UGANDA’S RECORD FDI AND THE MAN ON THE STREET

In November audit firm Ernst & Young (E&Y) released a report on Africa’s economic prospects.

"In the report “Pivot to growth” E&Y reported that Uganda attracted a record $10b in foreign direct investment in 2022 or seven in every ten dollars of FDI that came into East Africa that year....

This was driven by projects in the oil & gas sector.

The news left the man on the street scratch his head at how come he never saw this money.

The confusion comes from our not understanding how FDI is reported and secondly, how such monies when they do come, trickle down to the everyday man.

Reading the report one realises that when they talk of $10b in FDI booked, they are reporting the monies committed for a project. So in our case for example, our share of the $10b East African Crude Pipeline (EACOP)for which final investment decision was reached in  2022 would be included in this number.

The funds of course will not arrive in one lumpsum but will mostly be parceled out over the duration of the project.

Why we did not see immediate improvement in the contents of our pockets is largely a function of what the project will need or buy locally.

The planning, design, plant and machinery will be  bought abroad and paid for there but are factored in as project costs. Foreign contractors may very well be paid in  to their accounts at home.

Local contractors, suppliers, hospitality and service providers are beginning to smell the money.

But as we all know there is no one as quiet as a man who has been paid. The loud ones are the one who are not in the slip stream of the money...

In years after commercial viability of our oil finds was determined in 2006, government has written into law what sectors of the industries servicing the oil & gas sector can be ringfenced for Ugandans. These were mostly food, hospitality, security, logistics and other low capital intensive sectors.

So if you are a friend, relative or business partners of the local businessmen who have already seen some contracts you are not complaining.

But also while the oil & gas sector may very well effect some major changes in the greater scheme of things our 200,000 barrels per day at full capacity, is really not much to write home about.

Nigeria last year averaged 1.35 million barrels per day, Angola came in second at 1.1 million barrels per day and Algeria at 908,000 barrels per day.

That being said businessmen are reporting that they are beginning to feel an uptick in demand, starting the middle of last year and one may imagine some trickle down is beginning to show its head.

The relative stability of the Uganda shilling which traded in a a narrow band of sh3750 – sh3850  may also indicate that some of that oil money is already coming and supporting the shilling.

Kenya across the border saw its currency cross the sh160 to the dollar mark before Christmas, a trend that continued into January. Some of the reasons were falling commodity prices and a flight for the exit on indications our eastern neighbour is set to default on some key international loans.

Whether you will earn from the oil & gas sector or not will depend on how you are positioned. As a worker the industry has stringent accreditation standards that have to met before they can look your way, for contractors and suppliers the same.

"The expectation is that at least $20b will spent until first oil in 2025 and so it may not be late to position oneself to draw from the oil wells...

The money will not come dripping with oil and easily recognisable as coming from the sector, but it will come.

Many have been called to partake  but few will be chosen.

LIGHT AT THE END OF THE TUNNEL FOR THREE WAYS

Jeff Baitwa has been to hell and back.

Draining court battles and the near-death experience of his company are an understated snapshot of the journey he has been on.  But he can now see light at the end of the tunnel and his business, BroGroup Ltd seems set to return, stronger and wiser.

While the rest of us after university, in the mid-1990s, set out to find jobs, brothers Oscar and Jeff started Three Ways Shipping, which is now the flag ship of their BroGroup holding company. They struggled to get a foothold in the highly competitive clearing and forwarding business, building the business to the point that, at the height of its success about a decade ago, they were reporting top line revenues of $30m(sh110b) and were employing at least 750 people across a network that stretched from the Mombasa and Dar es Salaam to their operations in western Uganda, where they were gaining a foothold in the oil & gas industry.

"Ironically, the oil & gas industry almost did in all their hard work. After the commercial viability was determined in 2006 the frenetic work around the exploration slowed to a crawl. Critical legislation, a tax dispute with UK-based explored Tullow Oil and negotiations surrounding the development of the oil fields, most especially the pipeline to Tanga in Tanzania, were to blame for the slowing momentum in the sector...

The slowdown badly affected Three Ways Shipping, which had positioned itself as the leading local logistics company servicing the sector.

Their bankers put them under receivership in 2016, before the company extricated itself from it in 2019.

In the meantime, the company found itself in a debilitating court battle with their client telecom company, MTN, which is still winding its way through the court system, but which Jeff thinks, is about to be resolved.

Just as the company battered and bruised, was girding its loins to begin a comeback, the Covid pandemic happened, setting them back deeper into the hole they had found themselves in. In Uganda and globally the Covid pandemic prompted a worldwide lockdown, that started around March 2020 and only last week did the World Health Organisation (WHO) announce the pandemic was finally over.

“I think we are over the worst now,” Jeff told Business Vision last week in his office on Jinja road. But not without pain.

In order to resuscitate the group, the brothers have had to invite new shareholders, offshore investment firm, Delux Group, which took a 20 percent stake in the company and brought in much needed financing to tide the company over its earlier challenges.

“The new investors are college alumni, some of whom are Ugandan who saw our situation and thought they could help us get back on our feet not only with resources but with their own experience,” Jeff said.

As a result, Jeff is now co-managing the company with Daniel Pettersson and a new, Chief Financial Officer (CFO), Chief Operations Officer (COO) and Human Resource Manager have been hired.

“Before our challenges we were servicing multiple industries -- trade, infrastructure, produce oil & gas and not only in Uganda but in Kenya ana Tanzania. In Kenya and Tanzania, we are already working through joint venture partners,” he said.

Already in Uganda, the BroGroup is in a joint venture partnership with the Johannesburg Stock Exchange (JSE) listed Grindrod Logistics Africa, focused on freight forwarding business opportunities.

"With BroGroup’s ducks lined up, Jeff is confident about the company’s future, but this hope is tempered by the experience of the last decade.

“During the challenging times I have better come to appreciate the need for self-belief, perseverance, patience as personal attributes. Also, good friends, supportive family and supportive workers and all those who stuck with us in various ways during the period,” Jeff said. “The relationships we developed have remained largely intact and we are grateful for that.”

It started as a two-man operation – Oscar in the UK taking orders and Jeff in Uganda doing last mile deliveries – it was called Equator Freight Services. That was in 1996, 27 years ago.

Jeff says, these last few years were as close as the company has ever come to being shut down and maybe that is what was needed for it to bring in new partners and reach for the next level of its potential.

"In the immediate future the group will be focused on the oil & gas sector, where first oil is expected by 2026, but there is a lot of logistical work needed to be done over the next three years and hopefully carry everyone along with them.

