Optimism in Uganda’s opening market

April 1, 2021

Proscovia Nabbanja, CEO of Uganda National Oil Company (UNOC), talks to The Energy Year about why international investors should be optimistic about Uganda’s key projects moving ahead and UNOC’s approach to partnerships. UNOC is responsible for state participation in Uganda’s upstream, midstream and downstream sectors.

This interview is featured in The Energy Uganda 2021 .

How will UNOC’s mandate evolve in the coming years?
Our mandate as a commercial player within the different commercial agreements varies depending on the value chain sector you are dealing with. As you know, we don’t only deal with projects that are reliant on the upstream and East African Crude Oil Pipeline (EACOP) FID. We have other projects that are already running and we are already playing a commercial role.
For example, in the bulk trading of petroleum products business, we are already independently running the business and getting some revenues. We have the Jinja storage terminal in partnership with One Petroleum Ltd and are getting some revenue. We are close to concluding the process of securing a strategic partner for the Kampala storage terminal which will be a bigger strategic storage terminal for the country. We are building capacity and getting to understand the market in anticipation of the products that will come from refining. Our role is to secure supply of petroleum products and this will continue to grow.
That being said, in the upstream, we hold 15% of the participant interest on behalf of the state, meaning that we are part and parcel of the development and production process together with Total and CNOOC. If the state, through UNOC, is going to be paying for a cash call for a particular development, you must make sure that UNOC is part of the decision-making process. Being part of the projects also allows us to build our capacity, which is very key in developing long-term independence.
Within the EACOP project, we have a 15% shareholding through one of our subsidiary companies, Uganda National Pipeline Company. That makes us a main shareholder in the project together with Total, CNOOC and TPDC. We hold the second-largest stake in the project. This means we are playing a key role for such a strategic project and the decisions we make there are critical. Within the framework of the agreements being discussed, we also see ourselves playing a critical role in the long-term sustainability of such a capital-intensive project within the East African region.
We also hold a 40% participating interest in the refinery. This means that we are taking up the biggest shareholding in the project through one of our subsidiaries, the Uganda Refinery Holding Company, on behalf of the state. We have a role together with the refinery consortium in ensuring that the refinery makes a final investment decision next year, in accordance with the timelines of the Project Framework Agreement. There’s a lot of work being done today, such as the environmental and social impact assessment and the front-end engineering design. We are also working with the Ministry of Finance to secure financing for our equity in the refinery.
The last project where we play a commercial role is the Kabaale Industrial Park in the area where the refinery, export hub and Kabaale international airport will be located. This key project is going to show the linkages between the oil and gas sector and other sectors of the economy. The presence of the second international airport, currently under development, gives the opportunity for the petro-based industrial park to serve as an export hub. We see the park contributing to development of other industries such as petrochemicals, fertilisers, industrial gases and cold-chain complexes, among others.
Our role will therefore evolve from structuring the projects and seeking strategic partners to implementing the projects, generating revenue and contributing to economic transformation. For every dollar we are investing in the various projects we have modelled a return of 10 dollars for the life of the projects. This means our role is going to be substantial in the economy.

How important are social and environmental aspects in this process?
They are absolutely critical. For any of the projects, developers must go through an environmental and social impact assessment process. The ESIA details the guiding principles and conditions that the project should be taking into consideration to protect the environment. The environmental and social impact assessments and the environmental management programmes are critical in allowing us to keep tabs on how the operators are complying with environmental obligations on behalf of the partners.
I must admit that, historically, we’ve seen that as much as people look at the sector as “dirty energy” and having a negative impact on the environment, there have been a lot of initiatives from both the international oil companies and the government to ensure that the environment is protected.
For example, Total deployed cableless technology while undertaking the seismic surveys. In addition, all the partners are implementing smarter technologies, including smarter ways of drilling using cluster drilling and extended-reach wells. Imagine if you had 450 wells standing in isolation in the park [Murchison Falls National Park]; that would be a large footprint. The discussion today is about drilling all these wells spread on only about 30 well pads for the Tilenga project and four well pads for Kingfisher development.
So environmental aspects have clearly been at the forefront of the planning. The same applies to the initiatives such as solarisation planning within the EACOP project. On the social side, the resettlement action planning is also done in conformance with IFC standards and the national legal and regulatory framework. In addition, the operators have developed strategies for livelihood restoration. This, among other initiatives, helps in addressing the social aspects while developing and implementing the projects.

