and for the entire region, commented Douglas Rycroft, the director of UK-based Gneiss Energy. “News this week of the FID decision by TotalEnergies on the Lake Albert Resources Development Project is very encouraging for the East African energy sector as a whole, while for the Ugandan government more specifically, Tilenga and Kingfisher will generate significant, and much needed, revenues as they ramp up to an expected plateau of 230,000 bpd following first oil in 2025,” he told NewsBase. “A critical aspect in the large-scale development of the Lake Albert resource potential has always been securing evacuation routes to the coast to justify full field development costs, so reaching commercial agreement on EACOP as an integrated part of the overall Lake Albert Development Project is a significant milestone in unlocking value for industry participants, the national oil companies of both Uganda and Tanzania, and the broader governments of both nations. Regionally, this is an important step, as it signals multilateral co-operation between East African nations to work in tandem to extract a nation’s hydrocarbons.”

Rycroft added: “With progress on Mozambique’s giant gas project delayed due to political unrest and slow progress on the commercialisation of Tanzania’s offshore gas resources, it is clearly a solid step forward in the region to see FID on a $10bn mega-project taken by IOCs.”

ESG encouragement

Altogether, these three initiatives are expected to carry a price tag of $10bn. The EACOP pipeline is anticipated to account for about half of the total, even though its price was originally estimated at about $3.55bn.

The French major has never offered a detailed explanation as to why it raised the cost estimate for the pipeline last year. Some observers have speculated, however, that TotalEnergies and its partners are having to pay higher risk premiums because of activists’ efforts to discourage banks from investing in the EACOP project on (ESG) environmental, social and governance grounds – and that these higher premiums are driving up the bill for the pipeline.

Advocates of this view have pointed to the fact that activists’ complaints have led the British export credit agency UK Export Finance (UKEF), along with 11 commercial banks, to opt out of providing funding for the pipeline and have also convinced the French insurer AXA not to provide coverage for the project. All of these institutions have cited climate considerations as the reason for their decision, describing EACOP as incompatible with their commitment to fund projects in line with the Paris Agreement.

It is not entirely clear whether (or to what extent) the activist campaign has affected the cost of the EACOP pipeline. After all, ESG factors are not the only consideration for TotalEnergies and its partners, and cost increases were perhaps unavoidable, given that high demand and supply chain disruptions drove prices for key supplies such as steel and construction materials to climb sharply in 2021.

Nevertheless, ESG activists have a strong enough perception of success that they are likely to continue pushing on this front. Landry Ninteretse, the regional director for Africa of 350.org, made clear that his organisation intended to keep fighting. In a press release dated January 31, he declared: “EACOP is not inevitable. In fact, it needs billions of dollars from private banks around the world to become viable. Most of these banks have already distanced themselves from this controversial project. Together, we can further pressure the reluctant ones and stop this fossil finance flowing into the East Africa region.”