Address to Parliament by

H.E. Yoweri Kaguta Museveni President of the Republic of Uganda

On Oil

Parliament

10th February 2012

H.E. the Vice President, Rt. Hon. Speaker, Rt. Hon. Prime Minister, Hon. Leader of the Opposition, Hon. Ministers, Hon. Members of Parliament, Ladies and Gentlemen

I greet all of you and I congratulate you all upon entering the New Year. On the 6th of February, while in Kasese during Tarehe Sita celebrations, I made two points: i. ii. The NRM/NRA fought a resistance war and won it without a reliable source of arms; and The NRM inherited a Government with ruined economy and without money but within a short time repaired that economy.
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It may be those qualities of ability to build great things with scarce resources that moved the Alurs to give me the nickname of Jalukunga the one who nurtures things to maturity. Even the Bakiga had given me the praise name of Ruhemba-Ogwenjura the one who successfully makes fire using wet firewood. This praise is not just for me as a person but for the whole NRM. During the phase of the armed struggle, we moved at a much faster pace. We had a lot of problems lack of arms, lack of food, lack of drugs, lack of clothes, indiscipline within the forces, etc., but we solved those problems systematically until we won victory in 1986. That phase of the resistance was building on the foundation of the earlier phase of 1971-1979. The 19711979 phase was also building on the foundation of the earlier phases of the peoples struggles in Uganda such as Kabalega and Mwanga resistances, Bataka Movement,

Nyangire Movement, Musaazis struggles of 1940s, the Student Movement in the 1960s, etc. Actions in the armed struggle phase were faster because we had tight rules in the form of the Code of Conduct and the Operational Code. Our strategy was correct and it was supported by appropriate institutions and tight rules. When we captured power in 1986, we had to share power with new civilian forces in the form of the expanded National Resistance Council (NRC). Using the closed sessions of the NRC, we would develop prior harmonized positions and come to the Legislative Chamber when everything had been agreed. We were, therefore, able to move a bit fast, acrimonious debates in the NRC notwithstanding. We were able to deal with many controversial issues such as the chasing of mafuta mingis out of the Asian houses, liberalizing the control of foreign exchange away from the monopoly of the Bank of Uganda, liberalizing the buying of coffee and cotton away from the monopoly of Coffee the Marketing Board (CMB)
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and the Lint Marketing Board (LMB), reduction of the civil servants, reduction of the army, the restoration of traditional leaders, etc. Infrastructure was tackled with the increase of electricity generation from 60 MW to 380 MW, the repairing of the major roads, etc. With the introduction of the 1995 Constitution, however, decision making process slowed down and indiscipline in the political class increased. This led to a number of strategic mistakes, one of them being the sabotage of the electricity development programme by delaying Bujagali. These mistakes cost our country dearly. Between 2005 and today, the country has squandered 1,500 billion shillings (1.5 trillion shillings) on subsidizing electricity. This does not include the cost to industry through the need to buy standby diesel generators which are always very costly. Through external interference, there was also a delay in the equipping and professionalization of the UPDF by insisting on a smaller budget as a condition for external financial support. This caused the prolonging
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of the suffering of our people in Northern Uganda on account of Konys terrorism and the continued damage by the Karimojong cattle-rustlers within Karamoja and also in the neighbouring districts. We, therefore, got into a situation where the NRM was forced to make mistakes on two strategic issues by internal indiscipline and external pressure. This was in the area of electricity and security as already pointed out. In 2001, I could no longer tolerate the sabotage to national security caused by the under-funding of the army. I called an emergency Cabinet meeting in Gulu. Using the savings, we bought We decided to cut 23% from the budget of each Ministry to cure this mistake. helicopter gunships and other equipments that should have been bought in 1991 when we reduced the Army from 100,000 to 40,000 but which were not bought because of external pressures. By 2003, we had started turning the tide against the terrorists. The battle of Apopong in Teso, in August 2003, was the turning point.
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That was the end of Kony terrorism. mistake was finally cured.

