Abdul Kibuuka, the founder and executive director, True North Consult, a manpower services company, has questioned why the laws that govern cost recovery in Uganda’s oil and gas industry do not include subcontractors amongst the beneficiaries.
Speaking during an NTV studio interview last month, as part of the Uganda Chamber of Mines and Petroleum’s (UCMP) annual publicity campaign dubbed ‘90 Days of Oil and Gas,’ Kibuuka called on government to compensate subcontractors who spend generously when training personnel to work in the nascent petroleum industry.
A member of UCMP’s governing council, he particularly sought to address human capital concerns in the oil and gas industry, reasoning that with skilled manpower hard to come by in Uganda since commercial oil deposits were only discovered in 2006, those investing in human resource skilling should be due some compensation.
This is especially because national content regulations compel the industry to prioritize the hiring of Ugandans before they consider hiring foreign nationals. Expatriates, the regulations say, can only be considered when a Ugandan with the required skillset cannot be found in the country.
Essentially the subcontractor is left not only needing to purchase the best equipment to execute the work, but they also have to find the money to fast-track the skilling of their employees.
“While this has lots of benefits for the country, the challenge is that the national content legislation does not provide for sufficient incentives to make it happen. If one trains ten (10) Ugandans to international standards for instance, maybe they should get a tax rebate or have their money refunded since we are under a cost recovery regime after all,” argued Kibuuka, a human resource expert who worked with Shell and Tullow Oil in the past before setting up his company.
Training core professionals like geologists, geophysicists, exploration and production managers or engineers specialized in drilling, reservoir, well and logging operations is expensive. Equally costly is hiring experienced expatriates to serve in the same roles, where Ugandan professionals cannot be found.
Kibuuka
Notably, Kibuuka said, the nature of work in the petroleum industry means that most tasks are executed by subcontractors, while heeding high international standards – from precision in execution to observing strict health and safety standards.
But what troubles subcontractors when participating in a tender, he added, is how to incorporate human capital development in their budgets.
“Subcontractors are running major contracts in the industry like logistics, lifting and environmental services provision. But how do you get them to train people to an international standard when they are not even guaranteed the tender?” wondered Kibuuka.
This uncertainty means that the subcontractors will only do the bare minimum when it comes to training their workers since the possibility that their competitors can swoop in and take with them their trained employees is real.
“One is right in worrying before investing in human resource training. That is why many of these companies are being minimalist in their investment unlike the licensees that are assured of recovering their money,” says Kibuuka.
Cost Recovery
Cost recovery means licensees – in this case TotalEnergies E&P Uganda, CNOOC Uganda and the Uganda National Oil Company (UNOC) – can have some of the money spent during the exploration, development and production phases of their operations reimbursed from the government.
The mechanism is however only limited to licensees and not their contractors or subcontractors.
Under the Production Sharing Agreement (PSA) fiscal regime which governs the obligations of the licensees to the Government of Uganda they (the licensees) are expected to take on the financial and geological risk of discovering a resource.
Uganda and other countries which have adopted the PSA model have done so because they lacked the finances to invest in the capital-intensive operations required to get the petroleum product to the market (once a commercial discovery is confirmed).
The PSA regime guides that a licensee who makes a commercial discovery will not only get a share of the profits after production, but they will also be entitled to a reimbursement of the approved costs they incurred in discovering and developing the resource.
At least $3.5 billion has been spent in the discovery and appraisal of commercial deposits of oil and gas in Uganda to date. And another $15 to $20 billion is expected to be invested in the ongoing development phase before First Oil is realized.
While the licensee hires contractors and subcontractors along the way, the PSA (the document that endorses ‘cost recovery’) is only between the government and the licensee.
That said, contractors and subcontractors provide goods, services and works on behalf of the licensee and therefore their contractual sums are factored into the costs recovered by the licensee, explains Gloria Sebikari, the head of corporate affairs at the Petroleum Authority of Uganda (PAU), the agency mandated to monitor and regulate the petroleum industry in Uganda.
“The money paid to the contractors and subcontractors is part of the sums approved at the Advisory Committee Meetings (ACM) that is held between the licensees and (chaired by) the PAU to review and approve annual work programmes and budgets,” she says.
Importantly, not all costs are recoverable.
“There are processes to cost recovery. The first being the submission of work programs and a budget for the annual expenditure to the PAU for approval before any activity is done. Once work is executed, the statements of expenditure are audited by the Office of the Auditor General (OAG) that determines which costs will be recovered. The risk of non-recoverability is also borne by the licensee and not the contractor,” she says.
Subcontractor Incentives
But shouldn’t local subcontractors that are going out of their way to develop human capital from scratch be supported by the state, as suggested by Kibuuka?
To Sebikari, while the training of an industry-ready workforce is commendable, it is expected to be part of the national content plan that all contractors are required to commit to beforehand.
“The onus is on contractors to understand the scope of work required, related costs and the training needs (if any) so that this is factored into the contract price,” she adds.
As such PAU’s advice to the suppliers is to always budget diligently while taking into consideration such costs in their bids. They also have the option of renegotiating with the licensee (in line with contract terms) in the event that costs overrun when the contract is well underway.
Nonetheless, most of the skills are transferable to other sectors of the economy like manufacturing and construction.
For instance some welders and machine operators originally working in the oil industry are now employed in road construction while others have been hired by a cement manufacturer.
Sustainability plus health, safety and environment (HSE) experts with petroleum industry experience are in demand everywhere as well; whereas some geologists have joined the finance world in advisory roles.
“If everyone only focused on working in the petroleum industry we would risk experiencing the ‘resource curse’; as it would appear like the rest of the industries contributing to the economy do not matter. Let us strive for diversification,” says Sebikari.
Sebikari
Furthermore, one is employable outside Uganda where internationally certified oil industry professionals are always needed.
“If you are not drilling anymore wells in Uganda why stay here when your skills may be required in Gabon or somewhere in the Middle-East?” she says.
As per incentives to subcontractors proper, Sebikari believes the ring-fencing of the supply of at least 16 goods and services to only Ugandan companies, as is the case today, is as good as any inducements out there.
Even for the non-ring-fenced areas, the law instructs that priority is given to Ugandans, or a joint venture between a Uganda and a foreign firm before considering a foreign firm. By the end of 2023, 35 such JVs had been awarded contracts worth $ 190 million.
In addition, the East African Customs Management Act (EACCMA) that governs the importation of goods within the East African Community (EAC), stipulates various rebates to oil companies and their subcontractors including a 0% import duty and VAT rate on equipment and materials for oil and gas production. The goods are also exempt from excise duty.
However, adds Sebikari, the door is always open in the event that Uganda subcontractors seek to petition the PAU and by extension the government for support when they encounter unanticipated challenges.
The specific incentives sought would have to be concisely defined before they can be addressed if at all, though.
Be that as it may, with every rebate offered impacting Uganda’s share of the oil and gas profits, government would be wary of giving away too much.
