Local service providers need to plan for oil deals

February 23, 2017 in Business, Energy, Finance, Financial Services, Hydrocarbons, Investment by Editor

February 23–Uganda’s Oil & Gas sector holds much promise for local content/service providers now that significant milestones in the journey to First Oil have been reached.

“In particular, the issuance of production licenses to all the upstream players and the commencement of Front End Engineering and Design (FEED) work means that it is highly likely that the final investment decision by the upstream partners will be taken by early 2018,” Edwin Mucai, the Head of Corporate & Investment Banking at Stanbic Bank Uganda was speaking at the 4^th Local Content in the Oil and Gas Conference in Kampala.

During the past 18 months or so, “We have also seen the passing of local content regulations and the establishment of the National Petroleum Authority to ensure that both the spirit and letter of the law are enforced. The local content regulations have ring-fenced certain services for local service companies and hence provide them to a great platform to reap from the future opportunities the sector holds,” he said.

Mucai said given these positive and timely developments, it is an exciting time for local content providers and the companies looking to provide these services should be “getting ready for action!”

He said while these opportunities appear to be very attractive, it’s also equally important to look at some of the finer details that owners of local entities must pay attention to, so as to achieve the maximum benefits from commercialization of Uganda’s oil.

“There is a long list of priority areas that local service providers ought to work on, but I will address three which I believe are critical in ensuring bankability of the contracts to provide these services,” Mucai said.

He listed these as improved end-to-end contract management; prudent financial planning and clear assessment of human capital requirements.

He said all local service providers should make sure contracts with the International Oil Companies (IOCs) and/or the Engineering, Procurement and Construction (EPC) contractors are reviewed by their legal representatives prior to signing them.

“This is so that they have clarity on their legal rights and more importantly, the contractual obligations imposed by these contracts and that they can fully meet these over the life of the contract. By doing so, the local service provider confirms that they understand the milestones that must be met so as to receive the remuneration under the contract,” Mucai said.

But equally important, Mucai said the service providers must have the capacity to deliver on these expectations throughout the life of contract.

He said, “Upon signing the contract and on moving to the execution phase, it is important that the local service provider fully understands the financial implications of the contract on their company.”

Mucai said, “In some cases, this contract might be one of the largest the company has ever been involved in and as such, a good financial plan on how they will service it will be important as it may turn-out to be a make or break opportunity for the company.”

Some of the practical tips the company should consider include; preparation of a cash flow projection, showing the quantum and the contract timing of cash receipts and cash expenses over the life of the contract which means that any financing gap is identified early and thought is given on how it will be financed that is, from the shareholder’s own resources and if not sufficient, if debt needs to be raised say from a bank.

“ In case of shareholder’s equity, consideration should also be given on whether forming joint venture with established operators for these services may be the best way forward to raise the shortfall in funds in a relatively short time as it will also have the added advantage of skill transfer as the JV partner may have done similar work elsewhere,” Mucai said.

In addition, when preparing the cash flow projections, it’s important to ensure any tax liability that may arise from the operations of the company is determined and financial resources for the payment of the tax isprovided for.

The final point worth considering is the elevated standards which the local services provider must adhere to so as to meet the requirements of the IOC and the EPCs.

“Here I am talking specifically about human capital and work place standards (such as Health & Safety standards) which cannot be compromised and are often, a deal breaker in the Oil and Gas sector. Given this, it is important for the local service provider to consider carrying out a skills audit of the human capital requirements necessary to deliver against these standards,” he said.

Mucai said such a process would usually involve looking at the experience and capability of the current management team to understand and deliver against the contract and if any gaps are identified, a remediation plan such as a training programme for the current team or even bringing in skilled resources from companies that have worked in the industry or with these companies elsewhere and understand the high standards required by the IOCs.

“In closing, it is worth noting that the move from the exploration phase to full to commercial development of Uganda’s Oil resource will undoubtedly present a multitude of opportunities for Local content providers. Whether they succeed or not will depend on their level of preparedness, awareness of the opportunities and willingness to invest long term in improving the overall quality of their services.

“This is why Stanbic Bank and its partners are hosting the 4^th annual Local Content Conference in order to give Local Service Providers insights on how best to position themselves today to make the most of the opportunities opening up tomorrow,” he said.