Local firms face uphill task to win oil contracts
Aerial view of oil activities in Buliisa
Detailed plans of which opportunities Ugandan businesses can exploit in the oil and gas industry are being unveiled.
Last week, COOEC, the Chinese firm that undertook the Front End Engineering Design for the Kingfisher field, operated by Cnooc, unveiled some of the plans and schedules that are needed before oil production can start.
Gulf Interstate Engineering from the USA, which undertook the Front End Engineering Design for the East African crude oil pipeline, also released its plans.
And over the last two days, the association of the Uganda Chamber of Mines and Petroleum, in conjunction with the ministry of Education and Sports under the patronage of the First Lady, Janet Museveni, held a skilling and local content forum, to offer companies tips on some of the standards that the oil and gas industry will be looking for.
With all these workshops, it is now clearer what amount of work is needed to get the oil flowing. The opportunities are vast. From offering transportation and security services, right down to supplying foodstuffs and fuel products, Ugandan businesses are spoilt for choice. Or so it seems.
The first stage of being considered for these oil contracts is easy; it requires you or your company to get into the National Suppliers Database, an initiative of the Petroleum Authority of Uganda. This process can be undertaken online from the comfort of your living room.
It is what happens after being listed on the database that requires one to haul themselves out of their comfortable sofas by the bootstraps. While the country has put in place laws and policies that ensure Ugandan companies are given priority while assigning who takes what contract in the petroleum industry, the failure to soften the other economic conditions is bound to see a lot more businesses locked out of the industry.
The obvious hurdle is the access to cheaper capital. Until Uganda finds a way of bringing down interest rates on loans from the dizzy heights of more than 20 per cent per annum, many businesses will find it hard to execute contracts. Even for its lucrative stature, few contracts have a return on investment of more than 20 per cent.
Uganda’s volatile foreign exchange market, where the Uganda shilling remains unstable against the dollar, makes it hard for businesses that need to import different materials. Tenders such as those in civil works usually require the importation of different materials, thereby disrupting the profit margins.
Getting the right standards for the oil and gas industry is something that Ugandan companies will have to grapple with. With the oil and gas industry fairly new to many in the country, Ugandan companies will find basic requirements such as sticking to time schedules a tall order.
Uganda’s oil industry is already behind schedule by government’s timetable; the government had expected to kick off an early oil production scheme by 2009. It is unlikely that there will be oil production by the current target of 2020.
Looking across the other sectors, local content remains a struggle. Take the electricity industry. Getting local cement and steel companies to supply materials to power projects such as Karuma and Isimba, both of which are being constructed by Chinese companies, has been tough.
The trouble has centred around price. For example, a tonne of steel from local firm Roofings Group is $100 (Shs 350,000) more expensive than that imported thousands of kilometers from China.
Local cement companies have had to use proxies to supply their products to one of the two power companies. Sensing that the situation was not sustainable, steel and cement companies have lobbied the president’s State House to rein in and give an executive order for companies to consider local goods.
As Uganda and the oil companies prepare to sign the Final Investment Decision for the crude oil pipeline in June this year, which will open the floodgates for the contracts to be won in the oil industry, expect some pushing and shoveling in who gets what.
Although there is some clarity on what constitutes a local company, the contest will be around price, standards, and what really defines fair competition.
High costs of production, low and inefficient skills to do the job, and the need to uphold the spirit of market liberalization could be something to watch out for in the months ahead. Don’t be surprised to see a couple of lawsuits from local companies, taking on the upstream oil firms over loss of contracts.
SOURCE: The Observer