Investiment opportunities in Uganda

Uganda to build oil refinery

Support for an in-country oil refinery has gained momentum following the presentation of a feasibility study report to the Uganda government this month by Swiss engineering company Foster Wheeler.

Nationalists in the government have been insisting the country’s oil be processed locally, while the oil companies have let it be known they prefer a refinery in Mombasa and an export pipeline for surplus crude.
The Swiss consultants’ report shows that an oil refinery inside Uganda would create many spin-offs for the domestic economy in the form of direct employment and secondary industrial activities.

While oil companies want crude exports because they can thus recoup their investment faster, the Norwegian funded study shows that Uganda would be saving over a billion dollars annually if it were to build its own oil refinery and the economy would gain from the refining process through creating employment opportunities and taxes.

The Ministry of Finance has said it should be possible to develop the refinery at Hoima, not from its own coffers but with external funding, which was the least of the problems, an official said.

With the political will in place after President Yoweri Museveni declared his willingness to go it alone if need be, raising the funds for the refinery with scientific evidence now in will be quick and easy.


There are already willing partners in the shape of Iran, China, Libya and Norway. While China and Libya have shown interest in building an oil refinery in Uganda, Iran has indicated that it is ready to fund the whole value chain, adding value to the oil and building a refinery.

Norway, a partner since 2006, has been supporting capacity building, establishment of competent institutions and transparency in the oil and gas industry through its Norad oil and development initiative.
The Foster Wheeler study also shows that a mini-refinery with a capacity of 15,000 barrels per day, which is
Uganda’s daily consumption rate, would cost $1 billion.
It is projected that Uganda can produce 350,000 barrels of oil a day by 2018, if the right development plan is adopted.

So far, estimates put Uganda’s explored oil reserves at between 1.7 and 2.5 billion barrels.
But transporting the crude oil by pipeline to Mombasa would, according to the report, cost $1.7 billion, while the southern route to Tanzania would cost $2.3 billion.

Libya’s Tamoil is in charge of the project to upgrade the Eldoret-Kampala pipeline while Noor Oil and Industrial Technologies (NOIT), a US-based multinational oil firm, won the contract to build a refinery in Dar es Salaam and a 1,500 kilometre pipeline to connect it to other landlocked East African countries.

The oil companies argue that it would not be profitable for Uganda to refine its oil in-country. But while they look at the quick investment returns, Museveni is looking at spin-offs like creating employment.

The need for employment is 400,000 jobs per year against less than a quarter that amount that are on the market. Whether a refinery would make a dent in that figure is debatable (see separate analysis).

At present, neither India-based Essar Group, which runs KPRL’s Mombasa refinery, nor Tanzania have the capacity to refine the Uganda crude oil, which the report says is waxy and heavy with sulphuric acids.
This peculiarity of the crude also means that using pipelines to either Kenya or Tanzania would be very expensive.
The waxy crude solidifies at room temperature, so the pipeline would have to be heated and at every 25 kilometres a “pig” station would have to be installed to remove the wax.
However, the report did not take cognisance of a recent announcement by the Essar Group that the Mombasa refinery will undergo a major upgrade from a processing into a merchant refinery, which can buy its own crude and process it.
President Yoweri Museveni has invited many oil experts, among them Canada’s Claude Landry, an engineer with the OPTEC refinery, who advised that refining the oil is economically viable.

Changing gears

Debate around local content in Uganda’s oil industry tends to get tetchy, amid accusations that oil companies are only paying lip service to the whole idea of local content. However, other business players are finding new ways of tapping the opportunities in the industry.

The Uganda Chamber of Mines and Petroleum, an association of players in the oil and mineral industry, supports monthly cocktails where the members – both Ugandan and foreign – can interact and find ways of building and hiring Ugandans.

Another association, the Oil and Gas Service providers, has been formed with the idea of growing Ugandans’ participation within the oil industry.

Other initiatives have been partnerships within the logistics industry. The logistics industry is supposed to play a key role in mainly transporting heavy machinery from the East African coast to the oil wells in western Uganda.

To do this, there have been mergers and buy-ins within the logistics industry as international firms eye the business in the oil industry. Still, foreign interests with ample financial muscle and experience continue to attract the attention of the upstream oil companies.

