How 2018/19 National Budget Will Fund Oil & Gas Sector Alongside Private Sector Financiers

Finance Minister Matia Kasaija Finance Minister Matia Kasaija

Finance Minister, Matia Kasaija, will in June read the National Budget for the FY2018/19. All eyes are on what key priority areas that his budget will focus on, in a bid to achieve government’s ambitious target of a lower middle income status by 2020.

One of the sectors to watch is the oil and gas sector that is expected to contribute tangibly to the attainment of this development agenda.

Government already approved the new budget whose resource envelop is Shs 30.9trillion. A bulk of which would be mobilized internally as domestic revenue –by Uganda Revenue Authority –projected to be Shs16.4trillion (over 53% of the total resource envelope). The rest will be through internal, external borrowing and donations. 

The Energy and Mineral Development sector – where oil and gas belong – is expected to get Shs 2.5 trillion in FY2018/19 (11.5%) up from Shs 2.3 trillion (10.5%) in the ending financial year, according to estimates in the Budget Framework Paper (BFP) for FY2018/19. 

The BFP represents the would-be face of the new budget. 

Government’s goal for the oil sector is to ensure reliable, cost effective and safe supply of petroleum products to the rural and urban markets for social and economic development. In addition, government is hoping to use the oil and gas resources to meet the targets in the National Development Plan II which is partly to meet the energy needs of Uganda’s population for social and economic development in an environmentally friendly sustainable manner.

Government also hopes to use oil and gas resources to contribute to early achievement of poverty eradication and increase lasting value to the society. 

Government officials say the sector will focus on the implementation of the refinery and other development activities including the oil pipelines, aerodrones, and the implementation of the oil and gas policy.  The others are the development of the Kabaale (Hoima) Airport, the refinery, oil roads to enable delivery of first oil by 2020. 

Regarding the Oil Pipeline and Refinery, the Inter- Governmental Agreement (IGA) between the GOU and the Republic of Tanzania was signed on 26th May, 2017 to pave way for the implementation of the East African Crude Oil Pipeline (EACOP) and the foundation stones between the two countries were laid.

The negotiations for the Host Governmental Agreements have commenced and this is expected to end by June, 2018. The Final Investment Decision for the pipeline will be taken by of June, 2018. 

Government also expects to use some of the money from the Petroleum Fund to partly fund oil roads. The rest of the funds will come from government coffers and other sources. 

The good news is that, in April, government signed the contract for the construction of the $4 billion oil refinery with the Albertine Graben Refinery Consortium. Meanwhile, the Front End Engineering, Design phase, and the Environmental Social Impact Assessment (EIA) are expected to end by March, 2019 and the Final Investment Decision is expected to be taken by June, 2019.

Other sources of financing

William Ssekabembe, the Head of Business and Executive Director at DFCU Bank said they are heavily capitalized and ready to fund different products for the oil and gas sector. He said their operational capital is just under a US$ 1bn, one of the highest in the banking industry in Uganda. 

Speaking at the Oil and Gas Business Opportunities Conference organized by the Association of Uganda Oil and Gas Service Providers (Uganda) together with the Association of Tanzania Oil and Gas Service Providers (Tanzania) in Kampala from March 28-29, Ssekabembe said that they have several products around trade finance. He said they have got some counter guarantees with some partners across Africa and Europe. 

“As you look to bid for these products, we will be able to offer you bonds, discount some invoices, do advance payment guarantees and will also do modular financing without having security,” Ssekabembe said. He added that they were going to launch their incubator specifically for skilling suppliers in the areas of financing or credit uptake, book keeping, financial literacy and related services. 

Similarly, the Stanbic Bank Chief Executive Officer, Patrick Mweheire said they are working on linkages with small and medium enterprises to digitize technology and reduce their cost of service. He said they are working on mechanisms to link the SMEs to mentors, working space and more. 

Mweheire said, the bank is doing this in response to challenges that SMEs face – lack business plans and entrepreneurial skills, insufficient financial resources, poor record keeping and low corporate governance. He said that these challenges make the SMEs become less competitive at the international landscape.

In addition, he said, the bank has put in place an incubator to train SMEs on finance related skills like procurement to survive for longer periods in business. He said Stanbic is looking for partners to support SMEs on these training skills.

He said entities like USAID, Financial Sector Deepening Uganda, Enterprise Uganda and Universities are helping to provide financial and technical support for SMEs eying oil and gas deals. In addition to these areas, Mwehire said the bank is well capitalized to extend financial services to the SMEs and other oil and gas suppliers at negotiable rates for different products and services. 

Big numbers

Funding and any form of support for sector players is important given that the country confirmed around 6.5 billion barrels of oil in about 20% of the potential area of which about 1.5 billion barrels is recoverable. Government says about US$15 -US$20bn will be invested in the sector in the next 3-5 years for the various projects. 

Elly Karuhanga, the Chairman of Uganda Chamber of Mines and Petroleum (UCMP) said at the recently concluded 4th Oil and Gas Convention in Kampala, in which over 500 players from Uganda and abroad attended, said the government and sector players need to pick lessons from countries like Nigeria which have created a local content fund and lends money to oil sector players.

Karuhanga said the Fund is capitalized by contributions from various players engaged in the oil and gas industry. It also lends money out to institutions, which in the long term earns it interest. As at early this year, the Fund had over US$400 million as its capital base.

As the country eyes first oil in two years from now, one big question will remain: Can the banks, government and other supporting agencies offer affordable financing and related services to sector players especially suppliers who are critical in getting first oil? Time will tell.

 

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