The Declining Value Of Oil Wealth – The Case Of Uganda

Since 2006, Uganda has made several oil and gas discoveries. The country has been sighting the prospects of development that will follow planned production after all preliminary preparations are finished. The said production has previously been set to kick off by 2018. It has been reported that the government is looking to the oil and gas sector to transform Uganda from a low-income into an upper middle-income country by 2040 and from a net importer to a net exporter of oil and its products with wider regional benefits. The latter part of this expectation will most likely be easy to achieve since Uganda will not need to import all the oil and its products the country has been buying elsewhere. Transforming the country from a low-income to middle-income country by 2040 is what will meet with a lot of challenges.

Forget about the usual arguments and counter-arguments on this subject that pertain to the management and administration of the country’s oil wealth. That is an area for leaders and politicians to engage. The concern of my message is the goings on in the world which Uganda can do nothing about – the innovations in science that will make fossil fuel less and less useful to humanity with the passage of time. Since the development of the oil and gas sector now is a significant part of Uganda’s development strategy, it follows that innovation that provides alternative solutions to the use of fossil fuel is among the top threats to Uganda’s economic advancement plan. In effect, such innovations wear away the value expected from the country’s oil regardless of when production will commence. With each passing year, the threats escalate as scientists churn out ideas on alternative sources of energy and as the world works to move away from high reliance on fossil fuel.

France recently announced that they will end sales of petrol and diesel vehicles by 2040 as part of an ambitious plan to meet its targets under the Paris climate accord. This followed Volvo’s announcement that it will only make fully electric or hybrid cars from 2019 onwards. After more than a century, the internal combustion engine is being phased out. In Norway, only electric or plug-in hybrid cars will be on sale by 2025. Norway currently has the highest penetration of electric cars in the world. The Netherlands is also looking at 2025 as a good time to ban diesel and petrol cars. The UK aspires to have all new cars being electric or ultra low emission by 2040. Needless to say, the whole world will pick on this trend sooner than later. Proterra, a Silicon-based entity and leader in the design and manufacture of zero-emission electric buses that reduce fleet operating costs and eliminate dependency on fossil-fuels currently sells a Catalyst E2 bus that can drive 350 miles on a single battery charge. A recent test of their product delivered a drive of 1,101.2 miles on a single charge at the Navistar Proving Grounds in New Carlisle, Indiana. This is longer distance than a return trip between Nairobi in Kenya and Kampala in Uganda.

Of course fossil fuel has other uses such as being a source of energy for heating, cooking, and electricity generation and in the manufacture of plastic and other important organic chemicals but if its use as fuel for vehicles is diminished and possibly eliminated in future, the value of oil and gas production will be greatly reduced. The Institute for Energy Research estimates that about 45 percent of oil produced is converted to gasoline while 30 percent is turned into heating oil and diesel fuels. 70 percent of all diesel produced is used for transportation. According to the Center for Climate and Energy Solutions, transportation accounts for 62 percent of petroleum consumption globally. By implication, a replacement of oil in fueling transportation would slash demand for the black gold by around 50 percent, overall.

There other innovations that similarly threaten the oil and gas sector. BBC news recently carried an article about a new way of creating greener and cheaper fuel from methane that has been discovered by scientists at Cardiff University. They have found a way of creating methanol using nanoparticles of gold to initiate a chemical reaction between methane, oxygen and hydrogen peroxide. It can be done in one stage and at temperatures no higher than 50C. Prof Stuart Taylor of the university’s Catalyst Institute said it could become an alternative to petrol. It is also believed that the new system of creating methanol could be used to create chemicals and plastics.

Some may argue that advances in science that seek to replace the use of fossil fuel for transportation will not catch up with the whole world fast enough. However, seeing how other technological changes such as uptake of solar lighting and the use of mobile phones have quickly found their place as far deep as in the domestic affairs of underdeveloped nations, such argument would have to be promoted with caution. Technological changes will be welcomed everywhere and no nation can stop these changes.

It is obvious that lucrative production of oil and gas is being overtaken by events in the science space. Uganda will certainly attain its goals of producing oil and gas but the returns may not be as impactful as initially thought.

From the sidelines, one would think that the Ugandan government is borrowing monies to accomplish its development plans while basing on anticipated oil revenues. Since 2009, the country’s debt burden has been steadily growing; with the debt to GDP ratio adjusting upwards by 17.7 percentage points over this period. With decline in demand of oil imminent, the future could unfold with great difficulties for the country to meet debt obligations. If the country’s actual oil production delays significantly, this scenario will be even worse.