Ugandan Firms Eye Contracts As First Oil Approaches

In the 1990s Edward Kabuchu and his brother were mining tungsten in western Uganda when they were approached by a foreign company looking for oil in the region.

Soon their own business, MSL Logistics, was providing the logistical underpinning of oil exploration in Uganda: bringing in fleets of vehicles along rutted roads, recruiting local workers, and organising camps which moved around with the prospectors.

"We've grown with the industry," says Kabuchu in his expansive office in Kampala.

Kabuchu was understandably excited on 11 April when the Ugandan president Yoweri Museveni signed three milestone oil agreements with his Tanzanian counterpart, Samia Suluhu Hassan. After several years of stasis, the main construction phase of the project now seems just around the corner.

"The decision could not come any sooner," says Kabuchu, who is currently discussing contracts with the oil companies. "The next seven to eight years are going to be good."

Over the next few decades the French oil company Total and the China National Offshore Oil Corporation (CNOOC) plan to extract more than a billion barrels of commercially recoverable oil from the Lake Albert region of western Uganda.

The long-awaited development, including construction of a 1,443km pipeline to the Tanzanian coast, is set to begin this year, with first oil expected in 2025.

The project will bring $15bn of investment into Uganda, a country with a GDP of $38bn in 2020. The government says that over $4bn of that money will flow into the coffers of Ugandan companies, supplying everything from construction materials and transport to legal services and food.

But the oil industry - technical, specialised, and capital-intensive - has a track record of operating in enclaves, extracting resources without building strong linkages to local economies. Can Uganda succeed where other countries have failed?

Promoting local content

It has been a long, slow road to oil development since commercial reserves were first discovered in 2006. The Ugandan government and oil companies have repeatedly disagreed over tax issues and the construction of a refinery - a symbol of the "resource nationalist" approach which characterised Museveni's negotiating position.

The same nationalist rhetoric motivates a slew of laws and regulations which try to promote local content in the oil industry. Oil companies must submit plans outlining how they will employ Ugandans, procure local goods and services and transfer technology.

They can only use contractors who are registered on the National Supplier Database. They must give first consideration to goods and services produced in Uganda by Ugandan companies, and 16 categories have been ring-fenced for Ugandan suppliers.

The results so far have been mixed. During exploration between 2010 and 2013, as regulations were still being drawn up, about 28% of oil companies' procurement came from Ugandan providers.

Ahead of the next phase of development Total and CNOOC have presented contracts worth nearly $1.4bn to the regulator, of which $167m goes directly to Ugandan companies (though others may benefit as sub-contractors).

Behind those statistics is a debate about what counts as a "Ugandan company". The regulations classify a business as Ugandan if it is incorporated in Uganda, adds value in the country, uses local raw materials and employs Ugandans as at least 70% of its workforce.

"The definition looks at the value you're creating in the country," says Gloria Sebikari, a spokesperson for the Petroleum Authority of Uganda (PAU), which regulates the industry. "Ownership may be important, but it should not be the only parameter that defines a Ugandan company."

But Julius Byaruhanga, a researcher at the Catholic University of Leuven and lecturer at Uganda Christian University, worries that the approach could backfire.

"A number of multinational companies are coming here, registering as Ugandan companies, employing 70% of Ugandans - but they are truck drivers, they are cleaners, those very low-paid positions - and they end up qualifying to be local," he says.

He adds that those Ugandan-owned companies which have won contracts tend to be part of an "insider network", either with political connections or long-established relationships with the oil companies.

Bars to entry

New entrants face a host of challenges, from eye-watering interest rates to stringent international standards. During the exploration phase, for example, no domestic catering firms were able to meet the health, safety and quality requirements to win contracts.

An Industrial Baseline Survey of 25 sectors, commissioned by the oil companies in 2013, found that Ugandan companies were able to meet both quality and quantity requirements in only two sectors, security and cement. In transport, for example, only 200 trucks in a fleet of 2,500 met the stipulations.

A number of programmes are in place to build local capacity, from national content conferences organised by the PAU to a business incubator run by the Ugandan subsidiary of Standard Bank.

Patrick Mweheire, Standard Bank's regional chief executive, remembers asking the first cohort of would-be oil contractors whether they had a work environment safety policy.

"Ninety-nine percent of them did not have that," he recalls. "And guess what? The first question on the Total contract is: 'Can you please provide your safety policy?' So we saw a complete mismatch. The oil majors are never going to lower their standards, so we've got to raise our game."

The government should do more to understand the capacity of local businesses, says Daniel Tusiime of SA Field, a company dealing in personal protective equipment. Businesses develop capacity with time, he adds. "No one goes into business to remain small."

SA Field has set up a factory and acquired moulds from a British partner to manufacture more protective equipment locally, rather than importing it from abroad.

False starts

The years of delay between exploration and production have given local businesses time to learn about the industry and build capacity, says Emmanuel Mugarura, chief executive of the Association of Uganda Oil and Gas Service Providers (AUGOS), an industry body. But the uncertainty was costly.

"Many Ugandans lost their patience and their interest," he says. "People had invested, they had put in money, they had recruited people, they had bought equipment, they had prepared themselves - then there were two, three, four false starts."

One company hit hard by the delay was Threeways Shipping, a haulage and freight forwarding business which works with the oil sector.

"In order to meet the requirements of the industry - levels of service, standards of equipment, certification of personnel and equipment, and other related requirements in the sector - we had to invest a lot of money in assets so that we would gain a foothold in the activity," says Jeff Baitwa, its managing director.

Threeways spent $20m to prepare for oil, including purchasing a fleet of brand new trucks instead of the second-hand ones which usually ply Uganda's roads. When oil development stalled the business ran into financial trouble and Baitwa had to lay off half the workforce.

"Many of us burned our fingers," he says.

The signing of agreements in April has now put oil development back on track. For Ugandan businesses, the next five years will be crucial: four-fifths of the jobs that oil creates will be short-term positions during the peak of construction.

Mweheire the banker thinks, optimistically, that Uganda's GDP could double by 2027. "Don't obsess about the first oil. Actually when oil starts flowing the party's ended. The party is the next three to five years."

More From: Independent (Kampala)

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