Tullow, CNOOC, Total and The Local Content Dilemma.

Kampala. In my post yesterday, the case I made that Ugandan companies would not benefit immediately from the commercial exploitation of oil has been challenged. It has been suggested in private responses to my post that there would be no benefits, irrespective of the time frame and that in fact I was blowing smoke.

First off, I will repeat this here because it bears repeating, the benefits will come, most of them in the long run,  all of them as a result of local companies either through partnerships with international players or on their own initiative ensuring they meet the highest standards be they health and safety, be they accounting standards. The point here is simple; doing business with local companies must not carry with it a liability that extends far beyond any commercial gains. The other side of this argument is, local companies should not expect to benefit simply because they are local companies.

The interconnected nature of international business and the increasing demands being placed on large multinational companies with extended supply chains can best be illustrated by the following story. In 2010, Domini a US based investment firm reached an agreement with Nucor, the largest steel producer in the United States in which the Nucor committed to regular monitoring of its suppliers to ensure that none of its suppliers used slave labor in the process of making pig iron a key component in the manufacture of steel.http://www.ilo.org/sapfl/News/lang--en/WCMS_143438/index.htm

This agreement was brought on by an investigation by Bloomberg Business week Magazine that revealed the use of slave labor in the manufacture of charcoal, a key component in the manufacture of pig iron. The pig iron was sold to Nucor which in turn sold it to car manufactures.  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4j1VKZq34TM.

The interest that this issue generated also forced the car manufactures Ford, General Motors, to commit to ensuring they would not source products from vendors who have questionable business practices. The actions of one, maybe more individuals in Brazil had affected decisions in the corporate boardrooms of blue chip companies in New York, and Detroit.
 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=arPjegyeQ7ik

The foregoing is an illustration of how interconnected the world has become, how what in a past life may have been a local incident now has far reaching consequences. Nucor simply bought goods from its Brazilian suppliers, some may argue Nucor cannot be held responsible or punished for actions of a legal entity it does not control. That may have been true in the past, today that argument holds no water, multinational companies can no longer afford to slack off with respect to their choice of local partner, as the foregoing illustration shows; the costs of local noncompliance can be very steep commercially.

Bringing it home, while there may be a great deal of hoopla about Tullow and their choice of local partner, local businesses need to address themselves to the question of compliance standards across the board. Health and safety, labor, accounting, etc as a lapse in these areas could have deleterious effects on Tullow both commercially and in terms of reputation.   

Tullow, CNOOC, Total are duty bound to enforce their highest group standards with respect to vendors and local partners. They are also required to transfer as much skill and knowledge as they can to the local business community through. For local companies seeking to become regional and maybe even international players  they cannot expect a free ride,  it is important that compliance to the highest standard be they health and safety, be they accounting standards be seen as a requirement rather than an inconvenience. That is the new cost of doing business on the international scene.

Is Tullow Oil Really Bad for Uganda?

Kampala Uganda - Resource rich countries, the world over, with very few exceptions have all been touched by the resource curse. The resource curse for the uninitiated is simply a situation in which the natural resources and the income they generate in no way benefit the majority of the population. 

This ruthless exploitation is the result of amoral international companies, especially those in the mineral sector driven on by the ruthlessness search for market opportunities and profit. Furthermore, these mineral companies collude with local and international elite to malign the interests of the local people through corruption, weak laws and crony capitalism.

No other resource has cursed more nations than oil, from its ability to alter the geopolitical balance in a region, its ability to allow the ruling elite to live in a suspended bubble of luxury and unaccountability over the masses, to its effect on the local and international environment; the oil industry is a relatively easy target for a motley crew of individuals.

However, the resource curse does not occur in isolation; a key facilitator of this curse is an environment of deliberately enfeebled institutions, a political environment in which institutions have no sway over individuals, and an environment in which the office confers no authority. Based on the foregoing, Uganda is a prime candidate for the resource curse and Tullow is being painted as the vessel through which this curse is going to be delivered.

If you are inclined to believe everything you read in the newspapers, then Tullow Oil is the worst thing that has happened to Uganda. The newspapers in the past couple of weeks have painted Tullow as corrupt, the famous or is it infamous bribery scandal. In this way they are perpetuating an inherently unfair political system.

Then they are non-compliant in the manner in which they have let their exploration licenses lapse. On the flipside this can be seen as an attempt by Tullow to take advantage of weak oil laws in Uganda. These weak oil laws further allow the political elite to profit at the expense of the greater masses.

As if that is not bad enough, they have no real interest in developing local talent or local enterprises, the vast majority of the executive positions in this industry are filled by foreigners, and the primary contractors are foreign companies.  In this way, resources will be transferred abroad and there will be very few real benefits to the local economy.

In an earlier post I made the case that the bribery issue is a non-starter. With respect to local companies, that is a complicated issue, complicated in the sense that many of the local companies do not have the required skill set nor do they meet the demanding compliance standards required to be vendors. And no, the standards cannot be lowered; Tullow however is in the process of equipping local companies with the skill set and bringing them up to speed on the compliance front.

With respect to the question of the license, what license? Are we talking about the exploration license or the production license? Logically once Tullow discovered oil it would have applied for a production license, oil was discovered in 2009. According to the Petroleum Production and Exploration act of 1985 section 26 subsection one states A production license shall be granted for the period for which the application has been made but not for a period exceeding 25 years.

A production license is granted for 25 years, assuming the production license are granted at discovery then those licenses are still be valid. I could be wrong but then the article that suggested Tullow had lapsed was very nonspecific as to which license had lapsed.  And again, why would Tullows legal team apply for a one month license when conservative lift estimates put the oil well productivity at 25 years?

International Oil companies are easy targets; in Uganda the interests and personalities that drive politics over and above institutions have Tullow in their sights. Tullow is not the perfect international oil company; those ‘do not exist’. Based on the myriad of interests aimed at the international oil companies satisfying them would be a major miracle. Tullow however is not bad for Uganda; someone is working very hard to make us think so.