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Uganda signs agreement with foreign oil companies, clearing the way for crude production

KAMPALA, Uganda - Uganda's government has signed an agreement with three foreign oil companies, a government official said Thursday, clearing the way for commercial production of crude reserves.

A memorandum of understanding signed on Wednesday lays out the strategy for oil production amid warnings that the sector hasn't been transparent enough to avoid corruption and misuse of oil revenue.

Signing of the agreement had been delayed amid disagreements over strategy, with Uganda's government insisting on the construction of a $2 billion refinery even as its partners said there wasn't sufficient local demand to justify such an expenditure. Only up to 1.7 billion of the 3.5 billion barrels of crude reserves will be recovered, said Energy Minister Irene Muloni.

The agreement was signed with Britain's Tullow Oil, France's Total and the state-owned China National Offshore Oil Corporation, which already has been licensed to develop the first oil block in the Albertine rift basin near Uganda's border with Congo. Tullow and Total have not yet been issued production licenses for up to nine oil blocks.

"The conclusion of the memorandum of understanding is a significant step for Uganda as it gives a roadmap for the commercialization of petroleum resources discovered in the country," said Muloni, who was flanked by representatives of the oil companies.

Under the agreement, she said, some of the crude will be used to generate power locally while the rest will be refined for domestic consumption or exported as crude through the Indian Ocean coast. Uganda's government will build a refinery with a capacity of 60,000 barrels per day while its partners will build an oil pipeline to transport crude for export through neighbouring Kenya, she said.

The government is studying proposals from at least six potential investors in the refinery, she said.

Loic Laurandel, Total's top official in Uganda, said the oil companies agreed to "apply the most stringent standards" of oil production, especially over protecting the ecologically sensitive areas in which exploration is taking place. Total is drilling wells inside Uganda's largest national park, while CNOOC and Tullow are operating along the shores of Lake Albert.

Although production is not expected to start until 2016, Uganda's oil sector has been plagued by allegations of massive corruption and a lack of transparency. Campaigners note that the law places too much power in the hands of the energy minister, a presidential appointee with powers to issue and revoke oil contracts. Critics say the close involvement in negotiations of Uganda's long-serving president undermines the development of institutions such as a planned national oil company, which is yet to be established.

An independent lawmaker alleged in 2011 that three government ministers had accepted bribes from oil companies seeking contracts with Uganda's government, charges they denied. An official investigation into those allegations has not been completed.

George Boden, a campaigner with the watchdog group Global Witness, said Uganda's oil sector has been "characterized by a lack of transparency," raising questions about how revenues will be managed. Contracts have not been made available to the public and deals have been done behind closed doors, making it virtually impossible to track payments into government budgets, the group said.

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