Oil and Gas Sector in Uganda: An Exclusive Interview with Proscovia Nabbanja, CEO of UNOC

Interview with Proscovia Nabbanja, CEO of UNOC (Uganda National Oil Company Limited)

What are your main challenges to develop the company and be successful?

The biggest challenge that we are faced with as a company is financing. Working with projects across the entire petroleum value chain, we have investments in the upstream, investments in the refinery, the East African Crude Oil Pipeline, storage terminals, and all of these require substantial amounts of money. When we add up the numbers, we sit on a portfolio of about 845 million USD capital requirement in addition to the operational budget. Without that financing, you will enter into contracts where you have very minimal participation and minimal controlling interest and then your returns will be severely impacted on. So far, the returns have been above 15% internal rate of return and there is a business imperative for us to really participate in each of those projects. That being said, we are of course trying to work with the relevant ministries to secure financing, especially the shareholders, who are the Minister of Finance and Minister of Energy. We are also trying to enter into strategic partnerships that allow us to spread out that financial risk because the sector we are looking at requires about 15 to 20 billion USD and the GDP for the entire country is about 32 billion USD so as a company, you will never be able to pull off such levels of investment. That is why our approach is really driven by strategic partnerships. For equity, we are trying to go out and look for innovative ways of getting that financing to allow us to participate in the projects. The other challenge, which is not unique to us, is the fact that globally, oil prices have been low which creates anxiety when investors come in to invest in a country. That means that you have to take another look at your fiscal incentives.

UNOC is placed uniquely in that we understand the private sector but we are also able to look at the government side of things. We bring the private sector discussion to the government side and we also take the government side of perception tied to the National Development Goals to the private sectors. It is definitely still a challenge because no investors will invest in a country when the commercial metrics do not make sense. Your project will simply be sitting in a portfolio of countless other projects that they are dealing with globally. If it does not meet the numbers, then there is more likelihood that there will be capital flight to other projects.

The other challenge is the human resource and the ability for us to be able to participate in these projects. This is a nascent industry. We have never developed a refinery in Uganda before or put up a 1,500 km pipeline to the coast before. If you do not come with the requisite skills, then you will not be able to pull off those projects. That challenge can be addressed through the strategic partnerships that we are working with and we can back hope on someone who comes with the requisite financing and technical capability to help us develop into operatorship mode in the long term. Our advantage as UNOC is that we have staff from different walks of life and different faculties and people who have been in the diaspora who wish to come back and contribute and give value back to their country, but that is not within the threshold that we see that the market requires. Even as you open up the industry, the sector players are sourcing the same talent. There is a fight for talent across the different institutions and partner companies that are operating within Uganda. Today in Uganda, we are seeing the young talent being attracted to the oil and gas sector because it is a new trend. But in the western world, it is the opposite. There is talent flight from the oil and gas sector and those youths are going into IT and all these new generation technologically driven industries. When FID happens here, we are going to be faced with a situation where there will be so many companies opening up here and they will need talent. We will be left with a gap. Even talent coming from university needs some level of experience to get into the industry. That bubble is definitely coming. We have set up a training program that attracts internship students, graduate interns, and graduate trainees annually, and we also look internally with secondments through the contracts that we have as well as other players who are interested in taking our staff onboard. It is one thing having your staff seated in office and coming in with experience, but exposure is key. You can be experienced with doing the wrong thing, but if you are exposed, then you know how your competitors work. It is fundamental for us to get our team out there to sit on projects, expose them, and build up their skills.

What is the state of the oil and gas sector in Uganda? Why should international investors come to Uganda?

Within the three-year term, we hope to have made FID by December 2020, then realize first oil within three years after that. I would envision an economy that has entered into the producer space and is producing oil that is reaching the international market but is also retaining a reasonable amount to create value within the country through the refinery.

The oil and gas sector started back in the 30s when oil was first discovered in the country. In 2006, we made commercial discoveries with one of our first wells that was drilled in the Albertine Graben. At that time, there were minimal reserves that were discovered. A few years later, we saw a lot of wells being drilled and we moved away from the initial 300 million barrels discovered then to 6.5 billion barrels that we have today. That led the government to focus more on the institutionalization of the sector. Three institutions were created: The Petroleum Authority of Uganda which is managing the regulatory aspects, then the Uganda National Oil Company which drives the business side, and then the Ministry which drives policy in conjunction with the Ministry of Finance which drives revenue management. Most people will talk about what was discovered and the wells that are going to be drilled, the refinery, or the East African Crude Oil Pipeline. However, the umbrella of projects that we are dealing with as UNOC is even broader than that because we were founded as a vertically integrated company that operates across the entire petroleum value chain.

