New-found Oil Set to Change Uganda's Economy

Whoever wins this week's presidential election in Uganda will have to manage national reserves of 2.5 billion barrels of oil, a recent find that has transformed the country's financial outlook.

President Yuweri Museveni is expected to win re-election in Friday's poll but will face the toughest challenge yet to his 25-year rule from veteran opposition leader Kizza Besigye, according to analysts.

Rumors that the northwestern Lake Albert region sits above an oil field have been around for decades, but in late 2006, two foreign firms found the first reserves deemed commercially viable.

Earlier estimates had put total deposits at around 1.5 billion barrels, but Anglo-Irish Tullow Oil and Canada's Heritage Oil and Gas found accessible crude in more than 90 percent of wells drilled, one of the highest success rates in the world.

The wells are located in the Albertine basin, which lies in the upper-most part of the western arm of the Great Rift Valley.

Two other energy companies, Neptune Petroleum, the Ugandan subsidiary of London-based Towers Resources, and Bermuda-based Dominion have active exploration licenses but neither has found anything.

Although production plans have been set back by a series of public feuds between the government and the private firms, analysts see the outlook as rosy.

Just having the petroleum is enough for many investors...and has led to reasonably positive expectations about the future of the country," Lawrence Bategeka of Makerere University's Economic Policy Research Center told Agence France Presse.

Currently more than 80 percent of Uganda's some 33 million people depend on agriculture for their livelihood. One third of the population lives on less than one dollar a day.

Uganda has said it wants to build its own refinery.

Tullow, which after buying out Heritage now controls all the reserves, voiced initial apprehension, suggesting a pipeline to the Kenyan coast might be more efficient.

But the two sides now appear on the same page regarding a 10 billion-dollar (7.3-billion-euro) production scheme to refine some 200,000 barrels per day, with Tullow bringing in France's Total and China's state-controlled major CNOOC as partners.

The breakdown of who owns what between the Ugandan government and Tullow has not been made public, but Kampala is thought to have negotiated a deal that gives it a clear majority of profits over the life of the contract.

Tullow says early production could begin in 2012, but the full operation will take at least three years to scale up.

Uganda's parliament has meanwhile pledged to pass a law governing the nascent industry, but has yet to do so, making progress towards production difficult.

"When these things take too long, for investors, it gets very frustrating," said Hakim Muwonge, petroleum analyst at Kampala think-tank Fanaka Kwa Wote.

On the regional trade front, Uganda has historically sold goods to south Sudan, but recent relative peace there has boosted trade and the independence of the territory scheduled for next July should enhance prospects further.

"It could formalize trade relations," Bategeka said, particular if the new nation joins the East Africa customs union, something Museveni has called for publicly.

Bategeka said south Sudanese will likely start generating more of their own products, but added: "I don't expect their dependence on Uganda to decrease significantly in the near future."

And analysts say Ugandan traders continued to take advantage of the persistent turmoil in the mineral-rich east of Democratic Republic of Congo, noting a rise in the sale of building materials to a region wracked by conflict for more than a decade.

Museveni's 25-year presidency has seen steady economic progress, with an average of five percent growth recorded in each of the past five years.

Poverty levels have also dropped, although the World Bank said this is partly due to the expulsion of Lord's Resistance Army rebels from northern Uganda.

Since 2006, this has allowed some 1.8 million people to leave protected camps and resume productive lives on their farms.

One potential hurdle to Uganda's economic growth, according to Bategeka, is that "everything here still revolves around the presidency" rather than around government institutions.

He argued it's not yet clear if Uganda's petroleum sector will be well managed, and concerns over transparency may be valid.

"I am cautiously optimistic," he said, and recalling a similar dynamic in Malaysia added: "they may not have been completely transparent in all areas, but that didn't stop them from using the resource wisely."