Experts call for caution on oil investments

By David Mugabe

Financial experts have cautioned the Government and players in Uganda’s oil and gas sector to exercise prudence in spending on the project amidst the falling oil prices.

Ade Adeola, the Standard Chartered Bank managing director for energy and chemicals, said some level of stability among the players is needed because the cost of development has to be competitive by global standards.

“If you are going to build a giant pipeline, the market may not allow; so you build a small one. It requires more prudence, pragmatism. In Saudi Arabia, the cost of production is quite low, so you in competing with Saudi, you need to make sure your costs are low,” noted Adeola.

Oil prices have dropped by almost 50% in the recent past.

Central Bank governor Tumusiime Mutebile recently said the uncertainty surrounding oil prices does not mean that oil companies will not invest in Uganda’s oil industry, but instead they will be more cautious about committing resources to irreversible capital projects.

“It is likely, therefore, that the pace of capital investment in oil production and the associated infrastructure will be slower than it was prior to the fall in global oil price,” said Mutebile during a recent dialogue on the impact of oil price volatility on the economy.

Adeola, who spoke during the first Oil and Gas convention in Kampala last week, observed that the industry and the Government are reasonably aligned but one or two issues need to be resolved.

“For instance, if you don’t raise financing for the pipeline and you start drilling, how are you going to do it? Coordination is key, you need to start having all this working. We think it is bankable but it requires the full commercial understanding of everybody,” noted Adeola in an interview.

Critical to this process, Adeola said, is that all stakeholders are aligned and working towards the same object.

“Time is of the essence, the sooner the revenue starts to flow, the better. Over the last 12 months, a lot of issues have been resolved, it is getting better but it has become slow for over five years,” noted Adeola.

Rob Tims, Standard Chartered’s managing director for oil and gas corporate finance, noted that there is more positive momentum currently.

The next 18 months are key in time with the financial investment decision where you start to see the whole lifting of the whole economy.

On the local content issue, Adeola said it is critical that expectations are managed because the oil industry is not a big employer.

“It could create maybe 15,000 jobs, but the biggest benefit is the multiplier effect that feeds into the local economy,” he noted.

Adeola said as much as 80% of profits in the industry are payable as tax which can be used for roads infrastructure and other public investments.

“It is very important when you look at the indirect benefits as well. People will benefit from engineering training which will also be used for building bridges. The direct benefit is estimated at $50b over the lifetime of the project, but the most important is the indirect-education, gas for power generation and all in the entire value system,” noted Adeola.

Standard Chartered led the financing of the Jubilee offshore oil field in Ghana.

But Uganda’s project is considered a complex one because the country is landlocked and will require large multi-lateral investment involving many institutions like the World Bank and other private lenders.

“Investors and banks invest in projects that have better cash-flow. Your cost of finance goes up with the complexity of the project,” noted Adeola warning that delays mean the country pays more interest.

“The impression we get is a willingness to make things work and to make sure that the entire development succeeds for investors, government and local content, getting a working and realistic balance in expectations and being able to move forward,” he added.

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