President Yoweri Museveni says oil was found after years of exploration in the country's west and will soon begin production and start building an oil refinery.
He says an Australian oil exploration company, Hardman Resources Ltd, discovered the oil in June at three western fields called Weraga 1, Weraga 2 and Mputa.
President Museveni pledged to use the resource to fund development in the country.
"The oil is a blessing for Uganda and money from it will be used for development," President Museveni said.
It’s the first acknowledgment by a government official that Uganda has oil reserves, bringing it into Africa's oil producing club alongside countries like Nigeria, Equatorial Guinea, Sudan and Chad.
The president said that he expected production to begin in 2009, with initial production of 6,000 to 10,000 barrels a day.
By comparison, Nigeria, Africa's biggest producer of crude, can produce around 2.5 million barrels a day, but has seen a drop-off of around 20 per cent this year because of militant attacks on pipelines and kidnappings of oil workers.
President Museveni gave no details on how the oil will be produced, and did not say whether the fields will be put up for bidding or if the government will do the exploitation itself. He only said that Uganda has studied various oil production contracts around the world.
Three fields
Thomas Male, a Ministry of Energy official, said that the three fields in western Uganda where the oil has been discovered have reserves of between 100 million and 300 million barrels, with 30 million barrels ready for extraction at just over 12,000 barrels a day.
The government will also use some of the oil to produce electricity.
Oil exploration in western Uganda began in earnest in 1989, but until now no significant reserves had been discovered.
The president said oil exploration companies have spent at least US$70 million (A$94.07 million) on the search.
Ever since rumours about oil being discovered in Uganda began circulating, wealthy Ugandans have been scrambling to buy land in areas where the exploration is taking place.