Taxes a bigger problem than poor infrastructure-Total Boss
François Rafin is the new General Manager at Total E&P Uganda. He has worked for Total for over 35 years. Oil in Uganda spoke to him about his posting to Uganda and his plans to see first oil during his tenure.
Oil in Uganda: What experience do you bring to Total E&P?
François Rafin: Actually my role is to bring first oil. Total has done a lot of things from exploration in the Albertine Graben region to discovering nine oil fields in Buliisa District, North of Lake Albert.
We have brought in new technology in the industry and drilled the first horizontal well in Uganda, actually I should say in East Africa. We have also introduced the first 3D cable-less seismic technology onshore in Africa.
But now we need to develop the industry. We have submitted applications for production licenses to the Ministry of Energy whom we work closely with. They will comment on our Field Development Plans and ensure their optimisation and after that process, we hope to have production licenses to start developing the fields.
So when do you hope to have the production licenses?
We hope it will be soon, but that is not the only traffic light we need to turn green. We also need to have the authorisation to construct an export pipeline to Mombasa which is the cheapest and most secure route to export the oil and to secure the revenues for the country.
We further need to cut our production costs on the barrels we will produce in the future because crude oil is now at $80. We need to bring the cost down so that we stay competitive in an environment where the oil price is low. This may take time. That is why we need to have an agreement with the government to use advanced technology from the beginning of the production and also to simplify the project so that it is more feasible at a lower cost.
We need to have all these in place so that the investment can take place. So it is not only the production licenses that we need.
When should we expect first oil?
Bringing first oil is business as usual and for the last twenty years, it has been my job with Total to bring first oil.
I did it in Russia, Nigeria, Yemen and Myanmar. I was also responsible for bringing first oil and gas in Thailand. I would say that it is a characteristic of Total. We are capable of resolving all the difficulties to bring first oil and I guess that is why President Museveni and the Government of Uganda chose us.
What will it take for Uganda to start producing oil?
It will take three steps to have oil. First we need to build on the oil discoveries and technical studies we have done to secure global agreements with our partners (CNOOC, Tullow), the Ministry of Energy and Mineral Development, Ministry of Finance and Economic Planning and also with the Government of Kenya for the crude oil pipeline.
We need to agree on the production licenses, the technology we will use, the number of wells we will drill, the pipeline and on the definition of the project.
Then we go to the second phase which is to engineer the development-the Front End Engineering Design (FEED).
We need to conduct this phase and call for bids from contractors and that’s when we will know what the actual cost of the project is because today, it is only estimates. With this, you will effectively know what your costs are and (understand) the condition under which you make what we call the Final Investment Decision.
Then we shall start civil works which will involve importing steel, machinery, drill wells, laying pipelines and electric lines. We will construct facilities like power plants. That will take about three years.
When you are finished with construction, you will have to test the equipment and that is called commissioning. You can then start production and gradually wrap up your production field by field to reach what we call the plateau. This is the peak of production.
That is the process that will take place. We need to agree on what the project will be, the time schedule and the tax conditions so that we take fundamental decisions.
It is like a pilot who asks for his flight plan from the control tower and once you have your flight plan, then you can go to the run way. The most difficult thing is not to fly but to know how to take off or know how to follow your flight plan and land safely.
Not at all, because if you try to do things which are big, you need to take your time and if you want it done in one afternoon then you will not achieve good results. Spending your time is part of the investment. When you speak of big investment, it is not only cash, it is work, it is dedication.
Do you see Uganda’s inadequate infrastructure slowing this process down?
You need infrastructure in place but it is not item one on the agenda. We have been able to drill, conduct seismic surveys, employ at peak 2000 people and also award contracts to Ugandan contractors to supply certain goods (despite the infrastructural challenges).
Yes, if you have more infrastructure, it will help the project to move faster and better, but as Total we do not request anybody to roll out the red carpet so that we have a nice walk. We have already brought drilling rigs to the site and that shows that nothing is impossible. Even without infrastructure, we shall still develop the project.
The problem actually is not the infrastructure, but tax on investment. The tax kills investments.
Today’s oil industry is caught in a kind of crunch where on one side the costs are always getting higher and higher. Machinery, steel, salaries, contracts; everything costs more and more globally.
