Oil companies operating in Uganda are eager to start commercial oil production as quickly as possible, but first oil is unlikely to come to the surface until three to four years from now.

The companies say they have spent huge funds on oil exploration before and after oil was first discovered in Uganda’s Lake Albert Rift Basin in 2006. However, movement toward first commercial oil production has been slow, and it is unfair for them to hold their capital idle.

Oil experts said progress to commercial exploitation has been slow due to disagreements between the Ugandan government of Uganda and the oil companies over tax, delayed negotiations about a planned refinery, construction of an export pipeline, flow rates for oil fields and a power plant before actual production can start.

Uganda’s Energy Minister Irene Muloni said the country expects to pump crude by 2018, and the government will begin to use crude to generate electricity next year.

Geologists have estimated the country’s crude reserves at 3.5 Bbbl, but Muloni said only 30% of the country has been explored. Oil companies say the recoverable reserves now stand at 1.7 Bbbl.

CNOOC Uganda Ltd., a subsidiary of CNOOC which received the first oil license issued by the Ugandan government in September 2013, was expected to start crude output from its 635 MMbbl Kingfisher oil field in the Albertine rift basin in 2017.

But production has been delayed until late 2018 because the CNOOC must complete some pre-development infrastructure projects, including pipelines, access roads and an airstrip in the basin. Jin Weigen, a CNOOC vice president, said first crude was expected from the field by the end of 2018, adding that this also would depend on the completion of a crude pipeline to a refinery.

The 50-km (31-mile) pipeline will run from Buhuka, site of the Kingfisher Field, to Kabaale in western Uganda for the 60,000 bbl/d refinery, said Peter Lokeris, Uganda’s minister of state for energy and mineral development.

The Ugandan government is studying proposals from six potential investors expected to bid for the $2.5 billion refinery, the ministry said. The investors are Marubeni Corp. of Japan as an individual company and a consortia led by China Petroleum Pipeline Bureau, Petrofac, SK Energy, Vitol and Global Resources.

Bernard Ongodia, head of geophysics at the Uganda Petroleum Exploration and Production Department (PEPD), said the government would announce the lead investor to build the refinery in September 2014. The investor is expected to own 60% stake, while the rest will be shared by Uganda and other interested East African countries. Muloni said Kenya, Rwanda and Burundi have expressed interest in the refinery while word is being expected from Tanzania.

Production, refining

The government has insisted that an oil refinery must be built in the country after a study by the East African Community (ECA), which includes Kenya, Uganda, Rwanda, Burundi and Tanzania, recommended that another refinery was needed in the region.

Currently, the ECA has one refinery in Mombasa, Kenya. The refinery, according to the Uganda’s ministry of energy and mineral development, operates at 35,000 bbl/d instead of its installed capacity of 70,000 bbl/d. Consumption of petroleum products is rising in the East African region, and the current output isn’t meeting demand, the ministry said.

By 2030, the East African region will consume 370,000 bbl/d while most of the petroleum products will be imported from outside the region, according to energy ministry statistics. Oil companies in Uganda had opposed setting up the refinery because, according to them, there isn’t sufficient local demand to justify the expenditure.

Construction of the 30,000 bbl/d refinery in Uganda has been approved by the government and three international oil companies (IOCS)—Tullow Oil, Total and CNOOC—which signed a memorandum of understanding (MOU) in February 2014, ending months of protracted negotiations on a commercialization and development plan that will pave the way toward oil production in Uganda. The refinery’s capacity will be raised to 60,000 bbl/d before 2020.

Muloni said the plan provides for use of petroleum for power generation, supply of crude oil to the refinery to be developed in Uganda, and export of crude oil through the Indian Ocean. She added that the government of Uganda will construct the refinery while the IOCs will build an oil pipeline to transport crude for export through the Lamu port in neighboring Kenya. Uganda needs the oil export pipeline because it is landlocked.

At peak, the oil companies will export 120,000 bbl/d, which is double the amount to be refined. The oil companies, according to Ugandan oil officials, said a pipeline via the Kenyan coast is essential because the projected oil production target will exceed national and regional demand.

“The conclusion of the MOU is a significant step for Uganda as it gives a road map for achieving a harmonized commercialization plan for the development of the oil and gas resources that are being discovered in Uganda,” Muloni said.

Oil legislation

In the meantime, energy legislation continues to be discussed. Two pieces of legislation, the Petroleum (Exploration, Development and Production) Act 2013 and Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act 2013, became effective in April and July 2013, respectively. Both laws outline regulations to govern the oil industry.

A third piece of oil legislation, the Public Finance Bill, is being debated by Parliament. It spells out procedures for petroleum revenue management and proposes a separate government account in which oil revenues should be deposited and used for economic and social investments for the benefits of Ugandans.

However, the National Oil Company of Uganda, a regulatory body meant to look out of the Ugandan government’s interest in the oil industry, is yet to be established.

Muloni said the licensing round for available petroleum exploration acreage is expected to be announced before year-end, adding that about 40 companies, most of them foreign, have expressed interest.

An oil expert in Lagos thinks starting commercial oil production in 2018, nearly a year later than expected, is a setback to Uganda’s nascent oil industry especially considering oil was first discovered in the East African nation eight years ago and the first oil license was issued in 2013.

However, senior officials in Uganda said the delay in starting production is understandable and won’t hurt the country.

“Uganda is moving slowly to avoid repetition of mistakes that have occurred in other oil-producing countries. The government is in no rush to exploit the country’s petroleum resources with no sustainable benefits,” said Ernest Rubondo, commissioner for the Uganda’s PEPD.

Elly Karuhanga, chairman of the Uganda Chamber of Mines and Petroleum, told a team of interviewers from Oil in Uganda that “the progress of the oil industry in Uganda has been a slow process but very steady. I think rushing would have caused a lot of problems. Speed would have been dangerous.”