Benefits of Ugandan oil are beyond the price today

Feb 22, 2015

THE Revenue Management is only one component as addressed in the proposed Public Finance Bill. We could discuss this another day. Even if we limited the benefits of oil and gas to sales revenues

By Mugizi Herbert Magyezi

 

I read an article titled “Should Ugandans wait for the oil dream?” by Diana Taremwa in the New Vision Publication of Monday 16th February 2015.

 

The writer makes some references to borrowings made by Uganda to undertake major infrastructural developments such as roads and power projects and in her opinion these have been borrowed on the understanding that future revenues from oil will service these loans.

 

I’m no expert in the area of international borrowing and the security or assurances that nations give when borrowing such loans. However my imagination would be that these projects as standalones are self-sustaining and would be able to pay back that money directly or indirectly through increased productivity and revenues an example being the planned refinery that is supposed to be premised on the principles of business funded through a Public Private Partnership. (It’s payback period is in the region of 3-5 years).

 

Let me now address myself to the key issue raised regarding the current international crude Oil price eroding the benefits of oil that Ugandans are expecting.

 

Firstly the stated figure of 6.5 billion barrels referred to as reserves are not reserves but rather resources in place and the reserves are currently estimated at about 1.2 to 1.5 billion Stock Tank Barrels(STB) of Oil. But this is a trivial issue though worth correcting and setting the record clear.

 

Secondly the writer seems to insinuate that the benefits from oil are only through revenues accruing from the sale and of crude oil or gas which is not correct since the oil industry brings many other benefits (we briefly discuss them later in this article) on top of this revenue.

 

The Revenue Management is only one component as addressed in the proposed Public Finance Bill. We could discuss this another day. Even if we limited the benefits of oil and gas to sales revenues, the price of oil today wouldn’t be a determinant in the projected revenues for the following reasons;

 

Uganda uses the fiscal regime known as Production Sharing Agreement/Contract (PSA/PSC) just like many other developing countries and in these agreements there is usually a pricing mechanism stipulated (I believe Uganda’s PSAs are no exception).

 

In this mechanism, the price is usually considered as an average/opening price of one of the Internationally Traded crude oils for the month in which production occurs (note that Gas is priced differently). It is against this price that net backing and quality differentials are made in reference to the selected internationally traded crude such as the North Sea Brent or West Texas Intermediate or UAE Dubai Crude.

 

And it is public knowledge that Uganda is not yet producing oil/gas but expected to in about 2-3 years’ time. This therefore means that the price of oil at the time will determine the revenues collected from the sale. Like the say if one could predict the price of crude oil tomorrow with 100% certainty then he/she would probably be the richest person.

 

However one thing for sure is that the prices are like a wave moving up and down due to a number of reasons such as demand, supply, wars etc. Therefore, for the time that Uganda will be producing oil and gas (30 -50 years) we can only be sure of one thing being that we shall HAVE to experience the low and the highs.

 

The challenge with the current oil price is that oil companies may have more challenges in taking Final Investment Decisions (FID) and accessing financing though this means that they have got to cut down on expenditure through optimized operations and this is an advantage for a PSA regime(we shall discuss this another day).

 

The benefits of the oil industry extend to creation of employment by the oil companies and service providers, supplies of goods and services by Ugandan companies, increased Foreign Direct Investment, training of Ugandans in the sector and these could work in Uganda or out of Uganda, improved infrastructure (some roads have already been upgraded), reduced expenditure on white products importation and raw materials for plastics industry, growth of a petrochemical industry etc.

 

In conclusion, I think the oil industry still presents enormous potential and benefits for the citizens of Uganda though it shouldn’t be looked at(by government as well as the citizenry) as the magic bullet to all the challenges that Uganda is facing as this  can be a recipe for the Dutch disease. All sectors of the economy must continue to work towards the development of Uganda.

 

Therefore to answer the writer, in my opinion, we don’t need to hype the oil industry but rather support it and remain optimistic that it will give the economy much more mileage in a shorter time than if it wasn’t discovered.

 

Writer is a Petroleum Reservoir Engineer

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