That strategic

The strategic mistake on electricity took longer to cure. It was only in 2006, soon after the elections, when I proposed the setting up of the Energy Fund, using our own money, that we began addressing that mistake. Previously, we had relied on endless begging from outside for funds to build the dams. The begging itself was further complicated by the internal sabotage by the indisciplined political elements whom the external benefactors were only too eager to listen to. By setting up the Energy Fund, we were now able to build these dams ourselves if it was necessary although we continued to welcome external financing, if available. The usual games did not take long to to manifest be the themselves. Some old man claimed

personification of the Bujagali spirit and the spirit was objecting to the building of the dam. Some of the lenders started procrastinating using frivolous excuses
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they must consult civil society, etc. society? foreign NGOs.

Who is civil I

These are some individuals in the employ of How can these be civil society?

understand civil society to mean people who are living by their own means not employed by Government. This means industrialists, farmers, hotel-owners as well as workers in the private sector, etc. regarded as civil society? Why should people working for foreign governments that fund the NGOs be Fortunately, by this time, a We, therefore, contractor had already been selected.

released US$ 75 million to them from the Energy Fund as bridge financing to start building the dam straight away. If they would not start, we would kick them out and build the dam ourselves using our own money. Bujagali started on schedule this time. The first turbine has now been commissioned. turbines will be ready by July 2012. All the That is how

With Bujagali, we

shall not have load-shedding for the next three (3) years because the deficit of 135 MW at peak hours (between
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6.00 pm and 11.00 pm) will be more than covered by the 250 MW Bujagali will produce. The Energy Fund has not only helped us to kick-start Bujagali on time. Using the Energy Fund money, we have contributed to the following projects:
A. Construction of evacuation and distribution lines for the following small hydropower projects: 1. Mpanga Small Hydropower Station 18MW (Mpanga-KamwengeKahunge-Nkingo) 2. Mpanga Small Hydropower Station 18MW (the construction of the 33/132 kV, 2x20 MVA sub-station and switching station) 3. Buseruka Small Hydropower Station 9MW (Buseruka-Hoima line)

B. Construction of priority rural electrification projects : 1. Sironko-Nakapiripirit-Amudat 2. Katakwi-Moroto with T-offs to Matany and Lorengedwat 3. Ngora-Kobwin 4. Lwala-Kaberamaido-Kobululu-Amolatar and Kelle Port 5. Lwala-Otuboi-Acinip 6. Lwala-Dokolo
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7. Kitgum-Palabek 8. Lira-Apala 9. Lira-Aloi 10. 11. 12. 13. 14. Ibanda-Kabujogera-Kamwenge Muhanga-Kamwezi Kakumiro-Birembo-Nalweyo Bukwiri-Kyankwanzi Kayunga-Busaana

Therefore, today, we are emerging from the two strategic mistakes imposed on us by external forces and the indisciplined elements with the political class delaying the equipping of the Army and the delaying the the development of electricity. When you had the oil debate here in this Parliament on the 10th and 11th of October 2011, you were about to involve us in a new strategic mistake delaying the conclusion of the oil agreements which had been discussed by very competent people for a very long time.
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However, when the NRM Caucus met in Kyankwanzi after it rectified this position and, later on, the Rt. Hon. Speaker Rebecca Kadaga clarified to me that the resolutions you passed did not affect the old agreements or on-going negotiations. through the oil story: Let me, again, take you I first got involved with the

Mwitanzigye (L. Albert) oil on 10th of February 1986. Some two White men from Shell BP came to see me at the old State House, Entebbe. They told me that there were signs that there was petroleum in the Mwitazingye (L. Albert) area and that the previous Government had been about to conclude an exploration agreement with Shell BP. They now wanted to conclude the agreement with us. I told them to go away so that I consult with the concerned departments. I would call them back after a few days. I called people from the Ministry of Minerals, led by Mrs. Janet Opio who was the Permanent Secretary of the Ministry of Natural Resources. The team included the late Saul Mboijana who was the Ag. Commissioner of Geological Survey and Mines Department and
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Kabagambe-Kaliisa who was the Oil Project Coordinator. I asked them whether they knew anything about petroleum. They said they did not. Later I asked the