In the upstream, we have two projects with our partners on the Tilenga and Kingfisher developments, but we have another obligation of reserves replacement. Our mandate stretches beyond what Total and CNOOC and Tullow would be doing because for any country to drive the sustainability agenda, you have to invest in your national oil company. So, we go out and also look for opportunities to explore more hydrocarbons. We have the competitive advantage to get direct applications to the Minister and seek opportunities to explore for more resources. You may have seen us in the media applying for a direct license and also putting out an expression of interest to participate in the second licensing round. In the midstream, we have investments in the refinery which is intended to be a 60,000 barrels of oil per day capacity refinery to meet the demands of both the domestic and regional markets. This is a big project with an estimated CAPEX of 4 billion of which we are picking up 40%. That means that we are supposed to look for 480 million USD out of that 4 billion USD. It is quite an interesting project because it has the potential to create value addition within Uganda and also integration with other sectors in the economy. When you process the products of the barrel, you get your mainstream petro and diesel, but then there is also the bottom of the barrel that can give other value addition products such as fertilizers and petrochem. That is an area that we want to enter into in the long term. So, this is very critical to us. Currently, we are in a strategic partnership with the Albertine Graben Refinery Consortium which is a General Electric led consortium with the EPC contractor, SAIPEM, and makes quite a solid team. We will be able to make a final investment decision but, of course, there are interlinkages with the final investment for the upstream which we now anticipate to make in December.

Another large project we are dealing with is the East African Crude Oil Pipeline which is a gateway to the international market for our crude. This is estimated to cost about 3.5 billion USD and we pick up 15% of that through our subsidiary which is the National Pipeline Company. This is a very big project for us because it creates synergies with Tanzania but it also helps our crude to get to the international market. Today, a lot of work has been done: the route was defined, front end engineering design was completed, the corridor was narrowed down to 30m, we are looking at initiation of procurement of long lead items, the EPC contractor, the resettlement action planning. That gives a lot of activities and opportunities for any investors interested in the project to come and look out for those potential opportunities. That project is highly tied to the upstream because we have similar investors there with the ones in the East African Crude Oil Pipeline. The FID will be made in December 2020 and commencement of construction is projected for March 2021. Looking at both the upstream and this project, we know that there was the conclusion of the transfer of Tullow’s interests to Total which happened during COVID which gave more confidence to the market that this sector is still a lucrative sector to invest in. Total is spearheading all these investments. When you look at the strength of the partners within the projects, it gives investors more confidence that these are projects that are profitable and can actually make a difference to the economy in Uganda and the region.

We have additional projects such as the industrial park which is intended to be petro-based. There, we will have the refinery, export hub, and there is also a second international airport being developed. The need for this industrial park is really to drive industrialization from the products that are coming off the refinery, but also for the goods and services that can be provided to the upstream and midstream sectors, as well as an additional trickle-down effect to the other sectors of the economy, especially the agricultural side. We will be setting up industries such as petrochemical, fertilizer plants, cold chain, logistics, warehouses, real estate. So, it is quite a range from heavy to medium industries, other facilities that support the sector, as well as the international airport. Today, we are discussing with other agencies to create a plug and play model to create an investor friendly environment through providing ICT, water, roads, etc. We are also looking for a strategic partner. The expression of interest went out and now we are moving into the request for proposal process with the down selected potential strategic partners. There are absolutely avenues for further investment. When you discuss areas of financing for such big projects, you can see avenues for financial institutions to come in and provide the required financing. For the pipeline, upstream, and refinery, we will start to see a lot of interest in financing those projects. For the other investors, if you get the EPC contractor, they can come in as subcontractors. In the upstream, there is a whole range of services that have been tendered out from EPC to drilling, to completions and workovers to enabling infrastructure. There is a whole suite of areas that an investor can be interested in.

