By David Lettis…

The Ugandan government in late August awarded oil production licenses to Total SA, which should allow the company to begin activities required for future production.

Total has made East Africa a primary focus for production growth, largely because of the immense Ugandan reserves. Here’s why Total seems so intent on beginning production activities and how this factors into its overall growth strategy.

Oil in Uganda

The reason for going into Uganda revolves around one simple fact: There is a lot of potential oil. In 2006, the country discovered it is sitting on estimated reserves of 6.5 billion barrels, of which 1.7 billion barrels is believed to be recoverable. This immense resource has created a lot of attention among oil companies, even though Ugandan politics has delayed production by a decade.

Now that the government has figured out how to move forward, it has awarded production licenses to Total, as well as London-based Tullow Oil and China-based Cnooc. The licenses are good for 25 years and will require $8 billion in investment from the three companies to drill an expected 500 wells. When first oil begins to flow, probably in 2020, Uganda anticipates the production of 230,000 barrels of crude oil per day. The three companies have 18 months to decide if they will continue with the investments.

In addition to the $8 billion in capital expenditures for the required production infrastructure, Total, Tullow, and Cnooc are all participating in the $4 billion, 900-mile oil pipeline that connects Uganda to the Tanzanian coast. The pipeline is expected to be ready by 2020, just in time to begin transporting the expected Ugandan oil.

Expanding in Africa

Total’s decision to expand into Africa is based on its objective to add high-quality, low-cost assets to its portfolio while continuing to reduce the breakeven point of its positions . At the moment, Ugandan oil is expected to breakeven at $60. While this is not yet economical at current prices, there is a good possibility that prices will rise between now and 2020. Additionally, companies continue to develop new technologies and utilize low service fees to drive down production costs.

Through the first half of 2016, African production accounted for roughly 25% of Total’s 2.4 million barrels of oil equivalent per day (BOE/D) worldwide. That production has been relatively flat for the past year even as overall production has increased by 200,000 BOE/D. Through 2019, the company expects its production to increase by 5% every year.

Since first oil from Uganda is expected in 2020, this equates to a significant increase that is not yet accounted for in Total’s expected production. Since Total will have a working interest in a little more than a third of the expected 230,000 BOE/D, investors should expect a boost of roughly 80,000 BOE/D in 2020. That, of course, is assuming everything goes as planned.

The refrain “This is Africa” is often synonymous with “If something can go wrong, it probably will.” Just issuing production licenses took a decade. The pipeline has already been hit with delays.

Uganda is also a land-locked country and it may be a delicate political balancing act for a cross border pipeline. Even though Total has been successfully operating on the African continent for several decades, at this point, it’s safe to assume that 2020 is a best-case scenario for Ugandan production.

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