Ministry of Finance and Planning if anybody in Uganda knew anything about oil. They said: Yes, there was an expert on oil in the Bank of Uganda (BOU), they said. I called the expert from the BOU. The expert was a Ghanaian whose expertise was on account that he was the one that would handle the import papers for petroleum products into Uganda. You cannot imagine the disappointment and consternation I had. I called back the Shell people and told them that I could not proceed with the agreement because I had nobody on my side that knew anything about petroleum. I called the people in the Ministry of Minerals and told them to recruit graduates of chemistry, physics, geology and send them for Masters Studies in Petroleum. Once I had taken those strategic decisions and given the turbulent times Uganda and the Region were going
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through, I forgot about the issue until later when the students had come back and we had formed the Petroleum Unit in the Ministry of Minerals. At some stage, a group known as Petrofina from Belgium was negotiating with us and the Government of Mobutu in Congo about that oil. I even went to Gbadolite to see Mobutu in Congo about that oil. However, Petrofina was crippled by the riots in Kinshasa in 1991 because their equipment was looted. At this time, I looked for Shell BP because I now had my people who had come back with qualifications in petroleum studies. Shell BP was no longer interested. It seems that with the opening up of the Soviet Bloc, they had huge oil fields in those areas and were no longer interested. That would not have been a problem; the problem was that they told me a lie - that they were sure there would be no oil in that area. Why were you anxious to come in 1986? I could not get an answer from them.

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This is where my decision to send our people for training came in handy. When we could not proceed with Petrofina, Mobutu, Shell BP, etc., our scientists proceeded on their own. They did the aeromagnetic surveys (using aircraft), gravity survey and they also used seismological surveys to look for the oil. They were able to locate both the cooking centres and the possible storage centres (traps) for the oil. The oil would be cooked in one area and it would migrate and be trapped in the dome of rocks. If there is no appropriate dome, even if oil is cooked, it will migrate and evaporate because there will have been no proper storage for it. Our scientists were able to ascertain that oil could have been cooked in the Mwitazingye area and that there were rocks that could store the petroleum. The issue was to drill and confirm this or otherwise. That is when our Ministry of Energy advertised in search for oil companies who could come up with risk capital to use in drilling to confirm or otherwise.
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The following companies came in:

Licensee 1. Fina Exploration B.V 2. Uganda General Works and Engineering Co. 3. Heritage Oil and Gas Ltd. 4. Hardman Resources (U) Ltd. 5. Hardman Resources (U) Ltd. 6. Heritage Oil & Gas Ltd. and Energy Africa 7. Heritage Oil & Gas Ltd. and Energy Africa 8. Neptune Petroleum (U) Ltd. 9. Dominion (U) Ltd. Date Issued March 1991 Feb 1995 Jan 1997 Jan 1997 Oct 2001 July 2004 Sept 2004 Sept 2005 July 2007 Area Entire Graben Albert Basin EA 3 EA 2 EA 2 EA 1 EA 3A EA 5 EA 4B

We, therefore, must salute our scientists who did all this work. The first well sank by Heritage in Semliki in the It contained a lot of Our scientists were
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year 2003 was a disappointment. even, myself, I almost panicked.

carbon dioxide. The Europeans of Heritage panicked. I

resolute and insisted that there was oil. Even now, they insist that there may be oil even in that Semliki well, carbon dioxide notwithstanding. The first productive well was struck on the 6 th of January 2006 by Hardman Resources at Mpuuta Oil Field in Hoima district. Since that time, out of 64 wells drilled, 58 have found oil which is a 90% success rate. It is estimated that having explored in only 40% of the potential area, we have confirmed 2.5 billion barrels. Exploration in all the other areas will be done when licenses are awarded through competitive bidding once the Petroleum Resource Management legislation is enacted. When the first successful well produced oil, discussions started on the way forward. There were attempts to tell me that Uganda should quickly agree to a Pipeline for export of crude oil. I asked: How about a Refinery to produce petrol for our use, diesel, kerosene, HFO and other bye-products? Some people tried to tell me that
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Refineries do not make money. My question then was: Why do those who build Refineries build them? Are they Mother Theresas working for philanthropy? They could not answer this. When I visited Iran, in May 2009, I asked the President there whether they had Refineries and why? He said they had nine (9) and they were building another seven (7)!! Yet here we were being discouraged from building even one!! Unbelievable! Eventually, our people hired a group known as Foster Wheeler which said that the Refinery project is very profitable in Uganda and it has an NPV of US$ 3.2 billion at 10% discount rate and an IRR of 33%. Foster Wheeler also found that a Pipeline for exporting crude oil alone, would have an NPV of US$ zero at 10% discount rate and an IRR of 10%. In other words, a Pipeline would be much less profitable than a Refinery partly because our crude oil is waxy and needs to be heated all the way to Mombasa.

