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Costly licenses eliminate local firms

East Africa’s private sector is not yet strong enough to join the bidding for oil exploration and production licences.

Ugandans are being encouraged to enter into joint ventures with international oil and gas contractors but it is unlikely they can afford that level of investment.

Ugandans are being encouraged to enter into joint ventures with international oil and gas contractors but the level of investment required is very high.

East Africa is fast becoming the preferred destination for international oil and gas companies following impressive discoveries across the region.

Eager to cash in on this bonanza, East African governments are licensing more blocks to attract more companies and ultimately ‘de-risk’ as much territory as possible.

Tanzania, buoyed by the so-called world class discoveries of natural gas, has plunged straight in, launching its fourth competitive licensing round at the end of last year, in which eight exploration blocks are up for grabs.  The country has already captured the interest of some of the world’s biggest oil and gas companies and will be looking to sustain this trend in this bidding round which will go well into the first half of 2014.

Uganda and Kenya too are planning licensing rounds possibly in the coming year.

Costly

Yet despite pleas for preferential treatment from local business communities across East Africa, it appears that the status quo-of international oil companies dominating the region’s oil and gas sector-will remain, at least for now.

Not many locally-grown companies can afford to participate, even in the preliminaries, of such a bidding process.

In Tanzania, a company will need at least US$ 750,000 to purchase the mandatory Bid Round Data Package (BRDP) for the offshore blocks that contains the requisite information for one to place an informed bid. Other more sophisticated data packages are going for as much as US$ 3.375 million.

It is impossible to place a bid without these data packages, which give scientific data enabling bidders to assess the chances of a block containing oil or gas. There are strict confidentiality rules attached to the purchase of this information, ruling out the possibility of different local companies sharing the information.

In Kenya, any oil company intending to acquire an oil exploration licence will have to present audited accounts showing a minimum cash balance of at least one hundred million dollars.

Successful bidders must also pay a signature bonus fee of one million dollars, and spend at least half a million dollars on “Community Development Projects” in the country every year.

Kenya’s Commissioner for Petroleum Energy, Martin Mwaisakenyi Heya,told Oil in Uganda that the steep requirements are meant to discourage smaller oil companies from entering the oil and gas sector.

“We are no longer a frontier country. We want companies with money,” he said, adding, “We have had a lot of challenges with small companies [failing] to execute their work programme.”

Mr. Heya’s comments show that complaints from local businesses that East African governments only care about foreign investors may be valid, but then again, who really wants a cash-strapped investor?

Uganda itself has had a share of risk taking ‘wildcatters’ , more interested in trading blocks to the highest bidder for a handsome profit, than executing the agreed work programmes.

Starting with the Uganda Works and General Engineering Company in 1995, whose contract was cancelled a year later because they failed to meet their work obligation, government has had to deal with Heritage Oil and Gas, Hardman Petroleum, Energy Africa, Alpha Oil, Dominion, Ophir Energy and Octant Energy in the last eighteen years—yet the oil remains in the ground.

None of these companies showed much interest in developing Uganda’s petroleum resources. Heritage made hundreds of millions of dollars in profit when it sold its rights to Tullow in 2012.

Tullow on the other hand, despite its relatively modest wallet, has managed to move the industry ahead, attracting international major Total, as well as CNOOC, which is the proud owner of Uganda’s first ever production license to develop its Kingfisher assets.

Enter the National Oil Companies

The only local company which may have the ‘opportunity’ to participate directly in Uganda’s oil and gas exploration will be the state-owned National Oil Company. This will be entitled to a 15 percent ‘carried interest’ in the country’s oil and gas assets.

This does not mean that the government will buy into the industry by handing over cash. Rather, the companies will cover the National Oil Company’s share of investment, and the government will repay this when oil starts flowing.

Kenya already has a National Oil Company, which has cut its teeth in the midstream and downstream sectors by operating the Mombasa refinery and a string of petrol stations, but exploration and development work will be a totally new area to them.

Tanzanians have made it clear that they will not give any preferential treatment to indigenous private companies, arguing that the interests of Tanzanians are taken care of by the Tanzania Petroleum Development Corporation (TPDC).

“We as Tanzanians get the (international oil) company, when they make the discovery, they go to the production stage. They take 25 percent, we take 75 percent of the profits; or they take 35 percent and we take 65 percent. The 65 % is being held by TPDC in trust, on behalf of all Tanzanians,” said President Kikwete at the launch of the licensing round last year.

Indigenous companies may be keen to claim a chunk of the region’s oil and gas industry, but for the meantime, they may only afford to participate in the service industry which has cheaper entry requirements.

Report by Musiime Chris 

editor@oilinuganda.org