I was quite tickled that Mr Tony Buckingham, the shrewd ex-mercenary and chief of Heritage Oil, is set to make £80million (Shs240 billion) from selling its lucrative oil fields in Uganda.
Buckingham has done a deal to flog his company’s oil fields in western Uganda to Eni of Italy for a cool $1.5 billion.
This story reminded me of what they said about the many Gold Rushes in America; that the people who made the most money from it were not the miners who went to mine, but the people who went to mine the miners.
One way to best understand this is to look at an industry that is very much on display every night near places like Speke Hotel – prostitution. Contrary to popular belief, the people who make the most money from prostitution are not the prostitutes.
First, the policemen they have to bribe so they can leave them alone, make more than the prostitutes. A prostitute might do business with, say, five men in a night. Let us, for purposes of example, say each of the men pay Prostitute X Shs20,000; that is Shs100,000. Maybe she pays the policeman Shs15,000 to turn a blind eye.
However, the difference is that while she has only five customers a night, the policeman has about 20 prostitutes around town bribing him a night. So he goes home with Shs300,000 a night, but Prostitute X, who is the one who sells the primary service, goes home with Shs85,000. But she won’t be so lucky. She has other payments to make; Shs5,000 to the street boy who keeps a lookout for her, and if she has a pimp, she pays him Shs15,000. Therefore she takes home Shs65,000 only.
It is the same with Heritage. It’s making $1.5b not from selling the fields, but from selling its discovery. It is up to Eni (and Uganda) to try and make money from the oil, and they face uncertainties that Heritage no longer does.
Someone will have to sell (and service) the heavy equipment for drilling oil; to put money to finance the drilling; to sell insurance, name it. All these fellows will get paid BEFORE Uganda earns a dollar from selling a barrel of oil. And in the end, they will earn the most money because they will not be paying the heavy environmental price that comes with the oil business.
The real secret in making money in natural resources, therefore, is to play in the transferrable part of the business. An oil well is not movable. However, money earned from lending to oil companies and financing infrastructure is highly movable. Heritage Oil can now take its money to Shanghai, China, and invest in the booming property market there. Our oil wells, meanwhile, will remain in Bunyoro.
Others have been there before us. I like these subversive websites that like bringing awkward facts to lights. One of the more user-friendly ones as far as natural resources, especially gold, is concerned is ozkids.com.
It tells us that when gold was found in California in 1848, thousands rushed to look for fortune. As they still do more than 250 years in places like DR Congo and Sierra Leone, the miners of that time searched for flakes of gold, by sifting soil at the bottom of streams with a shallow pan. After a few years, the gold was harder to find, and heavy machines moved in. The miners got their horses and on to the next big find.
Most miners stayed poor (how little things change), because only a few of them found large amounts of gold. “The people who most often made money on the gold fields were the merchants who sold supplies to the miners,” ozkids.com reports. Well after the gold mines of the time have been forgotten, Levi Straus is still very much in business selling what it sold to miners then – jeans.
Far far away in Australia, at about the same time gold was found. The miners flocked in their thousands to the fields hoping to make it big.
It was hell for the miners. They had to pay for a licence before they could dig. It was backbreaking work and they were not becoming rich. They rioted
However, there were groups of people who were making it very big. These were, again, the fellows who came to mine the miners: The merchants who sold food and equipment to the diggers found business profitable, many grew very rich.
If there is anything in this, Heritage has taught us a valuable lesson in the key to making money in oil, and the secret to prosperity. It is a rule that works almost everywhere else: If you want to make money from a casino, don’t be the gambler. Be the casino owner.
If you want to win an election (in places like Uganda), don’t vote. Count the votes.
If you want to be very powerful and make a fortune from the presidency, you don’t have to be president. The only thing you need is to know el Presidente. Teach your children this ancient lesson.