“We will be looking to employ local, buy as much as we can from here and even source funding locally. We will try and get as many opportunities to locals in a sustainable manner,” he said.

In the medium to longterm they are going to see more corporate evolution as they mature.

“I may still be the MD for the next two, max five years. We are trying to drive the business so that management is more independent from the shareholders,” he explained.

Jeff thinks they are definitely out of the woods, never mind that the enduring lesson from the Covid pandemic is to hope for the best but expect the worst.

LESSONS FROM THE KENYA FUEL CRISIS

Kenya has been suffering a fuel crisis in recent days and Ugandan night dancers have been rubbing their palms in anticipation for when it will hit our shores.

They have been sorely disappointed.

The Kenyan fuel crisis is not one of low supplies but one created by a delay or refusal of Nairobi to pay an agreed upon subsidy to the fuel companies for supplies provided in the past.

The way it worked is that government in an attempt to cushion its citizens from fuel price increases, that have arisen from increased demand in recent months following the lifting of Covid-19 restrictions around the world and the Russia-Ukraine war, agreed with the fuel companies to cap pump prices at a certain level and pay the companies any extra costs they incur.

Last month global fuel prices hit a 14 year high at $139 a barrel.

Government fell back on payments to the fuel companies and they turned off the taps. Fuel prices had jumped to about sh6000 a liter of petrol from the capped value of sh3,500 a liter. The fuel companies claim government owes them about sh600b but the Kenya government says its about sh400b.

There were reports that the fuel companies were sending some of the excess fuel on to Uganda, where they get paid in full at the pump, hence no supply shortages on our side of the border.

Kenyans may get some relief soon as President Uhuru Kenyatta signed off a Kshs35b supplementary budget to continue the subsidy on fuel.

The problem with subsidies of this kind they are often driven by bad politics rather than good economics.

Kenya is in election season, with the elections coming up in August, the ruling party cannot afford to have people grumbling ahead of what is expected to be a tightly contested poll. So they bow to populism and ignore the economics.

There is an old saying that the market can remain irrational longer than you can remain liquid. So the Kenya government is hoping the price increases on the global market are not rational and will revert to previous levels. They think they have enough money to subsidise the pump price until this happens. I think they do not have the money and will be forced to remove the subsidy, after a few more fuel crisis in coming months.

The more cynical take is they will hang on to the subsidy at the cost of providing public goods and services and remove it once the election is done and dusted in August. If they are still in government they will grit their teeth and weather the protests but if they are out the new government can sweat with the mess they have created.

Subsidies, especially of consumption are never a good idea.

They keep the people happy for a while but the market will not be fooled for long.

As is already happening a parallel – black market, in fuel has emerged in Kenya and prices are almost double the targeted pump price. That’s an indicator of what will happen when the government gives up on the subsidy.

Across the border in Uganda where there is no subsidy the fuel prices have increased steadily allowing us to adjust our behavior, without suffering unnecessary shock. We have huffed and puffed about government’s insensitivity to our lives, that they should do something like the Kenyans are doing for their people, that was a few weeks ago.

Suddenly we are quiet as the Kenyans are lining up for hours to get fuel at their stations.

There was a funny story about boda bodas escorting a fuel truck. They thought the fuel tank was going to deliver fuel to a station, so they would be first in line.  To their shock even the fuel tank was looking for fuel.

What is popular is not always right and what is right is not always popular.

That being said the warranted subsidy government should be paying in Uganda is the cost of ensuring our fuel reserves are maintained and managed well in the event of fuel shortages -- hopefully not cause by bad economics, sometime in the future.

A few days ago US President Joe Biden announced the release of a million barrels a day for the next six months form the country’s strategic reserves to ease the pain of high prices there. It is expected the release will slow the rise in fuel prices – US daily demand stands at up to 20 million barrels.

The US oil reserves stand at just over 700 million barrels, which have been accumulated since the 1970s oil crisis.

I couldn’t determine the cost of storing them but assuming it was even $0.1 a barrel per day that would still come to about $25 billion a year that the tax payer has to foot, money that may be “better” spent on improving their health and education services.

Our consumption of about 20,000 barrels daily means our reserves would be much less, but we should have them. Like an insurance policy, they will be frowned upon in good times but will come in handy in tricky situations.

IT’S DÉJÀ VU ALL OVER AGAIN IN THE OIL SECTOR

Most people have forgotten but if the hype was to have been believed, we would have seen first oil in 2009, ten years ago.

The commercial viability of oil reserves were determined in 2006, when it was estimated that we had about 2.5b barrels of oil under western Uganda’s Albertine graben. Now we are talking about reserves of about 6.5 billion barrels of which about a third are recoverable.

"Seeing what we have been through since, it’s inconceivable that we would have had first oil in three years as the promoters of the hype suggested...

We since managed to put in place key legislation to govern the sector, we are building the oil roads – 12 roads that will cost us $600m to lay 700km and scores of local suppliers and craftsmen are being readied to supply and work in the industry.

We are only just beginning to get set for oil, imagine what things would have looked like if we had been stampeded into kicking off oil exploitation a decade ago? A disaster. Things can still go badly wrong even now – we will not know how ready we are until the action starts, but there is some consolation that we are better off now than a decade ago.

Also in that period we have gone to court to settle a tax dispute with oil explorer Heritage Oil, a tax dispute too, which had put the development of the sector on hold while it was being resolved.

The broad outlines of the tax dispute were that Government was claiming $404m in capital gains tax that Heritage Oil should have been liable for, were it not that they had sold their interest in Uganda and fled the country, leaving Tullow holding the bag.

How Heritage managed to get Tullow to pay and leave without fulfilling their tax obligations has been the stuff of barroom banter ever since.

Almost a decade later we arrive at another impasse, triggered by a difference of opinion about capital gains tax as Tullow seeks to pair back its interest in the oil fields and raise funds to finance its share of the investment required to develop them.

"I would imagine government technocrats are suffering an acute case of once bitten twice shy...

Following the grief they got for having let Heritage “go” and the no holds barred, bare knuckled fight that it took to wangle the tax from them, government bureaucrats are understandably reluctant to put a foot “wrong” this time around.

The current impasse has been created by a difference of opinion – again, as to what Tullow’s liability in terms of capital gains tax, would be. Last year it was agreed that the buyers – Total and CNOOC, would shoulder some of the liability but there is disagreement there too as to whether this will be treated as an allowable expense for tax purposes down the road or not.

There was a finite time frame for resolution of this issue, which expired last week but one.

