Uganda's Oil Industry at Risk of Disappointing Financial Returns Amid Rising Costs

The Ugandan government and its joint venture partners reached the Final Investment Decision (FID) in February 2022, marking the end of years of negotiations. The agreement unlocked the development of the Tilenga and Kingfisher oilfields, the construction of the 1,443-kilometre East African Crude Oil Pipeline (EACOP), and billions of dollars in investment expected to reshape Uganda's economy.

Expectations were high that the petroleum sector would create jobs, strengthen local businesses, increase government revenues, and provide the financial muscle to accelerate industrialisation. Much of this activity is already visible, with roads built to support oil operations opening up previously inaccessible areas of the Albertine Graben.

However, some analysts argue that the economics underpinning Uganda's oil ambitions have shifted considerably since the projects were first conceived. The Institute for Energy Economics and Financial Analysis (IEEFA) reports that the industry is likely to disappoint when it comes to financial returns due to rising construction costs, supply chain disruptions, higher financing costs, and an international energy landscape influenced by climate policies.

The report also challenges a widely held perception that Uganda's oil wealth will provide a steady stream of income over several decades. Instead, it argues that government revenues are likely to be heavily concentrated during the industry's early years, with 72% of the value expected to come from before-tax items and approximately 78% of the total value expected to be earned during the first ten years of production.

The Natural Resource Governance Institute (NRGI) cautions against assuming that petroleum revenues alone will transform Uganda's economy. It argues that uncertainty is an inherent feature of petroleum development, making strong institutions and fiscal discipline indispensable. The report reminds policymakers that Uganda's oil resources are finite, with the country having a relatively short period in which to convert petroleum wealth into broader and more sustainable economic development.