28 February 2013

Uganda: Local Content Clause in Oil Law Sparks Confusion

Speculators are aggressively demanding interests in the oil and gas industry without adhering to the legal and regulatory standards.

This follows the passing of a contentious clause in the oil upstream bill -the petroleum (exploration, development and production) requiring foreign service firms operating in the oil and gas sector to relinquish 48% stake to local entrepreneurs.

The intention of the clause is to encourage Ugandan entrepreneurs to participate in the petroleum industry so that petrodollars trickle down and build manpower.

Are local entrepreneurs ready?

The current challenge is that so much is being asked of locals so fast in order to achieve very aggressive targets. The local industry may not be able to deliver so much on time and at worldwide competitive prices.

Local content is under pressure for that reason. If operators and their key service companies cannot deliver, production targets and related income will suffer, compromising national development.

New Vision has learnt that a few rich individuals purporting to represent the interests of Ugandans have approached international firms currently offering specialized oil field services, demanding for shares.

"The firms approached are Schlumberger, Baker Hughes, Halliburton, and Weatherford," an inside source has said.

Francis Kamulegeya, the PriceWaterHouse Coopers country leader, described the situation as unfortunate.

"Local content does not mean local ownership. We need to understand the constituencies in the oil and gas industry and emphasis on use of local raw materials, service provision and local value addition in-country and transfer of knowledge and skills to the local people," he explained.

"Where you have a situation of local ownership, it creates a problem. Just look at the investments already in the oil and gas industry -over $1b. How many Ugandans can mobilise 48% of that money?

"Then we need to look at the criteria of awarding contracts. It means that you have to create a new company stipulating 48% for local shareholders and 52% for the international shareholders. You need to start afresh. Before a contract is awarded to a service provider, there are stringent procedures that must be met like experience, financial and technical capacity. Few Ugandans meet the required standards. You will end up chasing away investments," he adds.

And indeed, over $1.5b from multi-national companies have been invested in seismic exploration and drilling of wells since 1998.

The liberalised economy has seen major oil companies like France's Total and China's National Offshore Oil Corporation participate in the industry.

"In South Africa, there was the Black Economic Empowerment which intended to increase local content. But it ended up creating very few well connected black entrepreneurs and not all the black South Africans benefited. We need to see the opportunities where Ugandans have competitive advantage, train and transfer the skills to Ugandans and create jobs. Parliament has to learn and understand the dynamics in the oil and gas industry," Kamulegeya says.

Patrick Bitature, the chairman of Uganda Investment Authority said the clause in the law was "very aggressive."

"We don't have the capital. We don't have the technical know-how. We don't have the capacity and this will scare away the investments in the oil and gas sector. In my opinion I think the President is very mindful about this. I am also a Ugandan who would like to venture own share in international oil company but local content should be done in phases. We could say begin with 5% for the first five years, 10% in the next five years and so on. We need to build capacity, technical know-how and accumulate the required capital.

Local Content Policy options

Local content can be achieved through capacity building. It is a side-track if the focus of national content is on to what extent the oil companies adhere to strict quantified ambitions set by law or regulation.

Real contributions to capacity building, by creating a credible atmosphere for industrial collaboration, as well as for the transfer of competence and technology, are the only route to create lasting value to society.

Local content should not be a panacea for local development problems in Uganda, but should be respected and seen as one of several economic policy tools

Local small and medium enterprises (SMEs) often have limited access to finance, infrastructure, and capabilities.

To help them overcome such challenges, international oil firms can either work with specialised government agencies that provide direct funding through financing schemes or indirect support through advance/prompt payment policies and long-term visibility on planned expenditures.

Infrastructure challenges, however, can be overcome by creating serviced zones or parks where local industries can benefit from this shared venture and other cluster effects.

Procurement process

Each stage of the procurement cycle presents opportunities to foster the development of local content.

A first step would be determining the materials, technologies and contracts that allow the use of local resources and create opportunities for local companies to participate, join forces and compete on a global scale. In the subsequent prequalification, contract awards, contracting and monitoring and compliance stages, the regulator should also encourage first tier contractors to develop the capabilities of lower-tier suppliers and sub-contractors.

Technology transfer

Establishing innovative research and development centres capable of producing and commercialising intellectual capital has proven a challenge. Experience suggests that breaking into the technological development process is best achieved through sequential learning based on repeatable project designs, license arrangements for original equipment manufacturers, and local/international joint ventures for 'low-end' technology components and services.

Education and training

Multi-stakeholder partnerships between international firms, local private companies and domestic institutions can help attune education to the requirements of the job market.

A multi-stakeholder environment led and hosted by the international company can close the feedback loop between industry and academia and expedite the development of skills that would allow locals to assume more value-added, analytical and decision-making roles in the Oil and Gas value chain.


Steps toward improving any country's policy should include looking at what has worked successfully in other areas of the world and considering the country's oil industry in terms of where it stands globally

Too rigid local content policies could result in missing oil production timelines, losing new investments by operators and service companies, and compromising overall productivity and global competitiveness.

If local production is sustained in uncompetitive grounds, local employment and living standards will also be compromised.

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