Avoiding the 'curse' of oil: the news that oil has been discovered in the Lake Albert Basin has been widely welcomed in Kampala. Even modest oil production could provide a much needed injection of finance into the government's coffers. Can Uganda avoid the 'curse of oil' asks Neil Ford.

Although the Ugandan government has made a great deal of progress in rebuilding the national economy over the past decade, the country's economic base remains dangerously thin. Revenues from oil can help to fund infrastructural projects and improve educational services. Yet the dangers of the discovery are equally plain for all to see.

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A joint venture of Anglo-Irish firm Tullow Oil and Gas and Canadian company Heritage made the initial hydrocarbon discovery earlier this year and results from exploration wells have confirmed the find. John Morley, Tullow's country manager for Uganda, said: "The significance, I think, will be immense. I think we could be looking at changing the economics of the region, not only of Uganda itself."

However, the size of the oilfield has not yet been confirmed and there is no guarantee that production will be commercially viable. Many hydrocarbon finds made elsewhere in Africa have been abandoned because production costs were not economically viable, often because the reserves involved were too small or the site geology imposed great technical difficulties.

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Nevertheless, the early indications are positive. Given that very little exploration work has actually been carried out in Uganda in the past, it is likely that further investment in other prospective areas will now be made. At least 90% of oil and gas discoveries are made within 100 miles of an existing productive well, so niche independent oil companies are now likely to have Uganda on their radars for the first time.

Even limited oil production would enable Uganda to satisfy its own requirements for refined petroleum products. If the field yields high production volumes, an export pipeline to the East African coast will probably be required.

Yet even a smaller field could be used to feed an oil refinery within landlocked Uganda that could be used to supply the domestic market and much of the rest of central, eastern Africa, which is currently forced to import fuel at high cost from the east coast ports of Dar es Salaam and Mombasa.

Of course, given the track record of other African oil producers, there is a very real danger that hydrocarbon production could cause more problems than it solves. The sudden injection of large amounts of money--or even the prospect of its arrival--can destabilise a political system. Ambitious politicians can become ever more eager to take power in order to take a share of the new revenues. At the same time, rapidly rising income can stoke inflation and divert attention from other sectors of the economy that may be of more importance in terms of creating employment.

However, the minister of energy, Daudi Migereko, said: "I do not think the discovery will cause Uganda any problems. What we have done is to involve literally everybody. We have been carrying out consultations in the oil producing areas. Our view is that with this approach, you make sure you avoid the kind of mistakes other people have made."

Indeed, rather than taking advice from Africa's existing oil producers, the Ugandan government has opted to accept an offer from Norway to act as an informal adviser. Migereko has already held talks with officials from Oslo.

Border dispute

The geographical location of the oil find has already generated another problem--potential conflict between Uganda and DR Congo. Sovereignty of Lake Albert is divided between Uganda and DR Congo, although ownership of some islands in the middle of lake is still disputed.

The size of the hydrocarbon discovery has not yet been determined but it is quite possible that the field extends across the international boundary. An oil or gas well that lies on one side of a border can tap hydrocarbons from a large reservoir that may extend across the boundary, thereby reducing reserves in a neighbouring state.

In addition, Lake Albert lies within one of the most unstable regions on earth. Conflicts in Uganda, DR Congo and Rwanda have all spilled over into each other's territories and Lake Albert is located just to the north of the Kivu region, where Kinshasa has yet to impose its rule and where rebel groups continue to operate. Many armed groups were able to sustain their operations during DR Congo's bloody civil war by gaining control of natural resources, so any oil find is hardly likely to promote stability in the region.

Given the range of historic and ethnic cross-border links, there is always the risk that fighting within DR Congo could feed back into Uganda. For instance, at the end of October, the UN's High Commission for Refugees (UNHCR) revealed that at least 8,000 Congolese had fled into Uganda to escape fighting between the Congolese army and forces under the command of rebel leader Laurent Nkunda.

Finally, relations between Kampala and Kinshasa remain strained as a result of Uganda's invasion of north-eastern DR Congo in 1998. The Congolese government claims $10bn in compensation for the damage caused and the general atmosphere of disagreement could help to fuel a conflict over the sovereignty of any oil and gas reserves in their common borderlands.

Indeed, there has already been some fighting between Ugandan and Congolese troops on the lake since the oil discovery was made public. In one incident, three Ugandan soldiers were killed and others kidnapped, while a British member of the oil exploration team was killed on a boat in the lake.

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In an effort to calm the situation, DR Congo's President Joseph Kabila held talks with his Ugandan counterpart Yoweri Museveni in Tanzania, while Uganda's foreign minister, Henry Okello Oryem, has proposed the formation of a joint commission to oversee oil and gas exploration in the area.

Uganda's decision to take advice from Norway on oil sector management is a good place to start. Careful management of acreage licensing and production sharing agreements (PSAs) is vital, as is implementing sensible oil revenue management plans. Yet the lure of oil revenues has proved too tempting to hundreds of other politicians in the past, so the dangers are not to be underestimated.

At the same time, there is an obvious risk of armed conflict in the Lake Albert region. It is vital that the security situation across the whole of north-east DR Congo is improved and that Kampala and Kinshasa reach an agreement.

If a boundary delimitation treaty seems out of the question, perhaps some form of joint development zone (JDZ) would make a good compromise. This will only be possible once the extent of the reserves have been determined but the exploration companies involved need a certain level of security in order to continue their work.

RELATED ARTICLE: DCR Congo

Power progress for the DRC 

Most analyses of power sector developments in DR Congo focus on the potential Grand Inga scheme. Already the source of most electricity production in the country, the Grand Inga venture would yield generating capacity of 39,000MW, making it by far the biggest hydroelectric plant in the world, as well as being the biggest single source of generation. Such an undertaking would cost tens of billions of dollars and even if funding can be secured, the project is many years from being brought on stream.

In the shorter term, investment is more likely in schemes directly connected to mining projects. The wealth of DR Congo's natural resources helped to fuel the country's devastating civil war but could also make a major contribution to rebuilding the economy.

Banro Corporation of Canada has included a new power plant in its plans for a new gold mine. With limited power supplies and no national power grid, such investors will have to develop their own facilities in order to ensure adequate supplies of electricity.

Banro hopes to develop four gold mines in the Twangiza-Namoya region of Maniema and South Kivu provinces. The new hydro scheme would cost $55m, although additional infrastructure could drive the bill even higher. Hydroelectricity would be cheaper than power provided by a diesel fired plant and could also attract funding via carbon credit schemes that are designed to help tackle global warming.

A detailed study of the area will be required before the best site for the plant can be determined. A pre-feasibility study of the mining project is scheduled for completion by the end of this year, with a feasibility study due 12 months later.

Funding to rehabilitate the existing Inga facilities has also been agreed. The World Bank will provide a $296m grant, most of which will be used to upgrade the Inga I and II facilities, hopefully returning the plants to their nameplate generating capacity.

A lack of maintenance has caused a gradual reduction in output over many years. Canadian firm MagEnergy is already working on the refurbishment of Inga II. Some investment will also be made in transmission infrastructure to enable electricity from the site to be transported more easily eastwards to Kinshasa and beyond.

Finally, $88.5m is to be invested in improving the distribution network within Kinshasa. Technical support is also to be provided to the national power utility, Societe Nationale d'Electricite (SNEL) to enable it to operate more efficiently. Grand Inga may be the picture of things to come but DR Congo's power needs require action in the immediate term.