Work to start on Uganda-Tanzania oil pipeline

By Amit Jain

It has been a long, slow road to project development since commercially viable oil reserves were first discovered in Uganda in 2006. But work on a 1443km pipeline from Ugandan oil field to the Tanzanian coast is finally set to begin later this year. French oil major 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 in western Uganda. Expectations are running high. This single oil and gas project is expected to bring US$15bn of investment to a land-locked east African republic whose current GDP is US$38bn.

The government of Uganda and foreign oil firms have repeatedly sparred over revenue sharing, tax issues and the construction of a refinery. President Yoweri Museveni has insisted on promoting the use of local content in oil production. Oil companies must submit plans outlining how they will employ Ugandans, procure local goods and services and transfer technology. They can only use contractors registered on a state-managed national supplier database (NSD) and must give first consideration to goods and services produced in Uganda by Ugandan companies. So far, the database has 2,662 companies that are qualified and registered up from 513 in 2017 when it was established. At least 40% of the oil deals (estimated to account for almost US$1.2 bn) have been set aside for local firms. Some 16 categories of materials required have been ‘ring-fenced’ exclusively for local suppliers.

Tough negotiated terms have yielded results. During early exploration phase (2010 -2013), when regulations were still being drawn up, 28% of procurement was sourced locally. Ahead of the next phase of development Total and CNOOC have presented contracts worth nearly US$1.4bn to the regulator, of which US$167m will go directly to Ugandan companies. Others may benefit as subcontractors. Critics say foreign contractors are circumventing some of these requirements by registering their firms in Uganda. Local firms face a host of challenges - from high interest rates to stringent standards imposed by oil firms. According to a report by African Business last year during the exploration phase no Ugandan catering firm was able to meet the health, safety and quality requirements laid out by the oil giants. An Industrial Baseline Survey of 25 sectors in 2013, found that Ugandan companies were able to meet both quality and quantity standards in only two sectors - security and cement. In transport, for example, only 200 trucks in a fleet of 2,500 met the stipulations.

Years of delay between exploration and production have given local businesses time to learn about the industry and build capacity. A Kampala-based freight forwarding firm - Threeways Shipping, for example, claims to have used this time investing US$20m purchasing a fleet of brand-new trucks in preparation for work to begin on the oil project. A number of programmes have been put in place to build local business capacity to take advantage. This includes conferences and workshops as well as business incubators where local entrepreneurs learn how to bid for contracts and raise finance.

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. The benefits which are expected to accrue to the Ugandan economy as a result of the project and its linkages is expected to raise the Uganda GDP by a whopping 22% during the construction phase.  

According to the Petroleum Authority of Uganda (PAU) Ugandans have provided goods and services worth US$1 billion out of the total investment into the sector of US$3.7 billion as at the end of 2021. These services include human resources; construction; environmental and waste management services; broadcasting services; housing, hotel accommodation and office rental services; security services; ICT accessories and services; education management services; insurance; vehicle hire, tracking and maintenance; medical services and equipment; and legal advisory. The anticipated infrastructural improvements is expected to improve trade, and other economic activities.

Uganda is highly dependent on oil imports and thus vulnerable to price shocks. Most of it comes through Kenya over land. Striking of first oil is expected to reduce such dependence. Fuel prices shot up in 2020 when Kampala imposed a lockdown to contain the spread of Covid-19. A subsequent trucker protest resulted in petrol stations running out of fuel in many parts of the country.

Uganda ranks first in East Africa by measure of economic openness. In 2019 it recorded as much as US$14.3bn in FDI. Political stability and policy continuity over the past three decades have boosted Uganda's investment climate. However, fundamental logistical challenges inflate operating costs and erode profit margins. The government has committed itself to tackling deficiencies in the energy and transport network over the coming years. Work on the Lake Albert oil project starting with the pipeline is expected to bolster investor confidence.

 

References

Uganda Trade & Investment Risk Report Q1 2022, Fitch Solutions

‘Fuel crisis exposes country’s reserves gap’, Daily Monitor, 18 Jan 2022

‘Oil deals: Can Ugandans pocket petrodollars?’, Daily Monitor, 18 Jan 2022

‘Ugandan firms eye contracts as first oil approaches,’ African Business, 1 May 2021