The oil companies argue that the tax being quibbled over is small change compared to the benefits that will accrue from the industry over the period of exploitation and that government should let the matter go – insistence on the capital gains tax be paid before the Financial Investment Decision (FID) can be signed off.

Their supporters – many of whom have invested millions even billions in readiness, are critical of government bureaucrats who they complain have no clue of what is needed to not only bring investments to our shores but to also make it work.

"Whatever the case first oil has been pushed further back. The rule of thumb is that first oil will come three years after the signing of FID, which now with the latest setbacks looks unlikely this year. The optimistic outlook therefore is for first oil in 2023, assuming FID is signed next year...

Beyond our own experience with the oil industry, down history the sector’s players have not covered themselves in glory from Nigeria to Russia to Brazil to Iraq. The industry continues to struggle with the perception that they parachute into a country gut the resources, regardless of the damage to communities, the environment and move on to the next find. They repeat until fabulously rich.

As a country, we are at a cross road, one of many we have already crossed or will cross well into the future.

Powerful interests – national and international, are watching keenly and actively trying to get involved. The stakes are high. How it t urns out will very well determine whether Uganda leverages its oil for the improved living standards of its people or like a long parade of other countries, concentrate the returns among a few chosen ones willing to play ball.

THE BUFFETT LETTER AND DANGOTE

Last week US billionaire investor Warren Buffett released his annual letter to the shareholders. A much awaited document that he has penned for almost half a century as the head of Berkshire Hathaway, it spells out in detail his philosophy on business and life.

As he has done over the last several years in his annual letter, he laments that there re no big companies, selling at price that would meet his criteria and tempt him to commit some of the $112b held in cash by the company.

At 88 he has learnt over a long investing career, that started when he was 11, that waiting for the good deal may very well be the best use of his time and his investable capital...

Buffett is a billion air many times over and this is thanks to his investing process, which entails looking for good companies selling at discounted prices to their intrinsic value and holding forever. 

His search from value has been fine-tuned over the years to the point that is company is valued at just over $500b today or 20 times the size of the Uganda economy or thrice the size of the East African Community.

Which brings me around to our African billionaire Aliko Dangote. The Nigerian’s wealth has evolved from a commodities trader to a huge industrialist. The cornerstone of his empire has been his cement manufacturing operations strewn across the continent – his Obajana operation alone churns out 1000 trucks of cement daily.

The jewel in the crown will soon be the 650,000 barrels a day refinery that is under construction outside Lagos that will cost $12b. Uganda, using current estimated reserves, will be pumping out 200,000 barrels per day.

While not an exact fit Dangote may be the continent’s Buffett in the way he seeks out assets, in our case natural resources, and invests to extract their full value.

Anybody who knows anything knows that Africa is not poor, the challenge is that unlocking the value of its people and natural resources has been subverted by bad politics, foreign interference and poor business skills...

Africa as Dangote is showing, so dramatically, is a deep value play and the best people to fully unlock that value have to be us. Africa does not conform to the modern investment critea that are employed in western boardrooms. Investing in Africa takes a faith that the atheist west has long lost. Investing in Africa requires that’s its people are seen as useful partners and not statistics in market research report.

So why don’t we have more Dangotes around Africa.

It helps that Dangote came from a longline of businesses. One can only guess that every generation has improved on the business quality. So if Dangote’s forefathers started with trading cowrie shells in the Trans Saharan trade their descendant has overlaid industry on that foundation of business practice.

It helps too that he is Nigerian. In the most populous nation on the continent you either do big or go home. With this outlook ingrained in his DNA it should come as no surprise he has no qualms jumping onto his private jet to explore opportunities not only in West Africa where he has presence in Nigeria, Ghana, Cameroon and Benin but further afield in South Africa, Zambia and Tanzania.

He is more of a hands-on manager compared to Buffett, who rarely leaves is Omaha, Nebraska base to visit the constituent companies of his conglomerate. But maybe that is what is needed, face to face meetings with his mangers on site, if only to drum in his vision and their part in fulfilling it.

Apart from the aforementioned retained earnings in his company, a lot of the financing for Buffett's ventures is got from his insurance companies, whose “float” – the premiums policy holders pay out net of claims, is the gun powder he uses for his acquisitions.

The way the story is told Dangote borrowed $3000 from an uncle to start his first business. Four of his companies are listed on The Nigeria Stock Exchange (NSE) and given the scope of his holding one can expect that he is not averse to mining the money markets of Europe to finance his ambitious expansion plans.

He has on several occasion dismissed suggestions that his success has been driven in no small part by his closeness to the Nigerian establishment, but even if that was so we know dozens of people close to the establishment who have had and still have access to hundreds of millions and have squandered the opportunity. That Dangote can parlay this alleged advantage into huge economic success – he is the largest private sector employer in Nigeria, tells you a lot about the man.

"Value investors like Buffett and Dangote are happy to invest when there is blood running in the streets, they are greedy when others are scared. It takes a lot – risk, pain and sweat to develop such a mentality and maybe that is why there is only one Dangote in Africa.

KENYA OIL COMES A CROPPER

Seven years ago ( has it been that long ago?) then Kenyan energy minister Kiraitu Murungi gleefully reported that oil exploration firm Tullow had found sizeable oil deposits in northern Kenya and gleefully hazarded that these were  larger reserves than neighbouring Uganda (I wonder who gave the minister that impression?) which had established commercial viability six years prior.

Seven years down the road Kenya has ditched plans for a refinery to process their crude for lack of adequate resource.

Who is fooling who?

OF OIL AND THE LACK OF BEEF IN UGANDA

It isn’t news or it shouldn’t be. First oil will not be seen by  2020 as earlier expected.

The rule of thumb is that for first oil it takes three years from the signing off of the Final Investment Decision (FID). The FID comes after commercial viability of the reserves has been ascertained and the Front End Engineering & Design (FEED) of the necessary infrastructure has been done. This helps determine the amount of investment needed.

"Given that we are at the tail end of the year, if the FID can be managed by December 31^st then we can talk of 2021 at the earliest for oil to flow...

But fixating on first oil as a signal for the oil money to start flowing is  wrong.

During a recent New Vision function to consult stakeholders on the progress of our Oil & Gas Journal, a Tuesday pull-out, that has been running for almost a year now, Petroleum Authority boss Ernest Rubondo said tis thinking would be to miss the boat entirely.

To illustrate Rubondo told of the supplier to the oil camps who was in a dilemma because there was not enough beef of the required standard in Uganda to meet the camps’ demand in a year or so.

I had to do a double take.

Not enough beef in Uganda for a few hundred people in the oil fields?

