12 December 2012

Uganda's Oil Can Only Buy an Ipsum Per Person Over 25 Years.

Everyone is talking about oil. There is excitement that Uganda will soon be swimming in money and fix all her development problems. Samuel Apedel asked Francis Kamulegeya the country leader of global accountancy firm PwC to put the figures in context.

Uganda has 3.5 billion barrels of oil deposits confirmed. Should the country be excited about this?

Yes, definitely. The confirmed reserves of 3.5 billion barrels represent a big find for Uganda, sufficient to supply our oil needs for up to 30 years. However the reserves are still quite modest by world standards, and as a result expectations need to be realistic. This level of reserves will not transform Uganda into an oil economy as is the case in Saudi Arabia, Venezuela or Iran who have reserves in hundreds of billions of barrels of oil. However our reserves are large enough to deeply affect the future of our country and economy. It will be up to all of us to decide whether that effect will be positive or negative.

Uganda's Vision 2040 is to transform the country from peasantry to a modern prosperous upper middle income country by 2040. Is that achievable?

Yes it is, but we will have to work very hard to achieve it. Achieving middle income economic status will require us to increase the country's current level of productivity (GDP) by 30 times and also increase household income by 20 times. This will require an average annual economic growth of between 7% - 10% over this 27 year period. In order to achieve as well as sustain this kind of economic growth which is needed to structurally transform the economy Uganda needs to address the infrastructure bottlenecks, increase agricultural productivity and value addition, fully harness its tourism potential, manage urbanisation and strengthen its human capital base. And most importantly, corruption and theft must be stopped.

Is oil going to be a silver bullet that will solve all Uganda's development problems?

Oil is not a silver bullet, that will solve all Uganda's development problems, but rather it is a finite wind fall opportunity which if properly used should impact our economy sustainably. It is for all intents currency which we can invest to boost sectors where Uganda has competitive advantage and which are sustainable well beyond the oil opportunity. These sectors are agriculture, agro processing and manufacturing, tourism, and services. The investments that will boost these sectors are infrastructure in form of roads and rail, power and energy and quality facilities for training, education and health care.

The confirmed recoverable reserves are said to be only 1.5 billion barrels of oil. How much money is this worth to the country?

The World Bank estimates that when oil starts pumping within the next several years, we will be earning up to $2 billion a year from our oil. This money will come from royalties that oil companies will be paying to the government, revenues from the sale of the government's share of the oil production, and taxes collected from the oil companies. At estimated annual oil revenues of US$ 2 billion per year, this will be equivalent to 10% of the country's GDP.

Assuming the government was to decide on a policy of distributing the oil money to everyone in Uganda, how much would it every person get?

Assuming this revenue was to be distributed uniformly to all Ugandans in the country this would amount to some $50 or UShs 130,000 for every Ugandan every year. This may not be a lot of money to you and me, but such an distribution would provide a huge income boost to many Ugandans who are at the lower end of the income scale. Even if we assume that the policy was to distribute only half of the oil revenues to the citizens, this would yield $25 per head annually, which would still be a significant contribution to those families under the poverty line.

For the 24% of Ugandan􀍛s living on less than $1 or UShs 2,600 per day, an annual income increase of $50 or $25 per head would go a long way towards reducing overall poverty levels for these Ugandans. There are a few countries in the world that use this revenue management model. Examples are Mongolia, Bolivia and the US state of Alaska.

That is not a lot of money and suddenly it looks like it may not be a very good idea for everyone to focus oil:

You are right, it's not a lot. In fact looking at it another way, if you multiply the 1.5 billion barrels of oil we have by the US$ 110 price of a barrel of crude oil on the world market as of today, the revenue is only US$ 165 billion. I say only, because if you were to divide US$ 165 billion between the 33 million Ugandan in the country as of today, each person would get U$ 5,000. That kind of money will only buy you a small salon second hand car, or a small plot of land 30 kilometers out of Kampala.

Whereas I agree that there is a need to focus on oil and get the laws, rules, regulations, fiscal regime and governance right, we need to do this with a sense of urgency. After that is done, we need to leave the oil business to the private investors who have been licensed to develop our oil resources and the government bodies, authorities and institutions that will have been set up to monitor, regulate and govern the sector.

If Parliament, civil society and academia were to put just half the energy, time and resources they have so far put on the oil debate in other key critical sectors of the economy such as agriculture, manufacturing and tourism, I think this country would be very different. The economic transformation and the inclusive economic development that we all yearn for would become a reality.

Oil is a finite resource. It will not be here forever. How should Uganda plan for the time it runs out?

