Uganda, Congo and why the oil will flow

Uganda and the Democratic Republic of Congo have not always treated each other with a great deal of respect. But now that oil has been discovered in Lake Albert, that has only made things more complicated.
[image source: Heritage Oil, 2007]

Uganda and Congo: the background

Uganda's recent tensions with Congo go back to the mid 90s. During the First Congo War (1996-1997) Uganda, Rwanda and Angola supported a coalition of Congolese dissidents and minority groups known as the Alliance of Democratic Forces for the Liberation of Congo (AFDL). The ADLF was the movement that ousted Mobutu Sese Seko and brought Laurent Kabila to power.

In the Second Congo War (1998-2003) Uganda was one of eight African nations that participated in one of the bloodiest wars to occur on the African continent:

Uganda provided support to both the Rally for Congolese Democracy (RDC), specifically the break-away RDC-Kisangani, and the Movement for the Liberation of Congo (MLC). Over 3.4 million people were displaced and 40,000 rape cases reported during the five year conflict. The MLC, led by Jean-Pierre Bemba, is now the main opposition party in the new Congolese parliament.

Economic imperatives for oil

The Luanda Agreement marked a formal end of hostilities between Uganda and Congo, but in spite of the presence of a UN mission (MONUC), eastern Congo has remained a volatile region, particularly in Ituri, and in North and South Kivu. In October 2007, 8,000 Congolese refugees crossed the border into Uganda following clashes between the Congolese army and a renegade general.

The lawlessness in eastern Congo is a threat to the Ugandan government's plans for the oil and natural gas in the Albert Basin. Uganda's ongoing dependence on oil imports from Kenya exposes the economy to negative supply shocks, which in turn cause prices to rise. The reserves in Lake Albert are an opportunity for the country to control its oil supply, and thereby sustain the momentum of economic growth.

Like Uganda, Congo also is eager to ascertain the potential for oil production on its side of the Albert Basin, albeit for different reasons. Oil exploration in the Congo dates back to the 1960s. However, much of the activity has been in the coastal city of Muanda in the western region of Bas-Congo (Chevron is one of the petroleum companies currently operating there). Given that oil revenues account for 25 percent of the government's budget, the discovery of oil in the Albert basin has created a new impetus for the government to regain control of its eastern region and secure its rights to the resources in its territory.

Escalating tensions

It is for territory, specifically the island of Rukwanzi, that Congolese and Ugandan soldiers have clashed in recent months. In addition to being a rich fishing ground, the island also represents a strategic location for oil exploration in the basin. Efforts by either side to exercise control have left a number of people dead in recent months.

• July 29: Congo's army captures four Ugandan soldiers it claims illegally strayed across the border into the Congo
• August 3: a Congolese attack on a barge anchored in Ugandan waters leaves a Congolese soldier and a British geologist dead
• August 10: Uganda accuses Congolese authorities of harbouring Ugandan rebel groups
• September 8: In a meeting in Arusha, Uganda and Rwanda agree to ease tensions over Lake Albert and co-operate on oil exploration
• September 24: six Congolese nationals, two Congolese soldiers and one Ugandan soldier are killed in two separate clashes on Lake Albert

On August 23rd, the Economist published an article on the escalating tensions between the two countries. The magazine argued that these tensions would jeopardize Uganda's plans for oil production:

Peace and stability would be nice, but violence is unlikely to disrupt the extraction of the oil on either side of the border. As the map below shows, both countries have sold exploration concessions on Lake Albert to Heritage Oil Corporation, a company that has a history of staying the course in troubled regions.

[image source: Heritage Oil website, 2007]

Heritage Oil in Africa: the background

Heritage Oil is a Canadian-based international oil and gas exploration and production company. The company was previously registered in the Bahamas, and Britain before that. Aside from its interests in Uganda and Congo, the company is also operating in Russia, Oman, and Iraq.

It is the company's history in Africa, and its symbiotic relationships with private military contractors (PMCs) that is most relevant here. While operating in Angola and Sierra Leone in the mid 90s, Heritage Oil lobbied for the involvement of Executive Outcomes (EO), a PMC that operated in many of the continent's troubled regions during that decade. EO was founded by South African mercenary Eeben Barlow in 1989, and fought against the UNITA rebels on behalf of the Angolan government in 1994. In 1995 EO helped repel the Revolutionary United Front rebels in Sierra Leone and regained control of the diamond fields.

Other key people involved in the company include Simon Mann and Tim Spicer. Simon Mann is currently incarcerated in a Zimbabwean prison after being arrested for planning an alleged coup attempt in Equatorial Guinea. Another man is Anthony Buckingham, Heritage Oil's CEO.

Some sources link directly with the formation and operation of EO, as well as another PMC:

Following the dissolution of EO 1998, its operatives are reported to have joined other PMCs, one of which is Saracen Ltd. According to this PR statement for an MTN marathon, Saracen has been operating in Uganda since 1995, and has offices in South Africa, Angola, and Hong Kong. According to a Daily Monitor article in October 2007, Saracen in Uganda is controlled by Museveni's brother, Gen. Salim Saleh.

Tim Spicer is currently the Chief Executive of Aegis Defence Services, a PMC based in London and contracted to the U.S. Army in Iraq, with control of approximately somewhere between 8,000 and 20,000 private security personnel in Iraq.

For better or for worse

Considering Buckingham's connections and experience when dealing with mineral extraction in conflict zones, it is clear that both Uganda and Congo have selected a company that will deliver on its concession contracts, irrespective of what violence might ensue. In fact, it is possible that Heritage Oil was approved because of, and not in spite of its history of using questionable methods to get the job done. This is an insight into the callous logic often employed by African regimes: the end justifies the means.

Any negative press regarding the company's history has not had any negative financial implications. In less than one year, Heritage Oil's stock on the TSX has risen from less than CAD$30 in January to a peak of just over CAD$70 in July.

On 14th November, the company announced that it had raised CAD$181.5 million by offering 3,000,000 common shares at CAD$60.50 per share.

Tullow Oil: the final player

There is one more player that is worth taking a look at. Thus far, exploration on both sides of the border on Lake Albert is being carried out by Heritage Oil Corporation of Canada and Hardman Resources of Australia. Hardman was acquired by Tullow Oil Plc in January 2007. Tullow Oil is one of the largest oil and gas exploration companies in Europe. The company's headquarters are in London.

While Heritage Oil's activity in Uganda has drawn a great deal of media coverage, Tullow Oil has the more substantial interest in the region.

Tullow Oil is a 50% partner with Heritage Oil on the Ugandan side of the border, but also controls 100% of the block previously operated by Hardman Resources. Tullow Oil therefore controls 200 out of a possible 300 percent of the interest in Blocks 1 through 3A in Uganda, and 96 out of a possible 200 percent of Blocks I and II in Congo, making the London oil explorer the dominant player on Lake Albert. The company expects to begin oil production in 2009.

Rumors that Tullow Oil would acquire Heritage were refuted by the company's CFO Tom Hickney in July.


[source for tables and maps: Tullow Oil, 2007]

Tullow's decision not to acquire Heritage Oil might be motivated by a need to keep a healthy distance from its less scrupulous partner. Should more violence flare up in on Lake Albert, it is Heritage Oil that will likely play the ill-favoured role of hiring PMCs to protect both companies' interests.