As it turns out there is only one company in the country that can supply the amount of beef, processed to the quality that they demand in the country, but even it will not be able to satisfy the increased orders.

Our regular abattoirs do not meet the health standards to supply the oil camps. Because think about it if I am hiring the top oil geologist, or whatever they call them, to come all the way out to God forsaken Uganda and even further afield to western Uganda, to help me make hundred million dollar decisions, I can’t afford him reacting to the food in the area. So the food he eats under my care has to meet the highest standards and more.

So if we don’t have enough meat, how can we have enough fruit, eggs or even drivers and house help to support the industry.

About $20b (sh70trillion) or double this year’s national budget, is going to be spent in setting up for first oil over the next five years.

The investments are broken up into oil production, which for now means preparing the Tilenga and Kingfisher oil fields. The commercialisation of the crude that is produced in these fields, whose biggest projects are the pipeline and refinery. In addition there are the investments to support the above which include the Kabaale airfield and the “oil” roads.

We have neither the expertise nor the experience to play a meaningful role in the financing or construction of the above. But in the provision of services like hospitality & catering, security, logistics and even waste management it is possible that local companies and individuals can participate meaningfully.

But Rubondo pointed out that whether we have the capacity locally or not the functions will still be carried out with or without us...

Like the beef supplier who was willing to import the beef to cover the deficit of local beef, the industry will find people from outside the country to do the job.

The point is that to take advantage of the billions of dollars that are set to flow through the industry you have to be set up and ready long before first oil.

This involves formalising our businesses to take up contracts or be attractive to foreign partners wanting to work here. Relatedly it means stepping up the capacity of our companies financially and in human resource in order to play.

It has been an interesting journey since commercial viability of our oil reserves was established in 2006, 12 years ago. Some people thought they could stampede us into producing oil in three years later, in the absence of a legal framework or local capacity.

"Government’s insistence that we do everything properly, even if it takes forever has been the right way to think. In fact reasonable delays will allow us be better prepared to maximise the opportunity that comes with the industry for our local benefit...

Forget first oil. Be ready now. If you are not, it will be too late by the time the first oil starts making its way down to the coast.

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 we can do in the higher end of the value chain where the outlays are bigger, but there are 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 base 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

VENEZUELA SHOULD SERVE AS A CAUTIONARY TALE

Events across the border have captured our collective imaginations in recent weeks. US President Donald Trump never disappoints from day to day with his faux pas. Now everybody in show business is running scared for fear of the next set of revelations on sexual harassment. And meanwhile British prime minister Theresa May is scrambling to negotiate a soft Brexit that has left her isolated at home and abroad.

These and many other stories are a big deal.

But in South America Venezuelans are fighting an existential battle with disease, hunger and poverty and we are not just talking about the bottom of the pyramid people. Increasingly now everyone in Venezuela is living below the poverty line.

"It wouldn’t be a big deal. We would have brushed it off just another Godforsaken third world country excelling only at doing things wrong at every turn. But Venezuela has the largest oil reserves in the world. And as if that is not enough, is a stone’s throw away from energy hungry USA...

Things are so bad in Venezuela that inflation has sky rocketed to the point that people are throwing money away– the International Monetary Fund (IMF) projects it go beyond 2,000 percent next year from this year’s 650 percent.

Things are so bad that murder and kidnapping are the only serious growth industry.

Things are so bad that malaria which was eradicated in 1961 – before the US, is back with a vengeance, so are measles and there are no HIV or hyptertension drugs.

Things are so bad that people are dying of starvation in the streets, because the government would rather meet its international debt obligations than import food. If they did not meet their debt obligations, debts which were incurred during the oil boom days when a barrel peaked at $114.

The official figures paint a rosy picture of an upper middle income country with a GDP of $440b – almost 20 times our economy’s size and per capita incomes of about $8,000.

How did it come to this?

As so often happens it was a case of expedient politics being applied to remedy economic shortfalls. 

Former president Hugo Chavez in an attempt to endear himself to the Venezuelans after being overthrown once before, used oil to massively expand social programs, nationalised companies and looked the other way when his cronies were gouging themselves at the trough of state resources.

As long as oil revenues stayed high some of the worst ills could be paperd over.

Oil, which was discovered in 1935, has so dominated the economy that it accounts for a third of the Latin America’s economy, 80 percent of export earnings and more than half the tax revenues.

So when prices started falling to current levels of about $50 a barrel the emperor’s nakedness was exposed. As if that was not enough during the good days Caracas borrowed voraciously against future oil earnings. As it is now it receives almost no money from oil exports but still ships off massive amounts to Russia and China as debt payments.

"While we scout the globe for best practice in how to deal with our oil sector, we should not lose sight of how not to run an oil economy – and Venezuela, better than Nigeria and Angola can serve as a powerful cautionary tale...

Thankfully we are at least making the right noises.

The government is committed to using revenues to boost our infrastructure, which is important to ensure that other parts of the economy can continue to grow alongside the oil industry.

We are also talking about a sovereign fund, financed by oil revenues  and housed abroad. This is important because if all oil revenues gush back into the economy it can cause a massive appreciation of the shillings and make our other exports uncompetitive.

The argument that we should bring the money all back and not keep it offshore developing other economies is a populist one but not based on the facts. If the sh7trillion NSSF is struggling to find bankable projects in Uganda what of the estimated trillions of shillings in revenue we are expecting annually when production kicks off?

Beyond infrastructure it would do us a world of good if we could shore up our education and health services. This would enable upward mobility of larger parts of the population. A healthier and better educated population is a more productive one.

The temptation to start a flurry of state enterprises will always be there but we should resist the urge. 

State enterprises are not only inefficient, because their main role is not to deliver service or show a return but to pay off constituencies, they also distort markets, frustrating private sector players through preferential treatment, while giving suppliers and clients a raw deal.

We lack the discipline to run or even oversee the good running of good state enterprises, unlike Dubai. We would be better served if, along with improving our infrastructure – soft and hard, we developed industry wide incentives for investors – foreign and local, to come and set up the companies that can ensure an alternative economy to oil exists. These industries’ output would eventually eclipse oil.

"As we all know in our personal lives, there is no money that is too much to finish. Oil is a finite resource and we should behave with this in mind, unlike Venezuela which was seduced into thinking the good times would always roll...

And now after decades of betting solely on oil the irony is everything else doesn’t work, the oil industry inclusive and yet they still have billions of oil barrels underfoot!

OF OIL AND LOCAL CONTENT

A few months ago government issued production licenses to two of the three oil explorers paving the way for final preparations for oil production to begin.