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Right from the exploration period, our officials had reached agreements with the oil companies concerning what are called Production Sharing Agreements (PSAs). The logic here is that the host country either does not have the money or, if she has the money, she is not willing to risk it in drilling to confirm the existence of the oil which may not be there or may be there in small quantities that are not economic. Remember, our scientists had said the oil may be there by the use of aero-magnetic survey, gravity survey and seismology but they had not drilled to confirm their suspicion. The oil companies specialize in this aspect of the business. They put forward their money to drill the wells for the better or for the worse as they say in Christian marriages. If the oil is found, they share in the oil until they recover what they put in and, thereafter, they continue to take a smaller share in recognition for their initial investment. summary: In our case the PSAs our people signed go as follows in

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i.

An agreed exploration work programme and a budget to execute the work. In other words, the government obligates oil companies to drill a number of wells or carry out surveys over a specified area and within a defined timeframe. This helps to monitor the exploration work and monitor expenditure.

ii.

An obligation to return part of the licensed area (called relinquishment) on renewal of the exploration period.

iii. iv.

Government is entitled to a Royalty on gross production. Government is also entitled to a participating interest or share of the National Oil Company which is paid for initially by the licensed oil companies.

v.

An allowance for companies to recover the verified investment cost which recovery is caped at not more than 60% of gross oil production after deduction of royalties. This means that the costs
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to be recovered by the oil companies have to be verified as bona fide expenditure. Secondly, unlike other businesses where companies recover their costs from all revenues generated up to 100%, in the oil business the companies are allowed to recover up to 60% annually in order to allow for some of the oil to remain for government to take a share early. The oil that remains after recovery of costs is called profit oil. vi. vii. Production sharing of profit oil for both government and the oil companies. Taxation of the licensees profit oil.

Before the recovery of their costs, the oil companies will be taking 74 barrels out of every 100 barrels produced. After the recovery of their costs, the oil companies will take 42 barrels out of every 100 barrels produced. This is just sharing the barrels produced. It does not include taxes which are at 30% of barrels taken by the
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companies and does not include royalties which are between 5% and 12.5% of the gross production before cost recovery. It also does not include equity by the state oil company which would also earn dividends of 15% out of the joint venture with international oil companies. If you include the tax, the royalties and the dividends and assuming we are producing at 200,000 barrels per day, the total government share will be equivalent to 152,326 barrels out of every 200,000 barrels produced which is 76.2%. These agreements were signed before there was certainty that there was, indeed, oil. types of agreements. Our people could not have attracted those oil companies without these Now that it is confirmed that we Indeed, these have the oil, we shall be able to negotiate for higher government shares from the beginning. better. The benefits I have enumerated above do not include the capital gains tax i.e. the tax of 30% the government
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were the agreements of 2001. The later ones are much

levies on companies when they sell their shareholding as Heritage sold to Tullow two years ago. You remember the oil companies tried to play games on that but we told them that that tax was not negotiable. They paid us US$ 430 million in taxes, which we put in this years budget for building Karuma dam. The Banyankore say: Ekihambo kirakutambire kikubanza obutuutu the

