Uganda’s plan to use future revenues from its emerging oil industry to drive economic development may not work as expected, because evidence so far shows that the government’s effort to extract and export its crude oil may not produce the returns it is counting on, analysts have warned.

A new report by the Institute for Energy Economics and Financial Analysis (IEEFA) found that Uganda stands to benefit far less from oil production than previously projected, with revenues set to be half of earlier estimates if the world transitions away from fossil fuels on a path to reaching net zero emissions.

Uganda’s oil ambitions involve developing two oilfields on the shores of Lake Albert – Tilenga and Kingfisher – and constructing the 1,443-km East African Crude Oil Pipeline (EACOP), with the aim of transporting 230,000 barrels of crude per day to Tanzania’s Tanga port for export.

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Led by oil major TotalEnergies and China National Offshore Oil Company (CNOOC), alongside the Uganda National Oil Company (UNOC) and Tanzania Petroleum Development Corporation, the project was given the financial go-ahead in 2022.

Will Scargill, one of the IEEFA report’s authors, told an online launch this week that oil may have seemed a historically attractive option for Uganda but the benefits it could yield are very sensitive to major risks, including cost overruns around the project and in the refining sector, which it also plans to enter.

“The EACOP project is expected to cost much more than the original expectations, so it’s a major project risk in Uganda as well,” he said.

The start of oil production and exports through the East Africa pipeline had been expected by 2025 – nearly 20 years after commercially viable oil was first discovered in the country – but has now been delayed until late 2026 or 2027.

Meanwhile, the cost of construction – particularly for the EACOP part of the project – has continued to rise, reaching around $5.6 billion, a 55% increase from the $3.6 billion projected shortly before it got financial approval, the report said.

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Beyond delays and cost overruns, “there’s the risk the impact of the accelerating shift away from fossil fuels will have on the oil market,” Scargill said.

The report said the most significant factors for the Ugandan oil industry – which are beyond its control – have been the reduced outlook for international trade spurred by recently imposed US tariffs and the growing uptake of electric vehicles (EVs), particularly in China – which has led to a peak in transport fuel demand and an expected peak in overall oil consumption by 2027.

The 2025 oil outlook from the International Energy Agency (IEA) shows that growth in global oil demand will fall significantly by the end of the decade before entering a decline, driven mainly by electrification in transport which will displace 5.4 million barrels per day of global oil demand by the end of the decade.

In addition, structural changes in global energy markets, including oil supply growth outside the OPEC+ bloc – a group of major oil-producing countries including Saudi Arabia and Russia that sets production quotas – particularly in the US, Brazil and Guyana, are lowering prices.

“It’s a particularly bad time to be taking single big bets on particular sectors that are linked to external markets,” said Matthew Huxham, a co-author of the IEEFA report.

To make matters worse, Uganda’s public finances have been weakened in the past decade by external shocks including higher US interest rates and commodity prices, resulting in downgrades of the country’s sovereign credit rating, he added.

“What that means is, generally speaking, there is less fiscal resilience to shocks,” Huxham said.

Lower global demand for oil would likely see lower prices, profits and revenues for the Ugandan government, the report authors said. In addition, a global shift to renewable energy would mean Uganda selling even fewer barrels into international markets.

All of these factors suggest that investment in Uganda’s oil industry “would unlikely be as transformational as expected” for its development, Scargill said.

Climate Home News reached out to the Uganda National Oil Company and EACOP but had not received a response at the time of publication.

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Uganda has invested a significant amount of government funds not only in the oil pipeline but also in supporting infrastructure such as a planned refinery. The report authors raised concerns about revenue-sharing agreements under which foreign investors are entitled to recover their costs first, taking a larger share of oil revenues in the early years of production.

IEEFA estimates that while TotalEnergies’ and CNOOC’s returns could fall by 25-34% as the world uses less oil and moves from fossil fuels to clean energy, Uganda’s expected revenues could decline by up to 53%.

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Uganda is pursuing a $4.5-billion oil refinery project in Hoima District, with the country’s oil company UNOC due to take a 40% stake. To finance part of this investment and other oil-related infrastructure, UNOC has secured a loan facility of up to $2 billion from commodity trader Vitol.

Under the deal, Vitol gains priority access to oil revenues, placing it ahead of the Ugandan government when money starts flowing in, the report said. The IEEFA analysts warn that this will likely displace or defer planned use of the revenues for other government spending on things like health, education and climate adaptation, especially if oil production and the refinery construction are delayed or profits disappoint.

“Even if the refinery project is on time and on budget, the refinery and loan repayments could consume 40% of Uganda’s oil revenues through 2032,” Scargill noted.

Pointing to recent cost overruns at oil refinery projects in Africa, the report authors said Nigeria’s
Dangote refinery ended up costing more than twice the original estimate – jumping from $9 billion to over $18 billion.

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They said analysis shows the Uganda refinery will cost 25% more than planned, on top of an expected overrun of over 50% on the EACOP project, cutting the annual return rate to 10%.

“This means there is a high chance the project, by itself, will not make any money,” the report added.

Responding to the report, the StopEACOP coalition said the analysis confirms that beyond causing ongoing environmental harm and displacing hundreds of thousands, the project “does not make economic sense, especially for the host countries”.

They called on financial institutions, including Standard Bank, KCB Uganda, Stanbic Uganda, Afreximbank, and the Islamic Corporation for the Development of the Private Sector, which are backing the “controversial” EACOP project, “to seriously engage with the findings of the IEEFA reports and reconsider their support”.

Prioritise climate-resilient investments instead

In another report released alongside the one on oil project finances, IEEFA argued that Uganda could achieve stronger and more effective development outcomes by redirecting its scarce public resources towards climate-resilient, electrified industrialisation rather than doubling down on oil.

Uganda is among the countries most vulnerable to climate change, yet ranks low in readiness to cope with its impacts. The report authors urged the government to apply stricter criteria when deciding how to spend public funds, focusing on things like improving access to modern energy services and climate adaptation.

The IEEFA report recommended investments in off-grid and mini-grid solar electrification, agro-processing, cold storage, crop irrigation and better roads as lower-risk alternatives to investing in fossil fuels.

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Investments that take climate risks into account could also attract concessional climate finance and align with Uganda’s fourth National Development Plan and Just Transition Framework, the report said.

“They also take less long to construct, are easy to deploy, pay back over a shorter period and they also put less pressure on the system,” Huxham added.

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Uganda may see lower oil revenues than expected as costs rise and demand falls