Wednesday, March 7, 2018

THE OIL INDUSTRY AND THE FIGHT FOR OUR FAIR SHARE

The plan is that first oil will start flowing in 2020. The industry estimates that between now and then at $20b (sh72trillion) will be spent in preparation for this event.

In the exploration phase at least $3b was spent over eight years. It is estimated that local companies managed to capture 28 percent of this figure or $840,000 was captured by local firms.

The challenge is to keep us much more of that money here.

The truth is the capacity to produce oil without the local help exists. To appease local constituencies back home and retain as much money as they can for themselves means that regardless of whether we are ready or not as people the oil will be extracted and we will not even get the crumbs.

The oil industry is very capital intensive and therefore there is little week can do in the higher end of the value chain where the outlays are bigger but there areas – providing basic services where Ugandans can participate.

To that end the government through the Petroleum Authority of Uganda (PAU) has called on Ugandans to register onto a local data bases of goods and service providers, who will be given first priority in getting contracts, especially those ring-fenced for Ugandans.

Questions still remain about whether our local providers can live up to the exacting standards of the industry. A lot of work especially in the private sector is being done to ensure readiness.

"Assuming the $20b of inflows into the country attract two percent insurance premiums that would amount to about $400m (sh1.5trillion). In 2016 the industry underwrote sh634b worth of premiums...

In that line the insurance sector has been gearing up to participate in the oil industry.

At the end of 2016 they established a Syndicate to underwrite the risks in the oil & gas sector. The syndicate which was created with the approval of the Insurance Regulatory Authority (IRA) is supported by international reinsurers by way of $500m reinsurance facility.

This is important because average claims in the industry have been put at $25m according to Alliance Corporate Global & Speciality (ACGS) one of the world’s largest corporate insurers.

Essentially Uganda’s insurance companies have come together to collaborate in underwriting risk in the sector.

Being as it is a new industry they have contracted the UK based Total Risk Solution (TRS) with 150 years’ experience to train local staff in of oil & gas insurance.

And it is not as if they are reinventing the wheel. In Indonesia, Ghana, Cambodia and Nigeria similar arrangements have been put in place and have not only served the industry well but also ensured more monies remain in country.

All this is being done to conform to Ugandan Petroleum legislation which provides for the contracting of insurance services from locally registered entities.

There seems to be a loophole in that regard in the law under Petroleum Authority of Uganda (PAU) operates. While some basic services have been ring fenced – security, catering, logistics among others and fuel services, for local players, insurance services are not among them...

Some reservations persist at the regulatory level, about the capacity of local insurers to cover the magnitude of risk in the oil & gas industry, whether giving the syndicate a green light would constitute the creation of a monopoly, whether reinsuring our local insurers to do the job would not add another layer of costs and whether value will be created all around.

The truth is that foreign industry players given a choice would use their own insurers. The only way to ensure our own industry players get a fair shake is to compel the oil & gas industry to give first right of refusal to our own.

That has to be the guiding principle in ensuring we retain as much money as we can locally.

The benefits of the insurance company getting a leg up in the oil & gas industry would have a positive ripple effect throughout the entire economy.

At the bare minimum it would increase the capacity of the industry not only financially but technically as well. The industry players will get new capacity to insure for risk in the oil & gas industry, which capacity can be employed to win business in the region and further afield.

But just as important it could help boost the country’s stock of long term savings. The insurance industry took the brunt of the loss with the breakdown of stability and 1970s and 1980s, people stopped taking out insurance. The habit was lost.

"As a result the insurance industry is only just beginning to gather steam. The long term savings that insurance hold, in other countries has helped build infrastructure and support long term projects critical for national development...


The insurance industry’s attempts to get ready should not be lost and may even serve as a useful example of how other industries can position themselves to take advantage of the coming oil

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