The law

The Petroleum (Exploration, Production and Development) Act, 2013, which became effective in April this year, is supposed to set the stage for the growth of local content. However, the law can only do so much.

Bukenya Matovu, the spokesperson for the ministry of Energy and Mineral Development, said though the petroleum industry presented new employment opportunities for Ugandans, the public had to play a role and acquire the necessary skills in order to be absorbed within the sector. The act compels oil companies to employ Ugandans if they qualify for the job. It also makes it mandatory for oil companies to have plans of technology and skills transfer.

“The licensee shall within 12 months, after the grant of the licence submit to the Petroleum Authority for approval, a detailed programme for recruitment and training of Ugandans in all phases of petroleum activities and shall take into account gender, persons with disabilities and the host communities,” the act reads in part.

The act further compels oil companies to submit a report to the Petroleum Authority on achievements of trainings and recruiting Ugandans on an annual basis. Part of the training, the act emphases, might include offering Ugandans scholarships and financial support towards their education. To this end, Tullow oil and Total have given several Ugandans scholarships to further their studies.

Zakalia Lubega, the Corporate Social Responsibility Manager at CNOOC, reveals the company will soon launch its own scholarships. Besides employment, another important aspect of local content is buying local products like food, construction materials whenever they are available, as opposed to importation.

The act compels a licensee, its contractors and sub-contractors, to give preference to goods which are produced or available in Uganda and services which are rendered by Ugandan citizens and companies.

In case such goods or services are not available in Uganda, the law provides that they [goods and services] shall be provided by a company which has entered into a joint venture with a Ugandan company provided that a Ugandan company has a share capital of not less than 48 per cent of the joint venture.

The licensee is also required to, within 60 days of the end of each calendar year, provide the petroleum authority with a report of its achievements and its contractors and sub-contractors’ achievements in utilising Ugandan goods and services.

Recently, there were reports that Tullow Oil was sidelining Ugandan firms in preference for foreign companies on grounds that the local companies did not have the required quality and capacity.

Regulations

Bukenya, the ministry spokesman, says although the law does not provide for sanctions, the regulations that the ministry is already drafting will seek to punish non-compliance.

“The law doesn’t have to include everything; it sets out principles and standards. The ministry is now drafting regulations to operationalise the law,” he said recently. The new regulations will repeal the Petroleum Exploration and Production Regulations 1993.

Since local content is already provided for in the act, Bukenya stresses that the new regulations are to focus on how, in reality, local content can be achieved.

“The regulations will demand that for expatriate staff, there is a Ugandan counterpart being trained to take over,” he said.

Under the regulations being drafted, oil companies will be given only three years to have expatriates on their books. And after the expiry of the three years, the expatriate’s work permit will not be renewed, paving way for a Ugandan to take over.

PEPD estimates that the oil industry will employ between 10,000 and 20,000 people. The act also establishes new institutions: the directorate of petroleum, the Petroleum Authority of Uganda, and the National Oil Company, among others.

Fred Kabanda, a principal geologist in PEPD, notes that the establishment of these institutions, coupled with other production and exploration activities, creates an excellent opportunity for Ugandans to participate in the sector.

“All these institutions will need qualified staff; oil companies that will be licensed will also need staff; so, this is an opportunity. Ugandans need to prepare themselves to tap into these opportunities,” Kabanda said.

Kabanda notes that so far oil companies have been compliant towards hiring local staff. For instance, Tullow recently noted in its 2012 Corporate Social Responsibility (CRS) report that up to 88 per cent of its staff in Uganda are Ugandans.

“Whenever we can, we offer Ugandans the first opportunity,” Cathy Adengo, Tullow Oil Uganda’s Assistant Corporate Affairs Manager, said.

Kabanda says 70 per cent of Total E&P staff are Ugandans, while the Chinese firm CNOOC is at 60 per cent.

Challenges

Despite the impressive figures, Bukenya says getting qualified and experienced Ugandans in highly technical areas in the industry still remains a challenge.

“When it comes to high technical areas like operating and engineering of rigs, we don’t have Ugandans there,” he said.