Government had already issued a production licence to China’s CNOOC in 2013 who argued they could not do anything major until its partners, UK based Tullow Oil and Frances’ Total got their own licenses.

"It has been reported that up to $20b (sh66trillion) or about the GDP of Uganda will be invested by the time our oil fields reach peak production. Uganda has an estimated 6.5 billion barrels in the ground of which about 1.6 billion barrels are recoverable. At peak production it is expected that Uganda will be pumping out 200,000 barrels a day....

In money terms this could mean Uganda earning as much as 10 percent of GDP in royalties, profit sharing and tax revenues.

That is all very nice but those are official revenues, payments to government. There is the issue not being much discussed, which is the issue of how will Ugandan businessmen benefit from this windfall.

This discussion is going on in backrooms and not in the public space despite its benefits beginning to accrue well before real production begins and long after it stops.

Already we are seeing how it is a real issue with the building of the billion dollar Karuma Dam and the smaller Isimba dam. The contractors on this sites have pointedly ignored local producers of steel, cement and other inputs arguing that they are of inferior quality are not in adequate supply or don’t meet one requirement or another.

As a result manufacturers who had tooled their factories to take advantage of this new construction boom are operating well below capacity, with the excess capacity going begging, aggravated even more by the current economic slowdown.

Like the construction of the two dams, it is important to realise that exploitation of our oil find will continue with or without our input. The companies involved have already committed hundreds of millions of dollars to get this point and you better believe it that they have well laid out plans for every possible contingency including lack of local supplies.

If need be they will import their toothpicks, firewood and even toilet paper if we are not ready.

Speaking to various providers of local content it is clear we are not ready at a policy level or local capacity level and time is running out.

"Take for instance the job sector. It is estimated variously that the oil companies will be employing as many as 15,000 in fields varying from welders, electricians, plumbers and truck drivers. But outside the oil companies many more, in multiples of those hired directly, will be required...

We have a few thousand artisans of various types working in our local industries, doing business or just wandering the streets for lack of opportunity, so the industry will very handily absorb all this slack?

Think again.

According to Patrick Mbonye, founder of human resource consultants Q-Sourcing, the industry will not be hiring any one off the street and will definitely be hiring the graduates of our various vocational institutes.

“There demands are very specific. One needs to have internationally recognised certification to have a chance of working in the industry, first because they want to be sure your skills are up to their requirements and secondly, for their own regulation issues, “he explained.

For instance, in the second instance, to match safety regulations they need to insure the workers but the insurance firms will not insure unqualified people.

Mbonye’s firm The Assessment and Skilling Center (TASC), which is affiliated to several international certification bodies, has done some assessment of some of graduates of a vocational institutes and the results have been dire.

“Our people don’t have the skills required. Period.” He says. “They have done a lot of theory but cannot apply it.”. He warns that by the last quarter of next year, 2017, when actual work will begin, hundreds – he estimates at least 3000 artisanal workers will be needed, of artisans from around the world will be making their way here, taking our bread from under our very noses....

Mbonye says it is not a lost cause yet but time is of the essence, as taking the best of our current crop of workers and raising their skill level will take at least a year.

A disdain for vocational training  means that gaining certification may seem a pricey affair, TASC’s cheapest certifiable course costs $1,400 for a five-week basic electrical installation course by the City & Guilds, the UK based global leader in skills development.

His is one of only two organisations in Uganda that offers this certification – the other is Kinyara Sugar Works.

Maybe we should be content with the anticipated hundreds of millions government will collect in revenues and not try to be too clever and try getting prepared at an individual level for the oil but that will be stupid at best and criminal at worst.

INTERVIEW -- WAPAKHABULO IS REARING TO GO AT UGANDA OIL COMPANY

Josephine Wapakhabulo was last month appointed the Chief Executive Officer of the Uganda National Oil Company (UNOC). Dr Wapakabulo sat down with Business Vision’s Paul Busharizi to discuss her company’s role, her plans and the prospects for oil in Uganda, below are the excerpts of the interview.

1.       What prompted you to apply for the job?

a.       The first thing was a strong interest in the sector. Whilst studying for my PhD I looked at the adoption of data-exchange standards and knowledge management technologies in the oil, gas and defence sectors and since then I have always had interest in that area. One of things I also enjoy is setting things up, all my jobs at Rolls Royce plc were new roles where I had to set entities up and set the standards. A combination of the sector, being able to set something up and more importantly a chance to come home and make a contribution, those I would say are the three main reasons why I applied for this job.

2.       Have you had prior experience in the industry?

a.       Yes, I did my PhD in a consultancy called the LSC Group which specialises in the defence and energy sectors. I was working on oil & gas and defence projects.

3.       So what is UNOC and what do you see your responsibility as?

a.       The Uganda National Oil Company Limited (UNOC) was established by Article 42 ofthe Petroleum (Exploration, Development and Production) Act 2013 and incorporated under the Company’s Act 2012. It is a fully registered limited liability company wholly owned by the Government of Uganda. The overall function of UNOC is to handle the State’s Commercial interests in the Oil & Gas industry and ensure that the resource is exploited in a sustainable manner. The way that works very specifically in relation to recent events, is that the Ministry of Energy and Mineral Development has issued production licenses to the three companies – Tullow, TOTAL and CNOOC. Now UNOC will come into an operating agreement with the three companies to manage the government’s 15 percent stake. So the production license was a big milestone, the next big milestone is getting that operating agreement so that we can work together towards first oil. UNOC also has a key role in the refinery and pipeline activity and we are looking into additional commercial opportunities. It is an exciting time for Uganda in this sector and as CEO of UNOC I believe our main responsibility is ensuring maximum return for our shareholders, the Ministry of Energy and Mineral Development (51%) and the Ministry of Finance and Economic Development (49%), and ultimately the people of Uganda. 

4.       So what will be your priority over the next five years?

a.       The priority now developing our strategic plan and getting to first oil, production licenses have been issued and we have willing International Oil Companies working with us. So for me that is the immediate priority and in conjunction with that is the refinery and the pipeline activity, and also equally important over the next five years is local content development and ensuring we are developing local capacity, local skills and local suppliers. Those for me would be the main areas we need to focus on over the next five years.

5.       What challenges do you forsee?

a.       The promise of the oil & gas sector always has to be tempered with the uncertainties of the global economy and the fluctuating price of oil, and these are factors we must always be cognisant of. Where I forsee more challenge is on two levels, firstly, ensuring we build confidence with the public and with our partners that all the activities driven by UNOC will be transparent, well governed and at world class standard and we meet their expectations. The second challenge is in relation to how we handle the revenue we receive from the sector, which is currently estimated at $1.5billion a year. We must learn the lessons from other countries and not spend our revenues before we start earning them, ensure we save a portion of that revenue and most importantly spend the revenue on capital investment projects and not consumption.

