Where will Money for Oil Infrastructure come from?

BY IBRAHIM KASITA

Uganda’s oil and gas industry is now fast moving from exploration to appraisal, development and production chain. Tullow and partners suggested that commercial production could start in two to three years.

“This timeline is technically feasible,” Eoin Mekie, the Tullow Uganda operations general manager, said. “It is possible within 12-24 months.” At the same time, the energy and mineral development minister Eng. Irene Muloni, disclosed that the investors have agreed to establish refinery to produce petroleum products.

“Consideration of export of crude will be made as more reserves are discovered,” she asserted. The expected result is more oil revenues going to the treasury, significant jobs created in the refinery project and birth of the petro-chemical industry. This is cause for optimism and good bargain for Uganda.

However, a huge amount of money will be required before even petrol, kerosene, diesel or heavy fuel is refined from Lake Albert Basin crude oil.

Infrastructure needed

For profitable oil production happen, there needs to be a network of pipelines connecting the various oil fields to the central processing facility. Such projects are expensive and take time to execute. Most critical is roads, not only connecting the oil fields from Amuru to Hoima but also to domestic and regional markets to export the refined products.

Daily oil production rates are planned at 10,000 barrels, according to Tullow. But to transport such volume requires 170 trucks of 20,000 litres each, according Francis Kamulegeya, an expert petroleum taxation. “At full production capacity of 120,000 barrels of oil per day will require 800 trucks moving daily on our roads,” he projects.

This underscores the capital intensiveness of the oil and gas industry. But absence of the needed infrastructure - roads, pipelines and railway - threaten to delay the anticipated production timeline even if the investors are willing to accept Uganda’s demand of early oil production.

“Investments need to be made now to enable Uganda monetise this (oil) valuable asset. In particular, infrastructure estimated at trillions of dollars will be required in the near and medium term,” Ann Aliker, the Stanbic Bank director and regional head of investment banking, noted.

Where will the money come from?

So the question to ask is where will Uganda get the trillion dollars to finance the infrastructure necessary for oil/gas production in three-five years?  The answer is the capital markets because they provide long term funding for infrastructure projects like roads, railways, hospitals, pipelines and refineries.

“Debt capital market issuances such as infrastructure bonds attract institutional investors, pension funds, commercial banks, specialist funds, hedge funds that have longterm funds available for investments,” Aliker explained. Indeed, infrastructure bonds are long term in nature and fund public utilities such as roads, power and energy projects.

They provide longer tenor funding and there is progress in issuance of 25 and 30-year bonds in East Africa. The price is cheaper owing to tax incentives associated with bonds.

Many infrastructure bonds carry tax incentives such as exemption on corporate and withholding tax, making them an attractive investment for domestic and international investors, The cash can be drawn in tranches to reduce cost of inefficiencies. They also provide tailor-made structures to different investors.

And the energy ministry wants international oil companies to list on the Uganda Securities Exchange (USE), which if well implemented, will encourage savings and capital formation because the growth of capital is essential in achieving economic growth.

If they list, they will accelerate private capital into Uganda thus creating opportunities for the country. Tullow planned listing will provide the much needed capital and afford many Ugandans the opportunity to own a part of the oil wealth. As investment in oil industries rises, there will be further development of capital markets.

It will also aid needed and heavy investment in agriculture, infrastructure, communications, healthcare and education, among other baseline investments. Ensure stability In order to attract capital investments, there is a need for political stability. Reckless remarks should be avoided.

Investors need predictable and certain market. Yes, oil is there but before we benefit from it we need to invest first in the required infrastructure. The oil debate should be directed towards establishing development plans, and sourcing finances. It also calls for harmonised debates so that investors don’t panic because oil is capital and risky venture.

“I tell people that each level of the industry requires huge investments,” Fred Kabagambe-Kaliisa, the permanent secretary in the energy ministry, said. International oil companies have invested more than $1b in exploration alone. And with the sector moving from exploration to appraisal, development and production, the sector will need about $10b investment.

But with prevailing global economic conditions, how do we attract investors? The only way is to ensure macroeconomic and political stability. We must be careful about policy reversals because Uganda opted for private sector-led economy.

“The oil debates must be wellinformed and knowledgeable keeping in mind that investors are sensitive to remarks they perceive threatening their investments,” Muloni says.