Museveni locks out oil investors

It’s Total disaster

Kampala, Uganda | HAGGAI MATSIKO | Uganda’s oil sector has been thrown into another toss up after President Yoweri Museveni cancelled a highly anticipated meeting on June 05 between him and oil production company executives; The Independent can exclusively report.

The meeting was to be a follow up of one on April 29 that went badly as the oil executives attempted to squeeze a breakthrough from Museveni but he left them empty handed and, according to highly placed sources, pushed hopes of Uganda’s first oil farther.

Museveni’s cancellation sinks any hope of early or easy resolution of disagreements. According to insiders, it shows Museveni is still seething from the outcome of the April 29 meeting.

At the meeting, the oil executives wanted Museveni to direct URA on what to do to resolve a tax dispute. But Museveni reportedly insisted the oil firms had to go and resolve the issue with URA not him. At that point, one of the oil executives reportedly bluntly told Museveni that, in that case, there would be no movement.

By no movement, the oil executive meant the company would freeze its activities in Uganda. It appears this did not go well with Museveni and the meeting reportedly ended prematurely.

At the centre of the disagreement between Museveni and the oil companies are several issues including; new regulations for midstream activities that include processing, storing, marketing, and transport the oil.

There are potentially lucrative deals in this sector, which the oil companies are anxious to retain but the government insists it must be a player. The other point of disagreement is over recoverable tax costs that the oil companies are claiming, and Capital Gains Tax (CGT) that the government wants.

Initially, the CGT dispute was over a US$167 million (Approx. Shs625 billion) bill that the Uganda Revenue Authority (URA) slapped on Tullow for its sale announced in January 2017 of US$ 900 worth of assets to Total E&P and the Chinese oil firm CNOOC. Tullow had refused any of it insisting given the costs it had incurred, the cost didn’t arise—sparking a stalemate.

But since Total and CNOOC want to move on to the next stage; the Final Investment Decision (FID) into production with even bigger money at stake, they offered to clear the US$82 million in dispute and got Tullow to offer the remaining $ 85 million.

However, they also offered tough conditions, which URA has refused to accept and it appears Museveni has now also rejected.

The June 05 was seen as an opportunity to push the past behind and move on.

Museveni instead fired off a letter to Total E&P, the oil giant leading negotiations on the side of the oil companies, indicating that he rejected all their demands and, therefore, there was no point of meeting. By presstime, it wasn’t clear how the negotiations would move forward.

President Museveni has remained overly cautious at every point in the journey towards Uganda becoming an oil producing. This could be partly because of lessons learned from elsewhere—where poor decision making around oil extraction has hurt more than developed economies. He is also surrounded by technocrats who appear keen to squeeze out the best deal for the country.

The hardball stance has strong backers; especially at the Petroleum Authority of Uganda (PAU), the Ministry of Energy, and taxman, URA.

But it frustrates oil companies which are equally looking for the best deal, and the Uganda National Oil Company (UNOC), who partly owing to their business approach, want the government to get the oil cash now and invest it in other ventures to make even more money.

Indeed, when the UNOC boss, Josephine Wapakabulo, announced early May that she would quit the job within three months, some cited frustrations surrounding delayed decision-making.

Pro-business experts warn that Uganda is also discouraging future investors with its decision gridlock. Indeed, the last time the country put up fresh oil blocks for exploration in 2016, it only attracted small and in some cases dubious companies. Some pessimists insist more exploration blocks offered last year could equally suffer.

Uganda first discovered commercially viable quantities of oil—now totaling 6.5 billion barrels with over one billion of these recoverable—in 2006 but delays in establishing the necessary laws and institutions, erecting the requisite infrastructure, disagreement over route to production, and major tax wrangles have delayed the start of production for 13 years now.

The government’s failure to resolve disputes quickly delays the FID by oil companies. This in turn delays everything else—the oil pipeline through Tanzania, the refinery, and all the critical works on the oil fields.

Last year, the hope was that the investors would reach FID in the first quarter of this year. But going by what is happening, it will take a miracle to reach FID this year. That is why Museveni’s cancelling this crucial meeting is a major setback.