6.       But UNOC will not be involved in spending the money?

a.       Part VIII of the Public Finance Management Act 2015 details the collection, deposit, management, investment, and expenditure of petroleum revenue and UNOC will have a role to play along with other government bodies. The important factor again will be transparency in the process and the investment decisions.

7.       What price do we need a barrel to be at for the industry to be viable?

a.       I have seen a 2015 World Bank study which showed that even at $50 a barrel we could be earning approximately $800m annually and if you go up to $90 you could be earning $1.2b. It is something we have to continually analyse.

8.       How can we ensure this has wider impact on Ugandan society?

a.       Industry estimates have put the figure of potential jobs created in the sector and beyond at between 100,000 and 150,000, very impressive numbers but a drop in the bucket of what we need to pull millions of people out of poverty. Therefore, what is critical will be spurring greater economic activity in the key fields of infrastructure, agricultural production and tourism development. Its potential lies not in availing the populace with cash handouts alleviating them from the need for hard work as some nations have mistakenly tried, but in its ability to provide the nation with a source of independent funding which if steered to the sectors representing Uganda’s' best potential will help spur the nation to the next level.

9.       How do you see the Oil & Gas sector fitting into our middle income nation ambitions?

a.       When you look at the middle income agenda I always say to people no one sector will take us there, every sector has to play its part. Having said that, the oil and gas sector will have a big part to play, and we therefore need to continue our domestic revenue mobilisation drive to complement the flow from oil and gas. We should not be excited by the flow of oil revenues and start to eliminate/abolish some taxes, reduce tax rates and subsidise some sectors like in some oil producing countries. We also need to ensure that we comply with our tax obligations to spur revenue growth and consequently meet the objectives on the National Development Plan II, Vision 2040 and our drive to middle income status.

10.   Other countries have failed spectacularly despite finding oil how should we guard against that?

a.       By learning as much as possible from the countries that have had these challenges and those that have done better. UNOC is not the first ever national oil company and thankfully many NOCs are willing to share experiences and our role will be to take these on board and apply them as quickly as possible. But as I previously stated, I believe the key will be our discipline in how we handle the oil revenues – ensuring we save some of the revenue, not mortgaging our future by borrowing against future earnings, and expenditure on capital investments not consumption.

11.   Are you concerned that there will be interference in your job that will prevent you from performing?

a.       Right now I am working with the Board to develop a very clear vision and strategy so we know where we are going and how we will achieve that vision. We plan to recruit, and once we have a solid team and the momentum has been set we should be fine. But I know we are not in a bubble, there will be external factors that influence things and we will deal with them as we go along. However, if I felt they were insurmountable I would not have put myself up for this job!

CLEARLY WE ARE NOT READY FOR OIL

You can’t have missed our honourable members machinations to have taxes on their allowances waived. MPs are hopping to save more than sh5m a month in taxes with this provision they muscled into the Income Tax bill.

These manoeuvers were necessitated – in our honourable members’ minds, by a February high court ruling for them to pay taxes on their allowances like all other workers of Uganda. They somehow weren’t paying since 2004.

"Following a public uproar about their self-serving ways they, last week threatened to hold all of us ransom by refusing to pass the budget if they were not accommodated. Not unlike the toddler throwing its toys out of the play pen in a tantrum...

I am not hopeful that we can stop our honourable members in their quest for tax free living.

However this kind of attitude does not bode well for the country’s future.

All around the world, when politics comes up against economic, politics wins and often to disastrous effect.

Last week Uganda made the decision to pass the oil pipeline through Tanzania and not through Kenya as was earlier expected, which brings us one step closer to oil production now, now expected for before 2020.

At peak production Uganda expects to be piping out 200,000 barrels a day. To put this number in perspective using $40 a barrel, our exports of goods will double from around $3b annually currently. 

Of course all these monies will not find themselves into the national coffers but our share of the price of a barrel, the taxation of oil companies and the revenues from supporting industries will amount to a very tidy sum.

"As incredible as it sounds, if our political leadership is not focussed on the long term benefits of this windfall and only see the short term gains they can milk from the situation, we will soon be worse off than when we had no oil...

Hard to believe?

Well, Ghana established commercial viability of their oil find in 2006 around the same time as we did. Their fields were off the coast so easier to evacuate the oil. In the excitement and driven by bad politics – an election was around the corner, the government leveraged future revenues to raise public service salaries by 50 percent in one fell swoop, in addition to other jumps in consumption spending.

A populist move that has cost them dearly, because now with the collapse of oil prices from highs of $140 a barrel in 2007 to around $40 now, Ghana finds itself looking to International Monetary Fund (IMF) for help in paying for its imports.

Across the pond in Venezuela, during the oil boom, the Latin American nation initiated many populist social programmes and even had time to thumb its nose at the US. Since then prices have plummeted and the country finds itself unable to sustain the programs, with inflation jumping to 500 percent. It has become so bad in fact that last week it was reported that the government is running out of money to print more money to keep up with inflation.

It would have been funny if you don’t think about the man in the street there.

In all these crisis you can bet there were politicians – like our own honourables, throwing caution to the wind, disregarding basic economics to plunder the treasury regardless of the plight of the country in general.

You can bet the representatives in Ghana and Venezuela are also hatching plans to increase their pay as you read this.

But the winner has to be neighbouring Equatorial Guinea. This little country has proven that it is not population size but political management that is key. With a population of about 760,000 they have the highest GDP per capita on the continent of about $20,000, however its populations is among the poorest on the continent with more than three in four  living on less than a dollar a day.

President Teodoro Obiang, his family and cronies have squirrelled away hundreds of millions of dollars in western banks (maybe why he is the longest serving president on the continent) and squandered it on high living. But you can bet there are politicians in the country who have been co-opted into the racket in total disregard of the people.

"Politicians all over the world are the same, they will always be on the lookout for personal gain, their baser instincts tempered only to the extent that strong institutions, societal censure or basic good manners prevails...

The correct thing to do is to invest these windfalls so the returns from the investment can pay for improvements in the wellbeing of the people.

Investments in social services, which improve the quality of the human capital, or building infrastructure, which reduces the cost of doing business are better than raising MPs salaries, which is not an investment but a price we have to bear to keep up appearances of a democracy and maybe more expensive than the bother.

