By Mark Muhumuza
The granting of Uganda’s first oil production license to China National Offshore Oil Corporation (CNOOC) in September for the Kingfisher Area (Block EA-3A) was not given the deserved attention by local media and thus went by as a low key ceremony.
Even though the block contains an estimated 15% or 45,000 barrels per day (bpd) of the estimated full capacity flow of 22,000 bpd, compared to blocks EA-1&2 operated by Total that bears an estimated 75% or 175,000 bpd, the issuing of this license is a very historic step in the history of Uganda’s young oil & gas industry.
Other than the fact that this license now allows CNOOC to fast track plans to unlock US$2bn for the next four years for investment into infrastructure like access roads, an airstrip, land leasing and acquisition and engineering activities among others, the project will also help lessen on the anxiety that has been growing over Uganda’s real first oil.
It will also help provide learning to the other two companies Total and Tullow on the mistakes they need to avoid and the best practices they need to learn from. Armed with the production license, CNOOC is now in position to start engaging investors and financiers to provide funds for development of the infrastructure needed.
These are often referred to as Final Investment Decisions. Without a production license, rarely do investors want to sink additional capital into a venture. CNOOC declined to respond to our questions directly regarding the production license but instead referred us to a statement, where the company Vice President in Uganda, Jin Wiengen is quoted. It didn’t say much on the sourcing for funds, but rather emphasized the commitment of the company towards Uganda’s oil sector.
CNOOC, however, has a cash treasure trove as the company has been expanding its foot print globally, so convincing investors appears to be rather easy at least from its track record. Other partners, like Tullow on the other hand have to convince investors on their venture in Uganda if they want more capital. Tullow’s record before oil production started in Ghana in 2010 was mainly an oil exploration company.
This time, Uganda will be the second country where they are involved in an oil production venture, in Africa. “The issuance of the production license by MEMD to CNOOC (and its partners) is a key milestone for Tullow as it provides the approval for the development of the discovered reserves in Block3 and represents a further step towards the realization of the commercial value of Tullow’s (and it partners) investment in the Lake Albert Basin in Uganda,” says David Onyango, the Ag. Communications Manager, Tullow Uganda.
In fact in an interview with The CEO Magazine in July 2013, Elly Karuhanga, the President Tullow Uganda said once field developments are approved and production licenses issued, “it would lead to the unleashing of billions of dollars in Uganda.” Loic Lourandel, CEO Total E&P Uganda B.V says “The issuance of the production license to CNOOC is indeed an important achievement not only for the companies but the country as well. It is in line with the work programme presented by the JV partners and approved by the government,” adding, “we will submit our 1st field development plan by the end of 2013; others are to follow in 2014. Here again this timeline is in accordance with the approved work programme, therefore we are on track.”
Uganda so far, has an estimated 3.5 billion barrels of oil, of which 1.2billion barrels are recoverable according to the Petroleum Exploration and Production Department the Kingfisher Well is estimated to have about 635million barrels of oil 18percent of all reserves in the country of which 196 million barrels about 16.3percent of all recoverable oil in the country is recoverable. The well is expected to produce between 30,000 and 45,000 barrels per day, to be fed into an oil refinery.
Critical to all this is infrastructure and more importantly is a 50km crude oil pipeline from Buhuka Kingfisher area to transport the oil to a refinery to be built in Kabale in Hoima district. Government has invited interested parties to bring proposals for a 60 percent in the refinery which is expected to be complete by 2017/18, only then shall oil production start. Meanwhile as oil production beckons, Tullow has submitted its Field Development Plans for the Buliisa Discovery Area [block 2] it is the main operator and awaits approval from government.
It is estimated that over the next 5-10 years, investments of US$15bn to US$22bn the size of Uganda’s GDP will be needed to realize both the refinery and the pipeline. Even though this is recoverable money, raising it upfront and convincing the funders that it will come back quickly is something they have to clearly paint out in their business cases.
Issuing of production licenses provides the much needed investor confidence. It should be noted that FDI to Uganda the highest in the region rose to US$1.7bn in 2012 as a result of increased oil exploration activities by Tullow, Total and CNOOC. The amount could spike with further issuance of production licenses and lifting the moratorium on exploration activities.
Ugandans for long have lamented about the opportunities in the oil sector. On the other hand, there are Ugandan companies and none Ugandan ones involved in logistics, transportation, warehousing, security and camps services that employ Ugandans. Issuance of a production license opens up the budgets for the oil companies as they’ll be actively setting up infrastructure for production.
“You are also aware that the country has adopted laws which promote the participation of Ugandans and Ugandan entrepreneurs in the country’s oil and gas sector. In this regard, CNOOC Uganda Limited will endeavour to maximize the utilization of Ugandan companies, personnel and resources in supporting the development and production operations of the Kingfisher oil field,” Peter Lokeris, the State minister for energy is quoted in a ministry statement, adding: “The company will also motivate non Ugandan companies who will be sub contracted for this development to use Ugandan goods and services by incorporating National Content requirements into their tendering process as well as encouraging joint ventures or consortiums with local companies.”
Local participation yet to realize full potential
The Association of Oil and Gas Suppliers an association of indigenous Ugandan oil and gas suppliers have already been tapping the opportunities in the sector and are now preparing for even more opportunities in the sector. Denis Kamurasi, the Vice President of the association says “a lot of equipment is going to start coming in, which means there is need for logistics companies, among other services like food supply, engineering, vector control services and accommodation. This issuance of this production license precipitates a lot of activity for entrepreneurs.”
For the Association of Oil & Gas Suppliers however, the same old challenges continue to exist including the broader challenge of who owns a Ugandan company? The ownership the majority stake in companies is still a gravy train that local companies must navigate as the laws do not clearly stipulate this.
Section 125 of the upstream act reads; “The licensee, its contractors and subcontractors shall give preference to goods which are produced or available in Uganda and services which are rendered by Ugandan citizens and companies.” Philip Karugaba, a lawyer and partner at MMAKS advocates however points out what the law doesn’t provide for. “Goods may be produced or made available in Uganda, by anyone, not necessarily Ugandan citizens or companies,” he says.
In the same act, it notes that such services should be provided by “competent entities owned by Ugandans” however it doesn’t provide an answer to the matter of incorporation. Additionally, for an oil company to procure services and goods out of the country if unavailable there is no proper auditing in place by government to stipulate/determine what good these are.
Karugaba notes that what government needs to clearly define for Ugandan companies to benefit is the definition of a Ugandan company, Ugandan goods and services, goods and services not available in Uganda, the criteria for Ugandan companies and the local tendering process. Adding, “Criteria for the exercise of preference with respect to margins on price, quality and timeliness of delivery and Criteria for evaluation, stronger monitoring and enforcement mechanism.”
He further makes some proposals, including the setting up of a fund to finance local companies and register of goods and services available in the country. At the moment, the government is drafting a National Policy on National Participation that would deal with some if not most of the concerns of the local suppliers.
Betty Namubiru, the National Content and Capacity Building Officer at PEPD reveals that “We are currently drafting this policy, which will among others; Establish a government body for national content enhancement, regulate procedures for procurement and define and operationalize how national content shall be measured.”