Pending is the Host Government Agreement with Tanzania and the associated commercial agreements to put in place a comprehensive contractual and legislative framework for the development of Uganda’s crude oil discoveries. These are expected to be finalized shortly.

There was an additional announcement by Total on September 30, 2020 at an investor’s presentation in Paris that Uganda’s oil project is among the three it expects to sanction globally before end of year. FID is a key milestone as it will signify the irreversible commitment of the Uganda National Oil Company and the international oil companies (collectively referred to as licensees) to move ahead with field development for crude oil production.

INVESTMENT CAPITAL

Up to $20 billion in investment capital will be unlocked on constructing the central processing facilities (CPFs), the crude oil pipeline and the refinery. The CPFs will gather the hydrocarbons and filter out water, sands and other unwanted substances. The crude oil pipeline will evacuate the hydrocarbons to the port of Tanga to be loaded onto supertankers for delivery to export markets.

The refinery, on the other hand, will upgrade and transform the hydrocarbons into more useful products such as gasoline, diesel fuel, asphalt base, heating oil, kerosene, among others. As the local and international communities gear up and positions for the forthcoming business opportunities, it is important to understand local content requirements in Uganda’s upstream oil and gas sector.

Adherence to the local content rules will be key for enterprises vying for business opportunities in the value chain of Uganda’s nascent oil and gas industry. This is because local content is embedded in the evaluation parameters for award of sector business tenders.

The rules applicable to the midstream segment where the pipeline project falls or downstream that covers the refinery venture may vary. Uganda’s upstream oil and gas local content requirements derive from the provisions of the main oil contracts (PSAs) and legislation namely the Petroleum (Exploration, Development and Production) Act No.3 of 2013, and the Petroleum (Exploration, Development and Production) (National Content) Regulations, 2016.

As Dominique Strauss-Kahn, the former managing director of the International Monetary Fund once remarked, there are few areas of economic policy making in which the returns to good decisions are so high and the punishment of bad decisions so cruel as in the management of natural resource wealth.

Rich endowments of oil, gas and minerals have set some countries on courses of sustained and robust prosperity; but they have left many others riddled with corruption and persistent poverty with little of lasting value to show for squandered wealth.

To foster stronger sustainable growth beyond the lifetime of oil production, resource rich countries, Uganda inclusive, are now placing greater emphasis on the use of local or national content policy instruments to extract more economic value.

Although there is no universal definition of the term local content, the general theme in the definitions adopted by the different countries is similar and generally represents the extent to which oil production prompts more value and benefits to the economy beyond the sale of crude oil and direct fiscal receipts.

Uganda’s upstream local content rules give a twofold definition of the term local content. In the first part, local or national content, is the substantial combined value added or created in the Ugandan economy through the utilisation of Ugandan human and material resources for the provision of goods and services to the petroleum industry.

In the second part, it is the level of use of Ugandan local expertise, goods and services, Ugandan companies, Ugandan citizens, registered entities, businesses and financing in petroleum activities.

LOCAL CONTENT PLAN

Local content rules prescribe in varying forms the preferential use of domestically available resources and manpower to spur and create backward and forward linkages for the local economy.

Licensed oil companies prospecting, exploring or producing crude oil in Uganda are under duty to submit local content plans (LCPs) to the Petroleum Authority of Uganda (PAU) within 12 months of award of a license for approval.

PAU would only approve the LCPs to the extent it deems them satisfactory and compliant to the provisions of the law. The LCPs should outline proposals on: the employment and training of Ugandans; the required quality, health, safety and environment standards for goods and services to be procured; the transfer of technology, knowledge and skills to Ugandan companies, Ugandan citizens and registered entities; research and development in Uganda; the procurement of goods and services obtainable in Uganda; local supplier development; partnership with Ugandan companies, Ugandan citizens and registered entities; the succession of expatriates by Ugandan citizens; support to local education institutions; support to partnerships and collaborations; services to be provided by Ugandan companies, Ugandan citizens and registered entities.

Training and employment

From the start of their petroleum operations in Uganda, licensees must employ at least 30 per cent Ugandans in management roles, progressively increasing to at least 70 per cent within five years. A minimum of 40 per cent Ugandans should hold technical roles growing to 60 per cent in five years and 90 per cent in 10 years. At least 95 per cent of the support staff must be Ugandans. This is the reason why applications for work permits by expatriate staff in the oil sector must be recommended by PAU.

Contractors and subcontractors to the licensees are also obliged to employ a designated number of Ugandans as PAU may prescribe with respect to the execution of contracts in excess of $1 million.

GOODS AND SERVICES

As a rule of a thumb, the licensees, contractors and their subcontractors must give first priority to goods which are produced or available in Uganda and services which are rendered by Ugandan citizens and companies unless they are unavailable or are of inferior quality. Otherwise, foreign companies in joint venture with Ugandan companies holding at least 48 per cent shareholding in the collaboration and upon the approval of PAU may make these supplies. A Ugandan company is not one necessarily owned by a majority of Ugandan citizens.

A company incorporated locally, employs 70 per cent Ugandans, uses locally available raw materials and is approved by PAU qualifies as such.

The foregoing notwithstanding, licenses, their contractors and subcontractors must have in place robust suppliers’ development plans to support Ugandan companies and citizens achieve capacity to eventually supply and source locally all goods and services that the oil sector requires.

The supply of certain goods and services is, however, exclusively reserved for Ugandan companies and citizens regardless of the above highlighted exceptions in the law. This leaves the licensees, contractors and subcontractors with no option but help local companies grow their capacity to be able to supply them goods and services of worthy quality.

The reserved goods and services are transportation, security, foods and beverages, hotel accommodation and catering, human resource management, office supplies, fuel supply, land surveying, clearing and forwarding, crane hire, locally-available construction materials, civil works, supply of locally-available drilling and production materials, environment studies and impact assessment, communications and information technology services as well as waste management, where possible.

All vendors to oil companies and their subcontractors should be registered on the National Suppliers Database managed by PAU. To enable local companies take part in the supply opportunities, the licensees, contractors and their subcontractors are required to have a tender office that would disseminate information of the available opportunities. The underlying contracts available for award to the local companies must also be unbundled into work packages that Ugandan companies are able to compete for and execute.

TECHNOLOGY TRANSFER

The licensees are also under obligation to submit to the PAU for approval an annual plan, satisfactory to the PAU, setting out details and initiatives aimed at promoting the effective transfer of technology, technical know-how and skills relating to petroleum activities from the licensee to the Government of Uganda, Ugandan companies, Ugandan citizens and registered entities.

The significance of local content in Uganda’s nascent oil and gas sector cannot be overemphasized. Not only is local content embedded in the evaluation parameters for award of sector business tenders but licensees are also required to contractually bind contractors and subcontractors to report on national content compliance to the licensee and the PAU if it requests.

The law gives local content a total score of 10 per cent in the evaluations for award of supply contracts by the licenses, contractors and their subcontractors. When the gap between the best evaluated bidder and second best is less than five per cent, the vendor that scored higher on local content takes first priority for the tender award.

The author is the managing partner at Cristal Advocates.