A fly on the wall reveals that reeling from the public backlash MPS are now trying to extend the tax exemption to teachers, doctors and other public servants, so that there plan is not seen for what it is – a shameless grab for resources which, on close scrutiny,  they have no right to over the rest of us.

THE OIL PIPELINE:ITS ALL ABOUT THE OIL, OR IS IT?

Last week Uganda decided that the oil pipe line from the western oil fields will go south through Tanzania rather than through Kenya, as was earlier expected, a decision that served to open up old wounds and threatens to shift the region’s economic center of gravity.

The Kenyan route through Lokichar and onto Lamu, was discarded on account that it would be more costly to develop due to expensive land compensation claims, its passing through environmentally sensitive areas and the state of unpreparedness of the Lamu port, which was deemed too shallow and exposed to high tides, less than ideal conditions for oil tankers to operate in.

The route through Tanzania to Tanga port was shorter – though not by much 1500 km through Kenya as opposed to 1,410 km through Tanzania. This would be factor though as the waxy nature of Uganda’s oil which solidifies below 40 degrees centigrade necessitates heating plants every so many kilometres. In addition because all land belongs to the state in Tanzania compensation would be kept to a minimum and leases secured faster.

It also helps that Tanga port is already up and running unlike Lamu. This would mean Uganda’s first oil exports have a better chance of being realised before 2020 using the southern route.

"And it did not help that Kenya has not established commercial viability of their oil finds in the north...

This was important for both countries but more so for Uganda, because if Kenya didn’t have viable quantities to ship out Uganda would find itself carrying a disproportionate portion of the piping costs.

While Tanzania has no oil deposits of its own to share the pipeline there gas reserves are convenient as heating fuel for the length of the pipeline. In addition the development of infrastructure through southern Uganda as a plus given the unexploited iron ore deposits in the region.

Of course Kenyan officialdom and the business community were left unamused at the latest development. Some commentators went as far as to accuse Uganda of playing off its neighbours against each other, sticking it to Kenya over some unresolved and unclear past slights and threatening to jeopardise the joint multi-billion dollar Standard Gauge Railway(SGR) project.

The Mombasa to Nairobi leg of the SGR is already underway and will cost about $5b while the $8b has been earmarked for the Malaba-Kampala leg.

The economics of the project were lost in the hysterics.

It is understandable that Kenya Inc should be concerned.

"Fashioned as a colony the British never saw themselves ever leaving, like South Africa or Zimbabwe, the other territories around it were fashioned to feed into Kenya’s industries, leading to its regional economic dominance, a situation that persists to date...

However with Uganda’s economy finding its feet over the last three decades and Tanzania’s embarrassing wealth in natural resources – natural gas, gold and other minerals, means Kenya is increasingly having to see itself as first among equals rather than the 800 pound gorilla straddling the region.

Channelling Uganda’s oil, the fourth largest reserves in sub-Saharan Africa, through Tanzania threaten to redress historical regional economic imbalances. Uganda’s reserves are estimated at 6.5 billion barrels of which about 1.5 billion are recoverable.

It is not unreasonable to believe too that the accompanying improvements in infrastructure along the pipeline will make the much neglected Tanzanian route to the sea more attractive for Ugandan, Rwandan and Congolese commerce, a worrying situation for Kenyan transport interests.

And finally with tensions in South Sudan beginning to ease off -- rebel leader Riak Machar was sworn in as Salva Kiir’s  vice-president, the issue of an oil pipe line to the coast will be revived, only this time there will be an alternative through Tanzania to the Kenyan route.

"It is safe to say that when history is written the events around the evacuation of Ugandan oil to the sea will be seen as an inflection point in the region’s geopolitical alignment...

It is not only about the oil, but then again it is.

OIL PIPELINE: UGANDA AT CENTER OF HIGH STAKES GAME

Uganda finds itself playing the coy bride in a high stakes competition as neighbours Kenya and Tanzania court it for the right to pipe its oil to the Indian Ocean.

Last week Dar es Salaam announced that they were intent on fast tracking development of an oil pipeline from Uganda to the seaside port of Tanga and that French oil firm, Total had already earmarked $4b for the project.

In October Uganda and Tanzania announced that they were exploring the viability of a joint pipeline barely weeks after an August announcement by Kampala and Nairobi on the same subject.

An oil pipeline through Kenya via its northern oil fields would tie in nicely with the much touted LAPSSET (Lamu Port South Sudan Ethiopia Transport), a $20b project aimed at developing Lamu port, an oil pipeline from South Sudan, a road network and coal powered electricity.

Total however expressed disquiet about passing the pipeline through northern Kenya and onto Lamu for fear of terrorist attacks from neighbouring Somalia.

Total, CNOOC (China National Offshore oil Corporation) and London-listed Tullow Oil are partners in the development of the oil reserves in western Uganda.

Uganda’s reserves were upgraded to 6.5 billion barrels last year. Development has stalled as government and the oil companies negotiate production licenses, which the energy ministry had promised would have been issued by the end of last year.

"Last year Uganda laid down its conditions for Kenya to meet before it could put pen to paper – Kenya had to meet the cost of a risk guarantee on the project, pay for any cost overruns, offer affordable tariffs for use of the pipeline and, what is considered a potential deal breaker, that its eastern neighbour establish commercial viability of its oil reserves...

Kenya’s reserves are currently estimated at 600 million barrels, however commercial viability has not yet been established.

Commercial and geopolitical reasons are pushing the latest thinking and in light of cratering oil prices time is of the essence for Uganda to reignite the momentum in the development of its oil resource, experts say.

Oil explorer Tullow needs the pipeline to pass through the oil fields of Lokichar near Lake Turkana, where it is also the lead explorer, to make the fields even more attractive to potential investors.

Oil explorers, often smaller operators than the oil majors, make their money by finding commercially viable oil fields and on selling them to the bigger oil companies. Accessibility of the fields is a major determinant in the final price they can get from a buyer. In land fields are invariably more attractive if the oil can be evacuated easily for export, hence the need for the pipeline.

Total, who is championing the southern pipeline, is not only averse to bypassing the highly insecure eastern Kenya but also sees the Tanzania as more cost effective.

Last year Uganda’s southern neighbour discovered more natural gas boosting their known reserves to 55 trillion cubic feet and is working on a pipeline to transport the gas from its southern astern shores to Dar es Salaam.

This find is key because of the nature of the Ugandan oil, which is waxy and solidifies under 40 degrees centigrade. As a result a pipeline to ferry the oil will need to be heated regularly along the length of the pipeline. Experts estimate that there will be a need for a two megawatt power station every 20 kilometers on the pipeline.