What is UNOC’s role in exploration activities?
UNOC has participated in the second licensing round as part of our strategic objective of sustainability through reserves replacement. As a national oil company, we have a critical role in driving the sustainability agenda for the country. The Ministry of Energy and Mineral Development qualified us to take part in the request-for-proposals stage, which we are working on aggressively, in order to submit a proposal prior to the June 30 deadline. We hope the ministry will give us a licence. After that, we will go out and seek a strategic partner.
It would be best for us to find a partner whose strategic vision matches ours. There are companies that may come in with the intent to acquire, immediately sell and move to other assets. This would create a longevity asymmetry for us because UNOC is here to stay and has a sustainability agenda for the country with investments across the entire petroleum value chain.
We are looking for a partner who comes with the financing because we don’t have the financial muscle to execute all our exploration programmes. We’re also looking for a company with the technical capability and track record to undertake such exploration projects. We anticipate that the partner will recognise what we desire as UNOC within reasonable terms and walk the journey with us to building our capacity.
Hopefully, in the long run, UNOC can take over operatorship. That’s subject to negotiation certainly, because thinking from the investor’s perspective, they also want guaranteed payback for their investment. Overall, the key areas for us are financing, technical capability and national content within the long-term partnership.
Besides participating in the second licensing round we are also concluding a Joint Application Agreement with CNOOC in respect to one of the blocks in the Graben.

What kind of strategy does UNOC have to ensure technology transfer?
Technology transfer is critical for any oil and gas company. We are negotiating contracts to ensure that companies at least have a plan for skills and technology transfer to UNOC through understudying of experts, training and secondment. Such initiatives allow staff to gain the requisite skills and capacity to execute the work programmes.
In terms of deployable technology, we always try to map ourselves against our peers. The tools and systems we use should conform to what the partners are using to a good extent. From a global perspective, I know many companies have gone into artificial intelligence, machine learning and robotics to improve efficiency at a low cost. Is this an area we as UNOC can invest in? It’s all part of the planning process. Of course, it’s something we keep on the radar and we try to seek partnerships that imbed innovation as part of their strategy. We need to keep tabs on the changing global markets and business environment and be ready to pivot where necessary.

What are your key priorities for 2021?
Our number-one priority for 2021 is to unlock the sector together with government and our partners – and the conclusion of the agreements has launched EACOP and the upstream project. The projects will also open up a lot of opportunities for investment. Number two is financing. You can unlock the sector, but without financing you can only do so much. If UNOC is going to play as a contracting party or partner within the agreements, then we must have the financing.
Financing is not only for our equity participation; to deliver on your strategy, you must have a good target operating model and you must have resources for it. Internally, we have defined the financing needs for UNOC operations to make ourselves field-ready and capacitated for that time when we actually get into execution mode for the projects.
As a CEO, I’m always looking at three critical things. Number one is the strategy and how we deliver all these projects. This also touches on financing and national content. A second element is enterprise risk management. In an industry like ours, if you lose track of your risk management process, you will encounter problems.
The third aspect is talent management. We are working in an environment where the new norm is a lot of talent flight to other competitors and sectors. A key question is how to create a value proposition to retain the talent we’ve developed so far and make sure they don’t exit when new opportunities emerge. They must love their job, not just like it.

What is your final message to international investors?
It’s understandable that most investors had experienced fatigue due to the delayed project sanction. I relate to the companies that feel fatigued, but there are reasons to be optimistic. Even during Covid, with a backdrop of low oil prices, we’ve seen major transactions in the sector such as the buying out of Tullow’s interests. We’ve seen renewing of the tenders related to both the upstream and EACOP projects. The key commercial agreements related to EACOP have been concluded. These are all positive signals for the market.
The government has invested so much – close to USD 2 billion – in areas such as infrastructure development and facilitating the whole enabling environment. So, there is no more reason for the projects to stall. I believe we are in the last mile to success.
To participate in the sector, you must be registered with the National Supplier Database, where you can get a view of who has similar capabilities and who you can partner with or collaborate with to deliver a particular contract. There are tax incentives for companies to allow easier participation in the industry.
Overall, the efforts being made today are really giving a positive signal to the market that there is still a commitment from the developers and the government to ensure project sanction. We need to emphasise to the investors that many opportunities are now opening up. Around USD 15 billion-20 billion will be injected into the country within the next five years. That’s massive for an economy with a GDP slightly above USD 30 billion.
The issue is how ready we are to tap into those opportunities. From a UNOC perspective, our duty is to make sure that we send out the right information to avoid information asymmetry. It’s critical for us to go out and provide the right information to people to enable them to prepare in a timely manner. We also invest in partnerships that foster supplier capacity and development. So, together, let’s get prepared.

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