Projects that you do today cost significantly more than the projects you would have launched three years ago or ten years ago and it is not by a small percentage.
At the same time, there are unexpected occurrences. It could be a fall in the oil price, minus 25 per cent in a few months. That bites into our revenues and our cash flows. And in the middle of all this, you have an abundance of oil.
Investing in oil requires adaptation which means that whereas there is large portfolio opportunities in the world to develop your oil fields, the investment will go where it is most welcomed and where it is most rewarding.
If you are imposing taxes on investments, it means it costs more to invest (in your country) and investing in the oil business is a very long process because you invest in exploration, development and production. It is a cycle of investment which will take about 8-10 years and it will take years for us to recover our costs.
If you overburden your investors with taxes like VAT and others, yet other countries don’t do that, you put yourself at a disadvantage.
Another issue is the facilitation of your day to day work or operations. If you work in an environment where everything is fast, everything is easy then you use less equipment, less personnel, less resources and your global costs will be lower. But if on the contrary the government is more demanding and you have more obligations whether or not they are legitimate, then the work will go on slowly. It is like when you are driving a car on the road, if the police checks your papers every 15 kilometres then you will spend more time on the road, pay more on the car rental and fuel. So for us it is a journey and whether is faster or slower, it makes an impact.
It is a matter of attractivity and I think everybody can understand that the country is in need of infrastructure and other industries right from the development stage but first you have to grow the cow before you get the milk otherwise it will not work.
Is this the feeling even amongst your partners?
The investment is a joint venture project and so it is a joint venture matter. That is why the mathematics are the same for everybody.
We will pay taxes when we (start to) produce. We shall pay the royalties and profit share of the oil we produce, pay the income tax and other taxes but it will be at a time when you have revenues. If you want to milk the cow before you feed it, then you are in problems.
Uganda has huge advantages over so many countries. It is stable, has excellent security and well educated qualified people. The local spirit is excellent since people want to work.
Uganda has everything (it needs) to be a champion of Africa, but then you need, as a champion, not to be overburdened by the weight of things you cannot carry into the future.
Total and the other joint venture partners want to be champions together with Uganda but you have to turn things to your advantage or else you will give your competitors a chance to overtake you.
So we absolutely need to develop the oil in the Albertine Graben because it is there, it is waiting and has been discovered. All we have to do now is to produce it. It will not be easy but it is very much possible because it is just a matter of doing what is necessary and what is feasible. Nothing is impossible and we feel that the President wants this project to succeed very much. He has mentioned his full support and we are fully aligned with government on the development of the fields and on the government’s project to have a refinery-which we support.
We will be a very loyal, dependable, committed investor and operator until we leave. We want to produce the oil quickly and maybe benefit from the low oil prices to have low construction and trading costs. The situation may turn in our favour but we have to be capable of grabbing the opportunity.
What role is Total playing in establishing an export pipeline to get the oil to market?
About Total’s role in preparation of the pipeline, it is something we will discuss again with our partners and the governments of the two countries. We have to determine the most effective pipeline design from our fields to Mombasa and then we all need to agree because the pipeline is for everybody: the oil companies, the governments and for the future because there maybe new discoveries.
In a nutshell, our role is to be a leader. We are the most experienced company especially in Africa and we also have some experience in East Africa (Tanzania and Kenya) because we have been there for the last sixty years and we know the market. We are probably the oldest and largest oil company in those countries. We employ 7000 people in Uganda both directly and indirectly through our network of filling stations and we have a little bit of an understanding of what it takes.
We bring our technology to share capability so that we transport this oil at the lowest cost possible.
The pipeline is complicated because it is long. It is 1400 kilometres long and has to be heated because if you leave the crude oil at normal temperature, it freezes and then you cannot pump it.
This pipeline has to be as simple and effective as possible so that it does not increase transport costs to the detriment of the government and the investors.
To achieve a low cost and high security for the pipeline and maintain the flow of the oil every day of the year, we have engineered the pipeline and found the best opportunity is to go to Mombasa.
