Battle for oil contracts

By Haggai Matsiko

Total E&P’s Shs 3.9 bn industry survey revives debate on local content in the oil sector

With local businesses crying foul over big oil contracts and jobs going to international companies and expatriates, oil companies are drawing strategies to improve their local content input.

French oil giant Total E&P has announced it is spending US$ 1.5 million (Shs 3.9 billion) for an international firm to conduct an industry survey to map the Ugandan market and find out what companies and competencies are available in its local content drive.

“The proposal of this survey will be two-fold. First of all, the survey will enable us to have a better understanding of what is available in the industry,” Laurandel said, “…Of course, if you are talking about a project [oil production] of this magnitude, we need a lot of electricians, pipe welders and pipe fitters. And these people have to be trained. But we need to know how many we will need.”

It seems ironical that to carry out this local industry survey, Total E&P is hiring an international firm instead of a local one, which on top of directly benefiting Ugandans would have a better understanding of the local market. The Total E&P general manager said the international company would partner with two local companies.

The Ministry of Energy too hired international and local consultants to carry out a 2011 study Enhancing National Participation in the Oil and Gas industry in Uganda, which defines local content as the value addition to the oil industry by Ugandans using Ugandan materials, with services produced by Ugandans and Ugandan firms.

Local content helps keep oil money in the host country, by promoting local industries, products and services that is why it is a very touchy issue in Uganda.

Local businesses have accused the international oil companies of favoring international contractors against the local ones. The oil companies too, fault locals for lacking the experience and competence of serving the oil industry nascent as it is.

Supplying services to oil companies is the only way many Ugandans can benefit from the highly labour intensive industry.

The 2011 study notes that at most only 10,000 jobs, are expected from the sector. It adds that little less than 10 per cent of Uganda’s labour force (plant and machinery operators, crafts and related workers etc) can be expected to be in jobs which produce work experience of some relevance for the oil industry directly.

Supplying services and local goods therefore would help Uganda tap into the billion dollar industry—oil companies have so far invested $ 1.7 billion or 4.4 trillion; this includes payment for suppliers of goods and service.

Locals insist Uganda should have a big stake in that money since the oil companies will recoup this investment when production starts in what is called cost oil.

Insider dealings

On Total’s part, Laurandel told The Independent that promoting local content was a priority.

“We have already been involved in promoting for instance the main contracts regarding logistics support, camp management, lifting services, aircraft transportation and local transportation on sight have been awarded to local companies with 100 percent Ugandan ownership,” Laurandel said.   Dennis Kamurasi, the Vice Chairman, Association of Uganda Oil and Gas Services (AUOGS), said the Total survey will help reduce the dearth of information that affects the sector. But, he says, that is not enough.

“We are looking at these oil companies encouraging joint ventures and partnerships between local and international companies because that encourages transfer of skills.”

Kamurasi, who owns two companies Eco Sol that deals with waste and Quantum Associates for storage services, together with other executives formed AUOGS to lobby international oil companies and reverse a trend the oil companies were allocating all the lucrative oil deals to international contractors.

Sector insiders cite the Ben Mugasha case. From as early as 2006, when Uganda discovered oil, Mugasha, the proprietor of Bemuga Forwarders Ltd was seen as the poster child of the local suppliers market.

Behemoths of brand new tracks, loaders, lifters and excavators covered his huge parking lot at his Bemuga House, in Bukoto.

Bemuga, had been contracted by Tullow Oil to provide different types of equipment but a few months into his contract, in 2011, the oil company altered it and later cancelled it all together. The contract would later silently be transferred to the British-owned East African Cranes Ltd.

He was not the only one who suffered this fate. Tullow also transferred a contract of Eagle Air to Kajjansi Aero Club, owned by two British citizens.

An Ernest & Young audit had previously unearthed disturbing irregularities by Tullow Oil.

A Tullow Oil official, John Morley, Jerry Burley, Paul Sherwen owned a company BMS Minerals. Because Morley had all the insider information, sector players say, their company BMS was getting all the big contracts from construction, car hire and even heavy lifting.

“Tullow employees themselves,” a source said, “were leaking this information, telling us that what was taking place was too much.”

When the irregularity was un-earthed, Morley was removed from the company and the two Sherwen and Burley registered two other companies, Strategic Logistics Limited (SLL) and East African Cranes that still command big contracts from Tullow even in areas they had no experience at all.

After Tullow’s farm down to Total E&P and Chinese Offshore Oil Company (CNOOC), Sherwen and Burley sold some shares to French giant, Ortec Group. Insiders say, the proprietors were looking to tap into contracts from France’s Total E&P.

