Oil and gas: Why local and regional companies could miss out on oil dollars

The East African region is now a well-known hydro carbon hotspot and as a result foreign investors are flocking in to take advantage of this business opportunity.
Workers operate an oil rig. Regional firms need to do more to benefit from opportunities in the oil sector.
Workers operate an oil rig. Regional firms need to do more to benefit from opportunities in the oil sector.

The East African region is now a well-known hydro carbon hotspot and as a result foreign investors are flocking in to take advantage of this business opportunity.

However, there is need to put in place strategies that will enhance transparency and accountability, as well as ensure regional firms benefit from opportunities presented by the activities in the oil and gas sector, commented a participant at the just-ended seventh petroleum regional summit held in Kigali.

Sector analysts say regional companies are not benefitting from the lucrative business opportunities in the industry. Which is why some experts are calling for laws that support local firms to win tenders and provide services to oil firms operating in the sector. This is commonly known as local content aspect.

Lyoidah Kiconco from Schlumberger East Africa, one of the leading oilfield services provider, says there is need to align oil sector strategies with local content requirements.

She also challenges regional service providers to always study and understand tendering processes, contracts, and their implication on their businesses.

Kiconco told Business Times that most firms do not win tenders in the oil and gas sector as they do not understand the tendering process or lack financial and professional capacity to provide the services.

“Regional governments must also invest in relevant international accreditation and certification that could boost the profile of local firms, as well as encourage them to form joint ventures and partnerships with international suppliers to marshall the necessary skills and capital required to get oil jobs,” she said on the sidelines of the summit.

The East African region has confirmed huge oil and gas finds; Uganda has over 6.5 billion barrels of commercial oil resources in the Albertine Graben. The country is preparing to embark on the production phase, while Kenya with an estimated one billion barrels of recoverable oil, targets to start oil production in 2017.

Tanzania has huge gas resources, with the government estimate of recoverable natural gas resources to up to 53.2 trillion cubic feet (tcf) offshore to the south of the country, as of late last year.

Rwanda is currently seeking firms to explore for oil and gas, with promising prospects in the Lake Kivu area. These developments have presented regional businesses, especially SMEs in the oil and gas sector, huge opportunities for growth but the majority lack capacity and expertise. The region has also not developed clear guidelines that promote local content to ensure local firms do not miss out on jobs in the sector.

Other challenges

According to Irene Batebe, a petroleum exploration and production expert from Uganda, lack of finance and limited local private sector participation is slowing down to exploration of oil prospects in the region.

She said oil and gas operations are capital intensive, and called for joint efforts from all partner states to provide the necessary infrastructure, especially for capital intensive projects.

“We need to identify priority infrastructure as a region and jointly source for financing for the projects, thus solving the financing hurdle,” she added.

Bureaucracy in regional governments’ procurement and licensing departments is also threatening the region’s efforts to improve the oil and gas sector and attract more investors.

According to Etienne Kolly, the regional research manager at HIS East Africa, governments need to offer stable and clear fiscal and legal frameworks to ensure a conducive investment climate to encourage banks to finance the sector.

He said more often investors get disappointed by the bureaucratic procedures that delay the implementation of oil projects.

Governments are in the process of reviewing their petroleum laws and fiscal regimes to maximise returns and benefits.

However, they risk making it less competitive, especially if these laws are not investor friendly.

Kolly noted that laws play a key role in attracting investors in upstream oil and gas activities.

“Therefore, it is important to have the most effective, transparent legal frameworks to attract the best companies into the sector,” he said.

Commenting on slow procurement processes and licensing processes, Batebe called for prudent and fast procurement and legal procedures “as the most optimal solution for utilising the region’s oil resources”.

Oil price volatility

According to the experts, price volatility will increase ‘above-ground’ risk for investors in the oil and gas sector, thus complicating project planning and expenditure.

“This could also potentially limit access to financing in the long-term,” Tony Okao Otoa, the national content leader at Total, said.

“The sheer size of East African resources and potential for further oil finds are a foundation for commercial viability and continued investment in the development of the oil and gas sector.

However, poor investor cash-flows may force companies back to the drawing board.Also, a prolonged downturn in oil prices may hurt the industry’s prospects,” Otoa pointed out.

According to Nyaga Mwendia, the chief executive officer, Oil and Energy Services, sustained lower oil prices will drive policy adjustments to improve fiscal and regulatory terms.

Bridging the trade deficit gaps

According to the experts, oil and gas cash will greatly help the region to narrow its trade deficit through important substitutions

For instance, Rwanda is looking to boost its oil re-exports to neighbouring countries as part of the efforts aimed at strengthening the country’s foreign exchange reserves and narrow down its trade deficit gap.

The country’s petroleum policy, which is expected to play a critical role in the development of oil and gas industry, was approved by cabinet in July 2013.