It is the most beneficial arrangement for infrastructure we can enter with National Oil Companies and the governments. We want to conduct it as fundamentally a project run by us and the partners so that we can ensure minimum costs and ensure the earliest possible delivery schedule of the project because it is only when the pipeline is constructed that oil can flow from the fields.
Is the Kenyan government responsive to these plans for a pipeline through their territory?
Yes, very much. We have met with officials from the Kenyan government on many occasions and we discussed many discretions.
Kenya has the same issues as Uganda and has made discoveries in Turkana which are small compared to Uganda, but big for Kenya. It is team work that will help achieve the best out of the project and ensure that oil is transported safely at low tariffs and longer period of time.
How much will the pipeline project cost?
I will refrain from making announcements on the costs but let us wait for the bids because we are also eager to know the results.
What I can tell you is that it will be inexpensive and so the costs really have to be kept to the minimum to have a good, quality pipeline that can operate for decades without any problem or destruction.
The kind of project we are talking about here in terms of investments will be much more than the Bujagali dam (which cost approximately $900 million). It is the biggest project in the history of this country. It is the cost of many dams!
Total has proposed to government the use of polymer technology to enhance oil recovery during production. What is this technology about?
The polymer injection is used to sweep more oil out of the ground. Uganda’s oil is waxy and viscous which is a beautiful quality because when it reaches the refinery, it can give you lubricants which have high value.
The problem is that because it is viscous, it does not move freely in the ground. So to help recovering the oil, you have to inject water in the ground to push the oil out. But because there is a high difference in viscosity between water and oil, the water tends to break through and it leaves the oil behind. It is not very efficient.
If you use polymers, you will viscoucify the water. You make a kind of jelly and if you push something viscous with something viscous, it pushes it more gently and so over time you recover more oil and leave less oil behind.
So for us it is very important because we must try to recover the highest percentage of the oil. We need to take the maximum oil out of the ground and at the same time we need our wells to produce more and our investments to be associated with higher quantities of global recovery. If we can increase it by say one quarter, then it means we have one quarter more oil to flow through our well production centre to put in the pipeline. This means our cost per barrel is less.
We absolutely need this technology because there is a potential to increase oil recovery worldwide by 20-30 per cent. We propose to government to have the ambition from day one to start gradually injecting polymers, which is absolutely environmentally friendly, to recover more oil from day one and not after 10 or 20 years but immediately when production starts. That will make some change.
What is Total doing to promote agriculture in the Albertine region to avoid a labour shift to the oil industry?
Actually, we have many things in common with these farmers. As an oil company, we have almost the same activities as farmers. Like for instance, when you join a company in the oil business, we say ‘farm-in’.
If you go to France, it is the most cultivated country because of the climate and tradition. In Uganda, there are so many things in common (with France) like capability to cultivate the ground and be self-sufficient because you do not import food. That makes a big difference compared to so many other countries that have to import food and have issues with tax.
When we look at our relationship with the local communities, that is, our neighbours where we worked, where we work and where we shall work in the future, I think that they need to find benefit from our presence.
We have three (social) projects that we want to deliver first and after we shall do more.
One is to bring the solar lights to their doors. In the region of Buliisa, houses are not connected to electricity and whatever we do or whatever the government does, it will take some time to bring electricity to the households. So we are developing the distribution of solar lamps for all the houses to benefit from the lighting.
Secondly, it is the livelihoods and how to bring immediate gain to all these people who are essentially farmers and fishermen.
Of course in some locations, we employed a great number of people during the seismic campaign and we shall employ more when there is oil development but when you look at the need immediately to grow sustainable livelihoods, there is need to increase agricultural production.
Many people have very small plots of lands which they cultivate, actually they could cultivate a bigger plot but the problem is that they need to increase the produce. So we decided to help them increase the surface of the land which they cultivate with their families by providing small tractors for them so that they can increase their future production and also to plough deeper into the soil.
This we believe will give them an immediate gain. I have tasked our people to ship in the tractors and we shall then bring in people to teach them how to use them. This will be a medium to long term gain.
If you help people by kick-starting development, then later they can be able to stand by themselves. All that we can do as an oil company is help them by putting resources at their disposal and they will decide what to do with them.
Questions put by Beatrice Ongode