Lessons from Mozambique in financing oil and gas industry

Tuesday October 12 2021
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Mr Hermano Juvane, the head of oil & gas and value chain banking at Absa Bank Mozambique who explains how the bank is financing the sector.

By MARTIN LUTHER OKETCH

What is Absa doing in Mozambique with regard to financing the country’s oil and gas industry?

Our financial support towards the oil & gas industry is twofold: On one hand we leverage on our project finance expertise for the sector, and financial support for the operators. In recent years, there have been increasing opportunities to finance upstream and midstream operations. There are also emerging opportunities of players aspiring to acquire interests in existing operations, and they consequently need debt of up to 70 per cent of their capital structure on average. 
Industrialisation and supporting local enterprises are key government objectives. As a Value Chain Bank, we have created funding models which reduce the access to finance issue for Small and Medium Enterprises (SMEs). They are the heart of our economy, and they represent 60 per cent of our industrial activity. These funding models allow us to view SMEs differently once they are awarded contracts by key oil operators. 

Should investors in the oil and gas sector who require financial support to drive their investment here in Uganda expect financial support from Absa?
Different sectors from agriculture, manufacturing, construction, transportation among others will be required to support the oil and gas sector. 

How are banks planning to finance the oil and gas investment in Uganda?

Oil and gas financing revolves around contract requirements from bidding, contract award, contract execution and contract completion. At the bidding stage, we offer secured and unsecured bid bonds. 
At the contracting stage, we offer performance and advance payment guarantees. 
At the contract execution stage, we offer working capital and asset finance solutions and at the contract completion stage, we offer retention guarantees.

What must Uganda do to quickly set up the necessary infrastructure needed for oil production?

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Government and the private sector must come together to set up the necessary infrastructure needed for oil production. Government is already taking the lead with the planned construction of the refinery, the Kabaale International Airport and various Oil roads. Approximately $2.5b has been set aside by Government for this infrastructure. The private sector should augment these efforts by investing in infrastructure such as hotels in the Albertine region.

Mozambique is expected to become a major liquified natural gas (LNG) exporter and is home to Africa’s three largest LNG projects. What helped it develop its natural gas industry?

Being a country with over 100 Trillion Cubic Feet (TCF) of LNG, the Government has played an instrumental role in the industry’s development in the following ways:
The Government’s ability to offer attractive exchange control decree laws for key LNG blocks. The LNG operators, concessionaires, main subcontractors, and non-resident subcontractors are granted special exchange control regimes. This means the regulations regarding domestic foreign currency transactions, having offshore accounts allow investors to operate with minimised risk of exchange losses and cost efficiency from a fiscal point of view. 
Government’s ability to offer favourable tax regimes: Certain LNG operators are given corporate tax discounts for the first few years of production. The government’s share of profit of the oil operations are one of the largest revenue streams for the state. This profit share calculation if proportional to the cumulative cash flow of the oil operation, which reduces during moments of cash flow strain. 
The Government is finalising the drafting of the local content legislation. Other markets which have successfully implemented local content policies are being used as case studies, and advisory is being sought in policy drafting. While this is ongoing, the government has put together task forces that work with the oil operators as enablers, which translate to knowledge transfer, local enterprise contracting and job creation for the indigenous people. 

What can Uganda learn from Mozambique in developing the oil and gas industry?

The biggest lesson to be learned from Mozambique would be to focus on developing and industrialising the economy as a whole without too much reliance on the oil & gas sector, despite its resource wealth. Uganda has a healthily distributed GDP composition per sector, with the Agricultural, Services and Industrial sectors contributing 24 per cent, 43 per cent and 26 per cent, respectively. 
On one hand highly concentrating the economy on its oil & gas sector would translate to major shocks during periods when the oil price plummets, or if any event disrupts oil production. On the other hand, like Mozambique, Uganda is a net importing economy. The sanctioning of the Tilenga and East Africa Crude Oil Pipeline (EACOP) projects would mean more employment, as well as demand of goods and services. Capacity must be created across sectors to cater for this increasing demand, as in Mozambique we have seen immense pressure on the already negative trade balance of the economy. 

Why is Uganda struggling to find a market for its crude oil?

The crude oil market experienced a slump in 2020 on the back of subdued demand driven by Covid19 restrictions. However, oil prices have now picked up and are at $80 per barrel. This price recovery is attributed to the uptake in consumer demand on the world market. This demonstrates that there is a ready market for Uganda’s crude oil.

How has the oil and gas sector contributed to Mozambique’s development in your view that Uganda should not miss out?

As a result of the recent developments of the Mozambican oil & gas sector, we have seen small businesses in the value chain graduate to medium enterprises; and medium enterprises graduate to corporate clients. Their ability to successfully win contracts, and supply goods and services at exponentially increased volumes to the sector were the result of capacitation and certification programmes. This was also the result of the banking sector being willing to support these businesses with their increased funding requirements.

Oil prices recently hit a three-year high of $80 per barrel. How does this affect investments in the oil sector?

Frankly, this is something I predicted at the very beginning of the Covid-19 pandemic around March 2020. At the time, I noticed that in 2020, the oil & gas industry worldwide had cut CAPEX by over $70 billion. This was CAPEX for the sanctioning of new projects, as well as the expansion of the existing assets. The decision was driven by the radical oil price collapse when the world had shut down, and economic activity dropped drastically. Oil and gas operations worldwide were operating at a loss per barrel, as the oil price had reached $10 per barrel, and even been traded in the futures market at negative prices. The globe was flooded with oil & gas carrier vessels unable to offload the inventory. 
Between 2021 and 2022, demand for oil & gas would spike back as economies would reopen following successful vaccination programmes, while the oil & gas supply was lower than originally forecast. 
With the global supply shortage, resorting to alternative fuels might not be the solution to global energy security. We have recently seen the UK going back to coal consumption during this energy crisis despite their aggressive net-zero goals. This could mean short to medium term pressure on oil & gas companies to invest and sanction projects to keep up with the demand at attractive prices. 

What is the future of Uganda’s oil industry?
The industry will be active in Uganda for over 30 years given that first oil is expected in 2025. 
 

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