Oil & Gas News

Uganda National Oil Company To Recover 65% Of Its Costs

Nankabirwa and UNOC CEO, Proscovia Nabbanja

By Assad Mugenyi

The Uganda National Oil Company (UNOC) will only recover 65 per cent of its expenditure once it gets its Kasuruban Contract Area to the production stage, says Ruth Nankabirwa, the Minister of Energy and Mineral Development.

The minister was speaking earlier this week at the signing of the Production Sharing Agreements (PSAs) between the government of Uganda and UNOC, the company that represents the country’s commercial interests in the oil and gas industry. UNOC was also granted Petroleum Exploration Licenses (PELs).

Comparatively for the other PSAs the country signed before with companies like Tullow, TotalEnergies and CNOOC the cost recovery limits are around 70 per cent based on the negotiations and other considerations that were unique to the contract areas.

Cost recovery here refers to a mechanism through which a company can recover most of its capital and operating costs out of a specified percentage of production called ‘cost recovery oil’ or ‘cost recovery gas’ (eg 50 per cent of total production) once (and only if) the project enters the production phase.

Since the companies can only ‘cost recover’ their exploration costs following commercial discovery and production, they inherently take on the risk of exploration through this mechanism.

UNOC and DGR Energy Turaco Uganda Limited (DGR Global, Australia) were recently awarded the 1,285sqkm Kasuruban block and the 637sqkm Turaco block respectively under Uganda’s second oil and gas licensing round, first announced in May 2019.

The PSAs also spell out the royalty fees UNOC will pay to Uganda, based on the gross total daily production in barrels of oil per day. At least 5.5 per cent will be the least amount paid in royalty (when production has dropped significantly) and 18 per cent set as the most UNOC can pay at peak production.

UNOC has also paid into the Uganda Petroleum Fund account a signature bonus of $100,000, annual acreage rental fees for the Kasuruban contract area equivalent to $27,000, and $30,000 for research and training.

The exploration license sees the company draw closer to its dream of eventually attaining the required capacity to become an operator of an oil block. The country also hopes to increase its resource base, which currently stands at 6.5 billion barrels of oil in place, by licensing more exploration companies.


UNOC has already embarked on a search for a suitable partner to carry its investment – a similar financing model to the one it already has in the Tilenga, Kingfisher and EACOP projects – where it holds a 15 per cent stake in each project.

This financing model is usually difficult to execute during exploration because of the uncertainty and risk of the phase in an oil project – where commercial resource discoveries are not a given.

Per the structure of the PSAs, without commercial success all exploration costs lay with UNOC’s joint venture partner, according to Gilbert Kamuntu, UNOC’s Chief Commercial Officer.

UNOC CCO, Kamuntu

“The cost of carrying us will also be on them. UNOC will have no financial obligation in case they walk away. That is how a “carried interest” works. That is the structure of the existing PSAs and the model PSA and that is the structure we intend to keep for this new license,” he said.

Kamuntu is also optimistic of UNOC fulfilling its own financial obligations going forward.

The company has not defaulted or been at risk of defaulting on any of its payments since the final investment decision (FID) was reached in February 2022, he said.

“As a 15 per cent shareholder in EACOP, UNOC began to receive cash calls after FID. We have never defaulted on our payments since then, to date. Together with the Ministry of Finance – who is our shareholder – we have done our financial planning diligently such that we always have money in time to clear the cash calls when they come,” said Kamuntu.

For the 2022 – 2023 financial year, the government needed $418.78 million to meet part of its equity financing for the different petroleum projects it has a stake in, including EACOP, the Tilenga and Kingfisher projects plus the Kampala and Jinja storage terminals, among others.

Because UNOC handles the country’s commercial interests, the government is mandated to avail the money the company needs to carry out its work.

As regards its stake in EACOP for instance, government’s capitalisation strategy for UNOC shows that over a period of five years, the company will receive about $350 million.

Uganda is, however, currently grappling with a huge debt burden, which has forced it to postpone many of its financial obligations in other sectors.

(Reporting by Assad Mugenyi. Email: mugenyi.assad@gmail.com)

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Deep Earth International critically examines developments in the extractive and energy sectors in Uganda and the wider East African region. Drawing from the vast experience of its founders who have each covered and written about these sectors for at least fifteen years, this website is the go-to platform for anyone seeking to get a better understanding of the same.

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