Does Uganda need an oil company?

 

Tindimubi Ow'ruhanga (not real name) is one of the highly respected petroleum scientists who confirmed commercial oil deposits in Uganda's Lake Albert basin at the border at the Congo border.

 

His ambition is to manage a national business entity that will do business on behalf of the Government to explore, produce and sell the crude oil not only in Uganda but also abroad.

Not only that. Ow'ruhanga expects to gain skills and the expertise needed to transform the venture into competitive and profitable international oil company.

 

This is why the Petroleum (Exploration, Development and Production) draft bill tabled in Parliament for debate, among other things, provides for the creation of a National Oil Company (NATOIL).

 

"NATOIL will take up government's commercial interest within licences (exploration and production licences)," Dozith Abeinomugisha, the petroleum exploration and production department senior geologist, explained.

 

"It is like any other oil company (and) may take up acreage (exploration and production) in Uganda or outside."

 

The proposed National Oil Company will be a state enterprise but will be established under normal company law subject to rules and practices applicable to commercial enterprises.

 

It will have no monopoly over petro­leum rights but will conduct petroleum operations on behalf of government, hold state participating interests in production sharing agreements and market govern­ment's share of oil and gas received in kind.

 

The main motivation is to build petro­leum commercial expertise answering Ow'ruhanga dreams of competitively managing a state company.

 

The International Monetary Fund (IMF) in its report: "Fiscal Arrangements for the Petroleum Sector 2008", said creating a national oil company was "not necessary" and may complicate the fiscal manage­ment of petroleum revenues. The authors of the report stated that the rationale for establishing national oil company needs to be carefully considered.

 

 If a national oil company is established, ac­cording to the IMF, then there needs to be necessary steps considered first so that the firm does not reduce the flow of oil revenues to the budget which would make the man­agement of oil revenues less transparent.

 

Global Witness, a US-based civil society, in its report: “Uganda’s Petroleum Legislation: Safeguarding the Sector 2012” expressed concern over the sources of financing the national oil company.

 

“There is no detail on where its funds and profits will be held and whether it will publicly disclose the receipts of payments or details of its financial management,” the report read.

 

“The law does not detail what information Parliament and the public will be able to access about its operation or precisely how it will be managed.”

 

Global Witness opines that creation of a national oil company is potentially a huge costly venture which risks diverting revenue away from government budgets and public services, not just in early years but well into the future.

 

However, the National Oil and Gas Policy for Uganda 2008, agrees that financing the national oil company may be difficult.

 

This is because in the initial period of pro­duction, most of the revenue will be financing cost recovery for companies that invested in the exploration and development phases. The policy proposes that government shall provide seed money to start the company and later consider floating shares.

 

“As more funds become available after recovery of the major investment costs by the oil companies, funding for national oil com­pany can be easily available from its share of participation,” it states.

 

Of course, the national oil company will not start from scratch. Under the current production sharing agreements, the national oil company has 15 to 20% interest in each exploration and production areas licenced to UK’s Tullow, France’s Total and China’s Na­tional Oil Offshore Corporation (CNOOC).

 

So if oil production in each licenced area starts, the state will participate either by having a nominee or a company to take its interest.

 

Establishing a national oil company means it will retain 15 to 20% either in form of cash or the actual crude oil. This is a reasonable start-up capital.

 

Tullow relinquished some part of Explora­tion Area-2. This area covers 2,503sqkm with two discovery oil wells of Karuka and Taitai Fields. The national oil company would start appraising and developing the fields which are now certain and predictable.

The state enterprises would also takeover Exploration Area-5 in West Nile where Nep­tune Petroleum drilled three dry wells. There is high potential to find oil there.

 

The Government should urgently enact the necessary laws and incorporate a national oil company vested with powers to own and control the oil and gas resources in Uganda.

“Such a company should be the custodian of all the oil and gas resources and be run on business principles despite being state owned,” Prof Ssemakula Kiwanuka, Uganda’s ambassador to the United Arab Emirates opined.

 

However, corporate governance is central to the effective and profitable management. A national oil company is in a unique posi­tion as they have to address commercial and social functions, which develop and main­tain a comprehensive corporate governance framework.

Henry Banyenzaki, the State Minister in charge of Economic Monitoring, said Parliament just passed amended Companies Act last month, which covered the issue of corporate governance, accountability and transparency.

 

If effectively managed, the national oil com­pany would serve as an engine for developing Ugandan know-how and capturing significant long-term financial benefits.