In addition to those projects, there is the other avenue that will play in the downstream in terms of storage terminals and bulk trading. We currently have one terminal that is fully operational in Jinja. It is a 30-million-liter capacity terminal of both petrol and diesel. We entered into a joint venture arrangement with One Petroleum which is our partner and it is already on the Kenyan open tender system, so we are able to bring in product and put it to the market. In order to improve that operational efficiency, we want to unlock the water transport so that we bring in product from Kisumu to Jinja to the tune of 2 million liters in one cargo compared to the roads that bring in 35,000 liters per truck. We will reduce the burden on the roads while at the same time improve the operational efficiency and strategic stocks we have for the country. Today, even if that terminal is filled up to 30 million liters, with a daily consumption in the country of about 6 million liters, that only gives you about 5 days cushion. Yet, globally, we are seeing a requirement that sits between 30 and 60 days . So, to expand that business, we are setting up another terminal in Buloba which will be about 320 million liters capacity. We have started it in a phased approach. We intend to start off with about 138 million which will cost us about 140 million USD with our 51% interests making us the source for about 71.4 million USD and the rest to the private investor. We want to take the lead. The capacity to run storage terminals exists in Uganda so we should take a controlling interest. This is also going to be a strategic terminal because it will be receiving product from the refinery and it will also make us tap into the transit market. Today, most of the cargo that goes to Burundi, Southern Sudan, Rwanda, and the DRC is transiting through Uganda so why not tap into that regional forward market? Those are the low-hanging fruits that we are trying to look at to make sure that we remain competitive and also become the main distributor of bulk petroleum products in the regional market. We have started to test the market with bulk trading and have traded about 2.8 million liters of petroleum products with one of the oil marketing companies. The intent is to grow that number to meet the local and forward markets and utilize the current storage terminals that we have.

When you look at the scope of projects that we have, for every dollar that UNOC invests, we expect 10 dollars in return in the 25-year term. There is a lot of incentive for us to invest as a company. When you look at what the country in general is going to get out of those projects, it comes to 35 billion over that 25-year period. That is huge. There is merit for the country to participate in these projects to get those returns to the state. I hope any investor that is out there sees the beauty in investing in these projects.

How easy is it to invest in Uganda?

We are a landlocked country, but we are also land linked. This means that if you produce your refined product within Uganda, you can have access to the forward markets. All the forward markets are getting their transit cargo through Uganda. There is free movement of capital from country to country and full repatriation. We have good regulatory and legal framework in the oil and gas sector. There are incentives that have been structurally included in the tax laws. VAT is deemed paid on all imports for licenses and contractors. We have a ten-year tax holiday for corporate income and there is also no withholding tax on external debt, especially for the East African Crude Oil Pipeline. Withholding tax on imported services is reduced from 15% to about 10%. You can also have your foreign ownership of private investments if you joint venture with a domestic company. There are good incentives for anyone to come into the country and we should be able to attract the investors for a 15 to 20 billion spread of projects that we are seeing within the oil and gas sector.

What is the impact of the oil and gas sector on the environment in Uganda?

Of course, environmental concerns are quite important and we have seen quite a number of people raise concerns on the impact of oil and gas on the environment. However, having been in the sector for close to 20 years, I have seen quite a number of initiatives put in place to lessen the impact on the environment. First is the legal requirement to carry out the environment and social impact assessment. At the end, there is a public hearing to address all the concerns from the different stakeholders. You should never start a project without a proper environmental impact assessment. We have also seen our partners invest a lot in initiatives that protect the environment. Total, for example, introduced the cableless technology in acquisition of seismic data because we are working in a National Park. We have also introduced cluster drilling. Instead of drilling a single well, for example, if you are going to drill 414 wells in one area, if all those were spread in isolation there would be a large impact on the environment. Now, with cluster drilling and extended reach wells, you can reduce the footprint for the wells. For 414 wells, we are now looking at below 36 well pads. We have also seen initiatives around unmanned aerial vehicles where you do your resettlement action planning and route studies and not displace or impact people. You can pick data using intelligent missions so that you have minimal impact on the environment. Uganda also has a zero-flaring policy. The oil and gas is only supposed to be flared in emergency situations. We have seen the sector players really working a lot to see that they limit the impact on the environment. Our wells are in National Parks and we really need to be cautious of the impact of the wells on the animals, on the environment, but also on tourism as a business.

What is one of your success stories?