Total’s planners think that gas powered power stations would be more effective as along the northern line the extra infrastructure to get power to the heating stations would be an added cost they do not need in this time of historically low oil prices.

"US oil futures bottomed at $26 a barrel in February for deliveries in May. A brief rally last year saw the same prices peak at $60 a barrel, a far cry from the peaks in July 2007 of $140, around the time that commercial viability of the Ugandan fields was established....

In addition the Hoim-Tanga port route is shorter than the Hoima-Lokichar-Lamu route by about 150 km, which has obvious cost implications.

Uganda seen to be dragging its feet on the issue of developing its reserves by industry players, is determined to extract the maximum value for its oil that it can when it still can negotiate.

Kampala has been holding out for more recovery from its estimated reserves. All the 6.5 billion barrel reserve cannot be recovered mostly due to technology limitations. The proportion of the reserves that can be recovered is often a sticking point. If the anticipated recovery is too low the country can miss out on revenues and if it is too high it would affect the affordability of the project.

Negotiations have brought the figure up to about 30 percent from a low of as little as 10 percent.

In addition Uganda also made it a condition that the first call on the oil would be to the planned $2.5b oil refinery. The oil companies’ preference was to pipe all the crude oil out of the country and impasse that was only broken in 2013.

"The refinery which will initially handle 20,000 barrels day building up to 60,000 barrels daily is expected to spawn oil related industries in plastics, fertilisers, pharmaceuticals and other oil based derivatives like Heavy Fuel Oil used in power plants and bitumen, used for paving roads....

In addition the huge iron ore deposits established in the Kigezi region, of southern Uganda last year make a possible tie in with the infrastructure development – transport and energy infrastructure, surrounding the pipeline good economic sense.

In June the energy ministry announced that following surveys of the area that at least 200 million tonnes of iron ore worth about $16b had been verified. To optimally exploit these resources billions of dollars in investments in power generation, road and rail transport will be required in coming years.

Government planners also the development of the southern pipeline as a means to break decades long over reliance on Kenya for its access to the sea. This dependence means that more than 80 percent of Uganda’s external trade is funnelled through Mombasa currently. Historically disturbances in Kenya, most recently during the post-election violence in 2007, have left Uganda particularly vulnerable, triggering fuel shortages, trade blockages and subsequent price hikes.

"A fringe element also thinks by passing the pipeline through northern Kenya, making the LAPSSET economics more attractive, would shift South Sudan’s interest away from Uganda. Before the civil war broke out at the end of 2013 trade with our northern neighbour racked in more than a $100m a month, which has fallen drastically since but is expected to resume when things settle down in the troubled nation...

Tanzania of course is glad to have such a project passing through, making the planned Tanga port more viable and may even shift business away from Mombasa, especially from Rwanda, Burundi and the Democratic Republic of Congo.

Kenyan officials will be in Uganda in a fortnight’s time to address Kampala’s concerns about the pipeline and one can expect John Magufuli’s government will be casting a wary eye on developments then.

OIL PRICE DROP, A SIGN OF WORLD CHANGE

Last week the price of oil fell to its lowest in five years. By the time of writing US oil had fallen to $62.21 a barrel. In June it peaked at $107.64. Each barrel contains 159 liters.

This dramatic collapse has come despite disruption to production in Libya and Iraq, sanctions on Russia and disturbances in Syria affecting supply routes.

Traditionally oil prices rally heading into the northern hemisphere's winter season but for the first time since 2008, the year the global financial crisis exploded, this year is the first time that oil prices have fallen in the lead up to Christmas.

According to the economist four factors explain the downward dip in oil prices. 

One, economic activity in the the developed north is still low, as they try to shake off the hangover from the global financial crisis of the last decade so demand for oil similarly low. 

 

Secondly, despite trouble in Iraq and Libya which account for a combined four million barrels a day, they have held production steady. 

 

In the last year the US has become the world's biggest producer of oil with its advances in extracting l from l bearing rocks. While it doesn't export any it has reduced its import volumes creating more supply on world markets. 

 

And finally last week the Organisation of oil producing and exporting countries (OPEC) voted not to curb production, which would have pushed prices up.

"The biggest winners will be countries with huge oil import bills. It has been reported that China is taking advantage of the situation to beef up its reserves.

The biggest losers are. The oil exporting countries that rely heavily on oil to support their budgets...

In this respect is Russia and Iran, which are already staggering under international sanctions, Iran for instance needs oil to be at at least $130 a barrel to balance its budget.

For Uganda its a double edged sword. Our oil imports account for about $2b (shs5.4trillion) annually and this would do wonders for us if our oil bill fell by 40% in line with world oil prices.

On the other hand this new development may force a rethink by investors looking to invest in our oil industry. Already the cost of extracting our oil which is waxy and needs a lot of heating to keep it fluid during transportation, makes it expensive to produce. And that is without factoring in the more than 1500 km from our oil fields in western Uganda to the coast.

Big commitments in exploration and other preparatory work means plugging the wells and leaving is not an immediate option but a wait-and-see approach may slow down investment in the industry.

Thankfully the revenues from oil have not been factored into our budgets yet, but a huge infrastructural developments we are planning like power dams and overinflated standard gauge railway line were pegged to an eventual production of oil within the next five years.

Industry players are not being forthcoming with possible changes to their projections or how badly oil price fall affects our prospects but it would only be common sense to put the brakes on our grand designs for the moment.

On the global scene with the US more confident about its oil supplies what will that mean for their determined presence in the Middle East? The Middle East assumed new importance with the fall of the Shah of Iran in 1979. Within weeks of his overthrow oil prices jumped to $17 a barrel (the good old days) an almost doubling from about $10 at the start of the Arab oil crisis in 1974.

With the loss of a major ally in the Shah the US has not been averse to intervening in the Middle East to ensure the continued supply of oil.

Beyond just unhampered supply is the fact that the US dollar is backed by oil. All oil contracts are denominated in dollars, so if oil reserves fall in the wrong hands the US economy would be in mortal danger.

The conspiracy theorists suggest that this fall in oil prices is a deliberate effort, beyond the fundamentals outlined above, to bring Russia to its heels. Last week's refusal by a Saudi Arabia to cut exports was their final confirmation.

A shift in world geopolitics is happening before our eyes which could see tensions flare up in the Middle East as long held grudges, suppressed by US backing of unpopular regimes, bubble to the surface as America's interest in the region wanes.

For Uganda its not inconceivable that we might have to wait a little longer for our own oil production to start.