Tullow Oil, however, maintains that it is strong on local content.  By 2011, it notes, it had spent $180 million on 2,700 contracts to 550 local suppliers. It held a logistics supplier’s forum, which 320 people representing 103 organisations attended, and 88% of their work force is local, among others.  But local industry players that spoke to Independent on conditions of anonymity because of the implications the subject can have on their businesses, said that Tullow needed to improve.

They cited several cases and the recent reports that Tullow had contracted for Shs1.6 billion a one man consultancy firm, Kevin Light Consultancy based in Cape Town and Johannesburg to do work that Ugandan companies can do.

Total, they noted, has been more generous, maintaining contracts to Epilson, EagleAir and Three Ways among others. CNOOC on the other hand has not been as attractive because it has not had as many activities as the two. They have hit dry wells there is no activity going on at the Kingfisher site.

Mobilising capacity

The biggest guise that oil companies use to favour international companies, industry players say, is lack of capacity.

“The issue of capacity is no excuse at all,” Kamurasi says, “capacity can be mobilized. For instance look at Three Ways [a transportation company], they have in a short time grown capacity to an extent that they can mobilise 300 trucks.”

He adds that in case of much bigger and technical deals, Ugandan companies are not unable to do joint ventures.  Today, huge internationals that operate in more than 5o countries and earn over a billion dollars a year like OGEC Cracow, Baker Hughes, Halliburton and Schlumberger are the ones that deal with the high-end-budget and specialised contracts like drilling and all the other complicated processes involved in the extraction of oil.

Ugandan companies like Quantum Associates, Epilson or MSL logistics can only deal with transportation, camp management, waste transportation and the like. Given their small budgets and inexperience, they are outcompeted by international companies like Ortec, that have experience but also the financial war chest.

Kamurasi suggests that in some cases the government needs to ring-fence some of the areas because international companies will always have an edge given their vast experience of the oil industry.

For Ugandans, even those trained in oil, breaking into the industry is tough. The 30 Ugandans who returned in October last year from Trinidad, where they received six months’ practical training on top of their two-year vocational course at the Uganda Petroleum Institute Kigumba, remain unemployed as the cannot find jobs in any of the oil companies.

For these students, Kamurasi says that the government “should have imposed quotas on these oil companies”.

Critics also say that Uganda’s law and policy on local content are still very weak— as such oil companies have lee way to do as they wish.

The Shs 2 million that Section 54 of the Petroleum (Refining, Gas Processing and Conversion, Transportation and Storage) law, puts in place as fine to those who do not provide a report to the Petroleum Authority every year detailing how much of Ugandan goods and services are being used by contractors and sub-contractors, is said to very small for oil companies that command budgets of billions of dollars.

No local standards

Local companies also face challenges from a lack of recognised standards. The standards body, the Uganda National Bureau of Standards, has a little over 1000 recognised standards for goods and services. Even regionally, this is laughable. The Kenya Bureau of Standards has almost eight times that number. Since, the oil industry is keen on standards, local companies have to aim for international standardisation procedures, which are cumbersome.

To handle oil waste, for example, companies need a respective licence from the National Environment Management Authority but several companies specializing in waste handling do not have the required licence. The two that had the licences, closed shop.

There is also the issue of ownership of companies. The ambiguity in what defines a local company has been exploited by foreigners who are getting involved in small end business of catering and other petty businesses.   To boost local content, legislators capped local ownership of companies in the industry at 48 % in the Petroleum (Refining, Gas Processing and Conversion, Transportation and Storage) law.

But Emmanuel Baluti, the AUOGS lawyer feels that 51 % would have been ideal and not as radical as the over 70 cap in other African countries like Angola and Nigeria.

However, the 2011 study notes that the ownership of the company should not matter as long as they are adding value to a country.

“In a globalised industry a local subsidiary of a multinational company can be just as effective in using domestic inputs and developing capacity and competence in Uganda as a company in which Ugandans hold a majority of the shares,” it notes, “This has clearly been the case in Norway and Malaysia where national content has been high and national content has been defined as value added in the host country rather than defined in terms of ownership of the supplier.”

So far, 88 oil wells had been drilled, 76 encountering oil, representing an impressive success rate of 85% with the less than 40% of the oil area explored. Hope is high that going forward, the government will engage the oil companies more on the issue of local content. Bernard Ongodia, the Senior Geologist at Petroleum Exploration and Production Department said at a recent AUOGS breakfast meeting that the government had commissioned a study of its own on how to improve local content.