From the perspective of UNOC, we have seen so many areas of growth over the past few years. We only became operational in 2016 when our first CEO was recruited. For any business to run, you have to put the people first. We saw a growth in numbers from just 3 personnel in 2016 to 118 today. We have also created two subsidiaries. The Uganda Refinery Holding Company is managing the refinery and petrochemical side of business along with the petro-based industrial park. We have also started the National Pipeline Company which will be running the pipeline business, storage terminal, and bulk trading. We are a company that is really focusing its strategy in a structured manner to manage the different business lines. When we initially got this company up and running, there was major talk on the upstream and the pipeline and refinery that were coming. But we have always driven our strategy in a way that if we see signposts along the road, we make the pivotal change and look for low-hanging fruits. You can see this where we have already gotten some value of the storage terminal. We have already started trading and done improvements on the storage terminal that was almost non-existent in Jinja. On the upstream side, there are also many success stories by government. Exploration was done, the appraisal campaign was done, we have found the resource envelope of 1.4 billion recoverable, the oil companies have taken all the deliberate steps to make sure that they conclude their commercial agreements, the front engineering design work was completed. You see them investing today 3.5 billion USD and they still have the commitment to invest an additional 15 to 20 billion USD in the projects. These are quite a number of milestones. Even on the back of that, the government has also invested close to 2 billion USD on infrastructure upgrades, expanding the power grid, acquiring land for projects, etc. There is quite a lot of value that is already generated to make the projects work. That gives the investor confidence that both the private and the government sides are pushing the projects forward and making sure that we achieve the value that we intend to get from these projects.

Project yourself to the medium term, three years’ time. What do you want UNOC and Uganda to achieve?

That is a very fundamental question. It is a question that people have been asking us about, especially with the delayed achievement of FID. Within the three-year term, we hope to have made FID by December 2020, then realize first oil within three years after that. I would envision an economy that has entered into the producer space and is producing oil that is reaching the international market but is also retaining a reasonable amount to create value within the country through the refinery. That is key. The returns are good, but in the bigger picture, the refinery has macro-economic benefits for Uganda. We have seen from the mapping of the different industries that it is likely to impact industries such as the agricultural sector and the other interfaces with the petrochemical businesses and the export market through the second international airport. In the three years, there will be low-hanging fruits. When COVID happened, even through a pandemic, an opportunity was created. Through the low prices in oil due to COVID, there was the opportunity to get strategic stocks. In the three-year term, we can realize that space.

We also want to get LPG onto the market. The upstream developments and the refinery will produce substantial amounts of LPG, but they are not yet online. We have a window to start importing LPG into Uganda and we need to change the mindsets of people in order to adapt to LPG compared to biomass. All these discussions about oil and gas are sitting at a backdrop of the energy transition discussion and the climate change discussion. We want to be that energy company that is not only focused on so-called “dirty energy” but also looking for ways of entering into the cleaner energy space.

Another goal for the three-year period is our access to licenses. Today we are non-operators with Total, CNOOC, and Tullow, but how do we move ourselves from that position to an operatorship position in the long-term? We need to start with baby steps. We need to get a license, get a strategic partner to back hope on, acquire the requisite skills, and then in the long-term take over operatorship or acquire licenses independently and operate them.

The last is the issue of national content. This is very critical for us because it is enshrined in our mandate to develop skills for the oil and gas sector. In the three-year term, we would want to see a lot of achievements against the six pillars in our National Content Strategy. First is the pillar of talent retention and management and we are more focused on Ugandan talent within the company. DEI and diversity in the culture is becoming a big conversation. We are open to that as long as our staff understudy these people in the various projects. The second pillar is about supplier selection. In all these partnerships we are entering into, how are we structuring the contracts to enable Ugandan and local companies to participate in the business lines? For every strategic partner we will go into partnership with, one of the tick off items is their National Content Strategy and the record they have in the different areas where they have operated. The third pillar is supplier development. How do we enable and improve the suppliers or SMEs to get winning bids, to structure their companies in a way that is good enough for a foreign investor to joint venture with them? How do they improve on the quality, health, and safety standards? How do they get the requisite certifications? The next pillar is how we can joint venture for service delivery. We know that globally, for any private investor to come into the oil and gas space, you always reach your economic limit and maybe you move away. Are you able to take up operatorship in the long term as a national oil company when the fields are marginal and are you able to tap into the operations and maintenance space, the oilfield services space through joint ventures for service delivery? Here, we are not going to joint venture with companies for logistics or catering. We want the highly technical areas so that we create a center of excellence within Uganda. This pillar is closely linked with our drivers for getting into operatorship in the long-term. We are also concerned with how to partner with institutions to develop the skill for artisans, getting them the requisite certifications, and partnering with vocational training institutions to empower the young workforce to participate in the oil and gas sector.

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