Local oil sector dealers turn to Chinese credit

Kampala.

Local players in the capital intensive oil and gas sector are increasingly opting for Chinese direct credit as one of the few alternatives available to keep afloat in the industry where several have already burnt their fingers.
This, according to Mr Jennifer Mwijukye, the chairperson, Uganda Freight Forwarders Association, is preferable “considering the loan financing problems” and high interests charged on huge loan principles.

“It is a model that several players in the (freight) industry are going for; which arguably might not be good especially if we are discussing local content but circumstances dictate,” Ms Mwijukye said last Thursday.

She was speaking at a stakeholders’ forum on two upcoming conferences—the regional logistics expo, and the third oil & gas convention, scheduled for April.
The conferences are expected to draw players in the two industries for discussions on how to leverage on available opportunities.

Since the announcement of discovery of commercial oil volumes 10 years ago, local participation in the nascent petroleum sector has been a thorny subject.
The sector during the last decade saw investments to a tune of $3.2b (Shs11trillion), according to the acting director of the Petroleum Directorate, Mr Robert Kasande, but local contractors raked in only 28 per cent of that or roughly $900 million (Shs3b).

This was mostly going into logistics, clearing and forwarding, supply chain management, catering services, air transport services (light aircraft carriers to the field) and camp management services.

However, last year took a bad turn for some of the prominent local service providers especially in the freight, clearing and forwarding businesses—and left several choking on loans with huge interest terms against backdrop slow activity in the sector, fall in international crude oil prices and generally an ailing economy.

Notable examples are Bemuga forwarders and Three Ways Shipping Group.
Ms Mwijukye, underlining the logic of local players entering into partnerships with Chinese players she did not mention, explained that “experience has taught local players the hard way” also given the fact that partnerships are an avenue for skills development and technology transfer.

Bemuga was last year revealed to have partnered with Chinese company Sanny, dealing in construction equipment. “The oil and gas industry is known for high standards some of which our players don’t have and or where there is will requires huge capital requirements,” she explained.

She also revealed that the absence of an integrated transport system—roads, railway, and a functioning water system was complicating freight business but with the much anticipated Standard Gauge Railway (SGR) expected to come on board by 2020 hoped “it could simply things for us.”

“There is need for linkage of the transport systems throughout the country to ease movement of goods, people and services,” she said.

The status
The recent awarding of production licences to Anglo-Irish Tullow Oil and France’s Total E&P, paved way for the next capital intensive development phase leading to production, which government hopes will commence in 2020.
Projections by the Energy ministry show the joint venture partners (Cnooc, Tullow and Total) will invest approximately Shs27 trillion ($8b) in the required processes leading to production. On the sidelines government is also planning a $4b (Shs13t) oil refinery and a $3.5b (Shs11t) crude oil pipeline to Tanzania, together with the jv partners

The jv partners early this year awarded Front End Engineering Design (FEED) study contract for the pipeline and last week Feed for the oil fields in Buliisa and Nwoya. The Feed is expected to give a clear picture of the investments paving way for Engineering, Procurement and Construction (EPC)—whose contracts local players will be scrambling for together with international players.

The chairman of the Uganda Chamber of Mines and Petroleum, Mr Elly Karuhanga, said already the environment and circumstances have not been conducive for local players, “and this has been worsened; because we have been betrayed by the local content policies.”

In broad terms, local content is defined as “the value addition by Ugandans using Ugandan materials, with services produced by Ugandans and Ugandan firms” with the aim of keeping money from the sector within the country while at the same time promoting local industries.

The ministry of Energy is currently working on a draft local content policy that was tabled before cabinet. The policy is borne out of the 2008 National Oil and Gas policy and seeks to promote employment of Ugandans and use local services and goods. This also paved way for the Petroleum Exploration, Development and Production Act, 2013, which touches briefly on local content but its wording has been panned as inconsistent and unclear.

The local content thorn
One of the challenges with the wording in the Petroleum Act, analysts, have pointed out is that it does not offer definition of a Ugandan company.
The wording as it is, similarly, does not expound company ownership, registration/incorporation, or place of registration.

“By Ugandan company the law does not draw distinction between a company incorporated in Uganda, or controlled/owned by a citizen of Uganda.”
Besides the need to modify the law or create one specifically on local content, various actors have also called for the establishment of a specific body, operationalised by law to take charge of local content monitoring, as is the case in other countries like Angola and Nigeria.

Nigerian example
Definition. Nigeria, in 2010 passed the Local Content Act, which for example defines a local Nigerian company as one in which at least 51 per cent of its shares are held by Nigerians, and progressively seeks to increase participation of locals through absorption of locally produced services and goods.
The same law, also established the Nigeria Content Development and Monitoring Board (NCDMB) as a regulator and implementer of local content. Current local content capacity, according to NCDMB is at 35 per cent and expected to climb to 50 per cent by end of next year.