Friday, April 13, 2012

COMING TO TERMS WITH THE UGANDA OIL CHALLENGE

At the beginning of this year government gave final approval for Tullow to invite partners French firm Total and the China National Offshore Oil Company (CNOOC) to help develop their oil filed in western Uganda.

At last count it is estimated we have 2.5 billion barrels of oil under the ground in the Albertine region and this is after exploring less than a half of the potential oil basin.

Real oil production will begin within three years but before then huge infrastructure developments will begin in earnest – roads, railway lines, pipelines, airfields. Poor little Uganda is going to see more money than it has ever dreamed of.

Hopefully the heckling has died down and we now need to start plotting how to extract maximum benefit from this finite resource.

To illustrate. According to the most recent figures I could find it costs between $6 in Saudi Arabia to $40 in Angola to produce a barrel of oil. At peak production it is expected that Uganda will be doing 200,000 barrels a day.

Assuming a wildly optimistic $6 a barrel production cost it will cost $1.2m about sh3b a day or sh21b a week or sh90b a month or … you get the point. The cost of production will include labour, food, accommodation, transportation and several other service costs a lot of which will provided here.

Tullow says they have already spent about $1b in their oil exploration endevours and expects by the time we hit peak production they and their partners will have shelled out $10b.

The scale of operations and the ripple effect through the economy is going to be like nothing we have ever seen before.

But as it is now we are woefully unprepared for what’s to follow. Recently we had to import air-conditioned buses from our neighbours to ferry delegates to the Inter-parliamentary union meeting, because we could not find the required number of the air-conditioned buses locally.

Tullow officials say to ship in their equipment and various supplies they will have at least 500 trucks on the road at any given time and there is no single trucker here who can meet their needs. And yet trucking is one of those things where we are doing well considering.

It reminds me of when the South African supermarket Metro came to town in the early 1990s and because of the volume of imports they would be handling – nothing compared to what the current supermarket chains handle, they were allowed their own bonded warehouse.

The local traders went up in arms pointing to this as an indication of how government favours foreigners over locals. But the reality was that our traders with their little lockups or share of the counter could not muster the volumes to get this “preferential” treatment.

The Ugandan businessman will need to step up his game.

Out of necessity the Ugandan businessman will have to scale up his operations just to get the crumbs. They will first of all need to get more organized, seriously considering partnering or merging their operations to achieve scale, explore alternative funding options and adopt better management practices.

Easier said than done but the alternative is too dire to contemplate.

International firms with experience in servicing the oil industry are already setting up shop in Uganda in anticipation of things to come. If our businessmen are not ready to step to the plate these firms can easily shut them out of the business and we will have only ourselves to blame.

Maybe to give our own a leg up government may want to consider making local input a condition of these businesses operating here. The nature of the local input could assume any form, from local partners to a percentage of their inputs be from local suppliers. This kind of affirmative action always has its pitfalls but none that cannot be worked out.

Meanwhile all the above is premised on the current situation where we are assuming we have only 2.5 billion barrels of oil under our soils, imagine if it turns out we have even double that?

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