You are right; petroleum is a finite and non-renewable resource. Uganda's challenge is to convert this valuable finite and non renewable resource into financial assets, and then use these financial assets to create wealth, that will ensure sustainable and inclusive development for everyone in the country. Investors in the sector predict that it will take between 20 to 25 years to fully exploit our oil reserves. That means that by that time my 18 months old daughter finishes University education, it's possible that our oil may have run out. How will she and all our future generation benefit from this oil?

Dubai started oil production in 1969, and by 2010 its 4 billion oil reserves had been fully exploited. As of now Dubai does not produce any oil, but it is still benefiting from its oil wealth.

The key to this has been good governance. By governance in this case I mean the system for making and implementing decisions concerning the exploitation of the country's oil and gas resources. Issues such as setting the policies and objectives for the sector, the processes of decision-making and communication, the structural and hierarchical organization and the regulation of the sector and so on. Good governance of the sector will increase national wealth, sustainable development and social stability. Poor governance will have far-reaching implications for the economy, social development and the political stability of the country. We cannot afford to get it wrong, and we will only have one chance to get it right.

So what does the government have to do to ensure good governance and avoid the risk of our oil becoming a curse like has been the case in some countries?

Our leaders must have a very clear and well articulated long term vision for the role of the oil and gas in our national development. The role of the sector must be realistic and based on sound understanding of the resource base and the economics of the resource development. The National Oil and Gas Policy 2008 deals with this very well. According to this policy, the goal of the government is is to use the country's oil and gas resources to contribute to early achievement of poverty eradication and create value to society. This policy statement must now be followed by action. To do this, there must be clarity of goals, roles and responsibilities, clear boundaries between policy and strategy making, regulation and oversight.

Secondly, institutions will have to be set up and properly resourced and enabled to carry out the roles assigned to them. To carry out the governance role assigned to it each institution whether it's the National Oil Company, the Petroleum Authority or the Petroleum Directorate, they will each need the necessary authority, financial resources, information, the knowledge, skills and supporting resources to enable them to do their work. However, there is also need to avoid 'over regulation' as this may hinder the commercial operations in the sector and affect its competitiveness.

What can Uganda learn from countries that have managed their oil resources well?

Transparency and accountability. Accountability in the oil sector is at the heart of good governance. Without it corruption and malpractice will flourish. People and society will need to know who the decision makers are. The decisions makers must be made accountable for their decisions to a higher authority, preferably the Parliament. There will be need for clear separation of duties, creation of capable institutions and a clear mechanism of enforcement for accountability. Parliament and civil society have a big role to play and their involvement will increase the peoples understanding of the sector as well as provide valuable checks and balances on practice. The media also has a big role to play in monitoring, investigating and reporting on the activities in the sector, but must do this responsibly

On the other hand transparency in the sector will help in removing cover for corruption, build trust and also allows rapid interventions to correct problems in the system. There is often tension (and at times contradiction) between the need for full transparency and the justifiable confidentiality and secrecy to protect investors. This will need to be properly managed. Transparency and publication of information and data will need to be accompanied by commentaries to minimise the potential for misunderstanding and misuse. Disclosures of petroleum facts, figures and information will need to be backed up by education campaigns to increase the public's capacity to understand the information and interpret it

There is an outcry that oil will kill agriculture. What is your comment on this?

The commencement of oil production can negatively impact our agricultural sector, if not properly managed. Production of oil will result in huge revenues generated locally which when sunk into the economy may result into exchange rates appreciation thus leading to cheaper food imports that can undermine our agricultural exports. This warning has been flagged to the government by both Professor Emmanuel Mutebile the Governor of the Bank of Uganda and Dr Ezra Suruma a Presidential Adviser on the Economy.

What must Uganda do to avoid this risk of oil undermining or killing agriculture?

The government must increase its investment in agriculture using the revenues arising from the oil sector. The government will have to use some of the revenues from the oil sector to unlock the country's agriculture potential by expanding on the program of provision of improved seeds and farm inputs, supporting the seed industry in improved breeding, and investing in irrigation schemes to ensure all year round crop production.

Agriculture holds the key to Uganda's economic transformation, job and wealth creation. The sector employs about 75% of the population. It is through increased agriculture production and productivity as well as developing the agro processing sector that the government will be able to create jobs and increase the livelihoods of the majority who earn their living from agriculture. Sustained growth in agriculture will result in spill over effects into the rest of the economy with agro processing, food processing, trade and transport sectors benefiting as well.

On the other hand, if the government ignores agriculture, then Uganda could easily end up facing the problem Nigeria is facing now. Oil in Nigeria constitutes 13% of the country's GDP, provides 80% of the government's revenue and is a source of 99% of the country's foreign exchange earnings. This state of affairs has led to the government ignoring its agriculture sector. As a result of this, despite the fact that Nigeria has one of the highest percentages of arable land in Africa, the country is now a net importer of food.

The government wants a refinery while the investors want a pipeline. What is the economically viable thing to do?