pumpkin plant that will save you from hunger starts by giving you the small pumpkin fruits; then, you know that it will give you even the bigger ones. We are now able to move on building Karuma dam fast without the circus we normally go through of begging money from outside. In the legislative proposals that the government is sending to you, we shall propose that oil money should never be squandered on consumption. Oil is a finite resource which will dry out tomorrow. It must be used to create durable capacity. Oil money should not be used for importing cars, perfumes, travel, etc. It should only be used for developing cheap electricity from hydro
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sources, solar sources, wind sources, the biomass and nuclear energy in their order of urgency and affordability. First to be developed will be all the all the hydro sites along the Nile and its tributaries. This should give us about 4,000 MW (Ayago, Karuma, Murchison, Ararang, Isimba, the many mini-hydros on other Nile system Rivers, etc). We must research in the solar and the wind potential. We develop the energy from the biomass and electricity from HFO, gas and some crude oil in the shortrun. In the long run, we are going to develop nuclear energy using our abundant uranium which I have refused to export. Nobody will export uranium from Uganda as long as I am the President of this country. Why should we donate fuel to light the neighbours house while our own is in darkness (kizikiza, omwirima)? What sort of wisdom is this? We are training our scientists in nuclear energy for peaceful purposes already.

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The second area I propose for the use of the oil money is in the area of transport infrastructure especially the railway and some of the roads. The third area for which we should use our oil money should be in the area of scientific innovation and research. This money should be used to build the for scientific research in government infrastructure

universities and research centres such as UIRI, NARO, etc. The oil money should also be used to give capital to our scientists to commercialize their innovations. Some aspects of irrigation could also benefit from the oil fund especially the strategic irrigation schemes around Mount Rwenzori, Mountain Elgon, the Kigezi Bufumbira hills, the Agoro hills and in the areas around the Nile River that can easily be irrigated without using too much pumping. With cheaper energy sources, we may be able to irrigate more distant parts that are not near the rivers such as Karamoja.

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With the four strategic factors in place now i.e. security in the whole country, enough electricity, an educated population and the signing of the oil agreements, the NRM has regained the strategic initiative more or less like in December, 1985, when we, finally, had the manpower and the weapons to capture Kampala and defeat the reactionary regimes. We now have the security, the electricity, the educated human resource and the money to transform Uganda our long time-held wish.

I, therefore, call on the NRM leaders and supporters and all the other well intentioned Ugandans to work together and take advantage of this new constellation of factors. You all can be pioneers (historicals) at this new threshold of transforming Uganda into a middle income country in the next few years.

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Lately, we have been having controversy on two issues of the so-called stabilization clause and whether we should automatically build both a Refinery and a Pipeline of crude. The stabilization clause aims at compensating oil companies if the Government, through tax measures, causes a substantial loss of economic benefits to oil companies. We had no problem with that except we had to be precise about the definition of the words: loss of economic benefits. The oil companies wanted to keep those words vague. We refused. We insisted that the words loss of economic benefits must be scientifically defined. We wanted the use of NPV as the yardstick for that definition. The oil companies refused. Hence, there was a stand-off until the oil companies relented and we used the NPV as the yardstick for defining the loss of economic benefits. I wish to advise the House that the two licenses which were issued to Tullow was to compensate for the time lost (2 years), while discussing the tax issues as well as the oil and gas Commercialization Strategy and Plan with the Company.
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The licenses are for periods of six months and one year maximum. On the issue of having both the pipeline and the Refinery, the companies, in the end, accepted our formulation which insisted on going for the Pipeline in addition to the Refinery if the economics are right in other words, we must be sure about the amount of money the Pipeline companies are going to deduct from the price of oil per barrel and the other economic benefits the Government would forego would have to be computed. The main overt argument by oil companies

for a crude pipeline is the fear that there may not be enough market for refined products (petrol, diesel, kerosene, HFO, PVC) within Uganda and within the Region!!

However, the real interest of oil companies in exporting crude oil are, obviously, the bye-products and the jobs, that go with them as well as the reluctance to invest in local refining, preferring to use refineries abroad that are
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already built.

This is a good agreement as a start.

It

gives a reasonable share to the Government; it avoids the mistakes one finds in other oil producing countries such as the flaring of gas which means destroying that great resource that can be used for generating electricity, making the urea fertilizer and making steel; we have insisted on a local Refinery; we have a tightly defined stabilization clause; and the Pipeline will be built if the economics are right. Future agreements are going to be more favourable and the ones signed after 2004 are more favourable than the ones of 2001 which I have described here.

