Uganda should assess the risks in managing oil projects
Posted Wednesday, September 18 2013 at 01:00
Uganda’s return on investment will have to be compared against a range of other investment options and a rational decision will be made on where to allocate scarce capital. The funding options will depend on the overall risk profile and tenor of the project.
Now that Uganda has confirmed oil reserves, the focus moves to the monetisation strategy. Initial estimates indicate that the project will require more than $10 billion, a significant investment for Uganda by any measure. Such a decision requires the sponsors and financiers to carry out an assessment of the risks surrounding the project.
Uganda is landlocked, with the nearest seaport more than 1,200km away. Evacuating the oil will require an increase in both the oil and non-oil infrastructure such as harbours, roads, airports, power, health and safety facilities, pipelines, processing plants, storage tanks and terminals. A key point of concern will be the overall safety infrastructure. A recent fire at a major regional airport aptly demonstrated this risk; it is said that the water hydrants failed to work. It is exciting to see that the presidents of Uganda, Kenya and Rwanda are working together to address the regional infrastructure challenges.
Planners have to deal with the technical risks, first at the point of extraction then at the refining, transportation and storage phases. At the point of extraction there will be hundreds of wells, so the engineers will have to figure out a way to link all these wells to both the pipeline and the refinery. The other challenge will be building a pipeline over a diverse and challenging terrain, with special attention around the massive rift valley escarpments. Uganda’s oil is solid at room temperature, so the designers have to decide how they will handle the waxy nature of the oil. However, it is important to note that the three key investors in the Albert basin have the combined knowledge and experience to overcome the technical challenges.
Environmental risks will have a significant influence on the investment decision. The oil wells are located within a very sensitive ecosystem and this will be a key issue for the investors. Providers of project finance now apply the Equator principles and other international environmental standards.
Potential financiers will be keen to ensure that they do not run afoul of any environmental standards and the exploration companies will be keen not to tarnish their reputations through environmental disasters. In this regard the oil explorers have embraced the environmental complexity of the Albertine basin. According to various press reports, one of the leading exploration companies is using 3D seismic, cableless technology that is harmless to the environment (for the first time onshore in Africa).
Funding risks will also be atop every investor’s agenda, assuming that the key sponsors have to choose between multiple projects. Uganda’s return on investment will have to be compared against a range of other investment options and a rational decision will be made on where to allocate scarce capital. The funding options will depend on the overall risk profile and tenor of the project. On a positive note, the ‘finding cost’ for Uganda’s oil is one of the lowest in the world, which will increase the return on investment.
It is now an accepted practice that international financing decisions are influenced by the credit rating of a country. Credit rating agencies such Fitch, S & P and Moody’s, periodically assess a country’s risk and issue a rating. Country risk refers to the economic, political and business risks that are unique to a specific country, and that might result in unexpected investment losses.
Generally, the development and execution of mega projects is fraught with a lot of risks. The oil and gas sector is distinguished among other sectors by lengthy overruns and arrant overspend on its bigger projects, according to Tim Haidar, of the Oil & Gas IQ newsletter - the question is whether these projects can be kept within the bounds of profit and operational acceptability.
Mr Karama coordinates the Oil and Gas strategy at Stanbic Bank Uganda. firstname.lastname@example.org