That is a difficult question. It involves both government policy as well as project economics. There is no easy answer, but the most important thing is for both the investors and the government to have a proper debate on the issue as equal partners. The truth is that the government does not have the money to build a refinery on its own, so it must attract investors to invest to invest in the project. On the other both investors and financers will only consider investing and financing in such a project only if the economics of the project add up. Both parties should be open to considering both options, and agree on what size and capacity for each of the options make economic sense.

The ongoing developments in the region such as the recent discoveries of oil in Kenya, the proposed Juba to Lamu pipeline, the on and off dispute between the Sudan and Southern Sudan and other geo political developments in the region mean that Uganda cannot decided to go ahead with these massive infrastructure investments whether refinery or pipeline without taking into consideration the plans and needs of our neighbors.

Your firm PwC advised the government on the setting up of the National Oil Company as a private company limited by shares. This was one of the contentious issues in the new Petroleum Bill.

According to the National Oil and Gas Policy the intention of the government was always to set up the National Oil Company (NOC) as a private limited company incorporated under the Companies Act, Cap 110. All we did was to validate this and also carry out a benchmarking study where we established that the majority of NOC of all major oil producing countries in the world are also held by their governments as private limited companies. In fact many of these NOCs such as Statoil of Norway, Petrobas of Brazil, Petronas of Malaysia and many others are all publicly traded and listed on their respective countries' stock exchanges.

Despite the fact that the NOC will be a private limited company owned 100% by the government, it will still be governed and regulated as a state corporation. This means that Parliament, the Accountant General, the Auditor General, the Public Accounts Committee, PPDA and all other state institutes that govern, monitor and hold state corporations accountable will have powers and oversight over the NOC. For example the NOC will be audited by the Auditor General, it will be accountable to the members of Parliament through PAC, and it will have to comply with the PPDA rules, and so on. The government's ultimate objective is for the NOC to be listed on the Uganda stock exchange so that Ugandans can own shares in this company. This would not be possible if the NOC was set up as a state corporation. That is why when New Vision which was a state corporation had to first be converted to a private limited company before the company could be listed on the Uganda stock exchange.

What should ordinary Ugandans do to benefit from the oil industry?

Effective participation of indigenous contrac¬tors and indeed Ugandan entrepreneurs in the oil and gas industry will depends, to a large ex¬tent, on their awareness of the opportuni¬ties that exist in the sector and the role they can play.

There are so many opportunities for every professions, vocations and trades. The upstream sector itself is heavily mechanised and automated and provides only limited employment opportunities. Oil companies operating in the upstream sector tend to contract out most or all of their upstream operations to service companies. This is where the greatest opportunities are. In the early phase of exploration and appraisal opportunities are mainly in the geological science work, engineering and design field, for example data acquisition and processing, data interpretation and modelling, exploration and development drilling, well completion, fabrication, installations, and general reservoir management services.

A colleague of mine working in the sector told me that his company will need about 2,000 welders and plumbers next year. These people will be involved drilling rig modifications and upgrades, pipe work assembly, repair, fabrication and plumbing work. Fabrication and welding is probably one area where Ugandans who are already involved in this kind of work welding beds, gates, windows and doors, in Kisenyi and Katwe have the greatest opportunity for upgrading on their skills through training, and certification. A skilled welder in the oil and gas industry can earn from US$ 500 a day upwards depending on his skill and experience.

Other opportunities that many Ugandans are taking advantage right now are in logistics, clearing and forwarding services, road construction sector, equipment installation, cleaning, security services, catering, accommodation and hospitality services.

With regards to consulting work, there are so many opportunities for Ugandans to provide services to the oil companies and their subcontractors. Major opportunities exist in accounting, tax and finance, human resource recruitment and management, supply chains management, banking and finance, insurance services, public relations and stakeholder management, dispute resolution, environmental management, health and safety, and so on.

What is your advice to the rest of Ugandans who are looking for opportunities in the oil and gas sector?

Become interested. Invest in training and education on all the different aspects of the oil and gas sector. Health, safety and environmental protection is the number one priority in this sector, and whoever is not ready to play by the sectors rules and regulations on this will not be allowed by the oil companies anywhere near their operations. Experience and expertise is very important in the sector, more important than academic qualifications. Ugandans interested in providing services to the sector should be ready to undergo very rigorous and intensive training and they will also need to be certified. This will apply to everyone whether you are a plumber, welder, cleaner, or driver. Those Ugandan entrepreneurs who are already providing services to the sector should be ready and willing to form strategic partnerships with international companies that have more experience, expertise and resources so as to build capacity, transfer knowledge and be able to compete and win big business.

As for our political leaders, please lets engage in a constructive debate that is aimed at empowering institutions that will govern, and regulate the sector both now and in the future as opposed to focusing on the personalities that currently occupy the offices of those institutions now.

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