As Uganda’s oil and gas industry warms up for the final investment decision (FID) expected by July, weak operational capacity and unfair business practices faced by local firms have drawn attention to industry challenges while efforts to boost the financial capacity of domestic companies seem to be paying off.
FID is undertaken by exploration and mining companies and shows how much capital will be invested in a particular project and its return on investment, sources of funding, project duration and commercial risks involved.
Several players in Uganda’s oil and gas industry are optimistic over the FID announcement, which is vital to the start of commercial oil production.
The final refinery configuration plan was presented this month to government officials by the Albertine Graben consortium, a group of foreign investors led by Baker Hughes of General Electric, US, that won the contract to build Uganda’s 60,000-barrels-per-day oil refinery. This project is valued at more than $3 billion, according to industry sources.
Already, Uganda has approved Italian oil services firm Saipem’s plan for early engineering work on the pipeline. The recent government tax settlement with Tullow Oil over a farmdown deal it entered into with the China National Offshore Corporation (CNOOC) has also raised optimism towards realising the FID.
Uganda agreed to collect $167 million in capital gains tax, down from initial demands of $300 million assessed against a transaction valued at Ush900 billion ($241.5 million).
Negotiations for the Government Host Agreements for the 1,445km Hoima-Tanga oil pipeline are also nearing conclusion, in spite of controversial demands made by Tanzania over the venue of arbitration. Tanzania insists arbitration matters should be handled on its territory despite it being a partner state in the cross border pipeline project.
However, the operational capacity required to execute large oil and gas procurement contracts among local firms remains low — which could deny a number of them access to big ticket business opportunities expected during the preparatory phase for commercial oil production.
The transport and logistics sector is among the most affected. For example, one oil rig requires 300 trucks to deliver it from Mombasa Port on Kenya’s Coast to Hoima district in Western Uganda in dismantled parts, logistics experts say.
Currently, Multiple Hauliers Ltd, the largest transporter in Uganda, owns roughly 5,000 trucks. This translates into a total carrying capacity of 16 oil rigs, which could put pressure on local transporters confronted with massive cargo delivery orders. Panafric Logistics Ltd, a rival cargo transporter owns a fleet of 500 trucks.
The Kingfisher exploration area, Uganda’s pioneer oil production site, covers 400 oil wells that are to be served by separate oil rigs while approximately two million tonnes of inputs are required for the preparatory phase, according to industry data.
Sources says that most business opportunities for service providers in the local oil and gas industry lie between the oil exploration tier, which currently features Oranto Petroleum of Nigeria and Armor Energy of Australia, and commercial production facilities being designed and financed by Total E&P and CNOOC in the Albertine basin.
“We expect about two million tonnes of materials to be shipped in during preparations for commercial oil production, but this may require around 2,000 specialised trucks to carry. There is a shortage of such trucks in the local industry,” said a senior executive at Multilines International.
Unfair business practices reportedly adopted by major oil and gas exploration companies operating in the country also threaten local firms’ participation in the lucrative business.
For example, a major exploration company offered a logistics contract to a local transporter in 2015 at a fee of $80 per kilometre. The local transporter rejected the offer and demanded a higher fee of $200 per kilometre. The oil company reportedly insisted on the $80 fee but awarded the deal to a Chinese company at $200 per kilometre.
In contrast, local initiatives undertaken by financial players aimed at boosting financial capacity of Ugandan firms seeking to do business in the oil and gas industry seem to be yielding fruit.
Under a strategic partnership between Stanbic Bank Uganda and some insurance companies, local firms pursuing supply contracts in the oil and gas industry benefit from a 50 percent credit insurance package against the value of a loan provided by the lender while the balance is covered by one’s collateral.
A smaller portion of the loan subjected to collateral requirements translates into reduced burden for a borrower and quicker turnaround times for obtaining loans, experts say.
In the past, local businesses were often confronted with stiff financial conditions that locked them out of lucrative oil and gas supply contracts. For example, a one million dollar contract was sometimes tagged to a performance bond of 30 per cent of its contract value whereas the supplier’s total assets were worth Ush500 million ($134,145), sources say.
“We have developed strategic partnerships with insurance companies in order to minimise credit access hurdles faced by local firms in the oil and gas industry. We have also encouraged local businesses to consider joint ventures with foreign companies so as to cut compliance costs. Certain services carry compliance fees of as much as $35,000 per annum and not many Ugandan companies can afford it,” said Stephen Segujja, head of enterprise banking at Stanbic Bank Uganda.
Around 40 percent of Uganda’s Albertine Basin has been explored since 2004 while the amount of commercially viable oil reserves is estimated at 6-6.5 billion barrels of crude oil, according to government data.