Continuing to procrastinate, on the other hand, would not have been good for the country. First of all, we are losing time. We need the oil money to develop our infrastructure. Secondly, we do not want our partners,

the investors, to think that we are unreliable partners. The longer the delays went on, the more money the oil
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companies

were

losing

by,

for

instance,

having

employees whom they had to pay and yet work was not starting. If you give somebody conditions and he fulfills them, then, you must fulfill yours. You should not cause the NRM Government to be paralyzed in that area or, indeed, in any other area. The people involved in this area are very capable people. Many of them are, indeed, the pioneers of this very industry.

There is also another factor. The Chinese Minister who visited me recently raised one point which all of us should bear in mind. He pointed out that in 20 years time oil and coal prices are likely to go down because at that time, cleaner sources of energy will have been perfected. What are these cleaner sources of energy? They are:He solar energy, wind energy, nuclear energy, etc.

pointed out that each day the world receives from the sun an amount of energy that is 50 times the amount of electricity generated in the whole world for one year.
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Another scientist had told me of this sometime ago. We, therefore, need to be aware of all these factors so that we do not, again, miss this window of opportunity.

There was one aspect of the oil business that I had not bothered with. These are what they call auxiliary This aspect came up during our These aspects are being services: Cooking, transporting and guarding other than by the Police etc. discussion in Kyankwanzi.

addressed in the proposed legislations.

More important is the training of oil scientists and technicians in the country. At the beginning of the programme of exploration in 1986, as I told you, we trained our initial batch of scientists at Imperial College London, the university of Aberdeen as well as in India, Norway and USA. We also trained technicians in different places. We are now training our technicians at Kigumba.
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The director, Dr. Kwesiga, was looking for 20 billions shillings to ensure that it is well equipped. I will ensure that they will get this money. The universities are also starting petroleum courses. being looked at. Every aspect is, therefore,

A renown Petroleum Consultancy Company called IHS Energy based in Cambridge Massachusetts in USA regularly publishes rankings of the Petroleum Fiscal regimes worldwide. In the publication of 2010, out of 114 countries analyzed, Uganda features with 76 points out of 114 points in terms of having fiscal terms (Royalty, cost recovery, State participation, production sharing and Income Tax) that are favourable to the country. Ghana had a ranking of 58 points and Trinidad and Tobago 68 points. Only countries like Malaysia, Iran, Nigeria, Qatar, Algeria, UAE-Abu Dhabi, Venezuela, Egypt, Bahrain, Syria and Iraq had much better rating (above 90) because they are mature oil producing countries.
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The systematic fight against corruption will continue in a scientific way. There are four positions that will help us to get rid of corruption. These are: the Permanent Secretary in the Ministries, the Chief Administrative Officer (CAO) in a District, the Town Clerk in a city or town and the Sub-county Chief in a sub-county. Constitutionally, these are the people that control money, contracts and personnel. On the 26 th of January, in Kapchorwa, I said that we needed 2,000 Musisis in the whole of Uganda and that would be the end of corruption. The politicians should be examples to the civil servants by not involving themselves in corrupt schemes even when it is the duty of Accounting Officers to manage money.

I cannot end this address by not cautioning you about the environment. I have flown over Eastern Uganda a Whenever I do so, I get
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number of times recently.

worried about two things:

the cutting of trees and the

drying of swamps for the growing of swamp rice. Early in the next financial year, I want to call a conference on this issue. The cutting of trees carelessly means, among many hazards, that there are no wind breaks. The wind, if not slowed down by trees, becomes so strong that it dries plants much faster and I think, it also interferes with the pollination of plants and crops and, therefore, lowers yields or harvests. Transpiration, on the other hand, is a process when water is sucked from the soil and put in the atmosphere by plants. Swamp grasses do this a lot. That is why West Nile has more rain than Karamoja although they are on the same latitude.

Apparently, it is because of the swamps of Southern Sudan and the forest in Congo. To destroy these swamps for the growing of swamp rice or growing Irish potatoes as they do in Kabale and a few other districts is very short-sighted and should be discussed before it is too late.
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It is irresponsible to pretend to talk about Mabira when real dangerous damage is going on all over the country and on a massive scale. Why cant all the families plant hedges around their farms using mulberry trees which can also be fed to silk-worms to produce silk or plant colleandra which can be used as animal fodder and also a nitrogen fixer so that they act as wind-breaks. discuss this issue before it is too late. Let us

I thank you very much.

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