Uganda oil money agreements

What is govt hiding?

Kampala, Uganda | RONALD MUSOKE | Hussein Lumumba Amin, a renowned socio-political analyst, recently ignited debate on one of Uganda’s most sensitive subjects since Uganda discovered commercially viable oil reserves in 2006: What exactly will be Uganda’s share of its oil resource when production finally starts, possibly in 2025?

The subject is touchy because the government has never disclosed to the public what is in the Production Sharing Agreements (PSAs) it signed with the international oil companies. Both the government and the oil companies; Total of France and China National Offshore Oil Corporation (CNOOC), cite confidentiality clauses as the reason for the secrecy.

Lumumba Amin is neither an oil expert nor an economist but he penned a widely shared letter just a day after Uganda signed three key agreements with entities involved in the planned oil production including Total and CNOOC.

The Minister of Energy and Mineral Development, Mary Goretti Kitutu, on April 11 signed the Uganda Host Government Agreement, the Shareholders Agreement and the Tariff and Transportation Agreement at State House in Entebbe. Reacting upon the signing, Lumumba urged the Ugandan public not to get carried away with the oil excitement.

Like millions of Ugandans, Lumumba has never seen the oil agreements the government has signed with the oil companies but he made calculations based on his interpretation of reported snippets in the news media of the agreements and concluded that “Uganda got a terrible deal on its own oil and nobody should continue sugar-coating it.”

“This bad deal is not from what was signed yesterday (April 11) but from the entire oil exploration project,” he said in the letter copied to several local and international media houses.

“Let’s do the simple maths in five seconds. Today a barrel of oil costs US$60. Now the oil companies will get 70% of that which is US$42. And the Tanzanian government charges US$12.77 as transit tax for each barrel of oil passing on the Tanzanian portion of the pipeline,” Lumumba wrote.

“The oil companies and Tanzanian government take US$55 from the US$60 of each barrel, leaving Uganda to take only US$5 from each barrel of its own oil. Even a kid will know they have gotten a bad deal.”

“This alone shows that those responsible for negotiating on behalf of Uganda were either incompetent, or incompetent. What I am reading in the papers is how some individuals just trying to get everyone excited about what they themselves are going to eat from the oil production itself.”

A few days after Lumumba’s comments, on April 15, Ali Ssekatawa, the Director Legal and Corporate Affairs at the Petroleum Authority of Uganda (PAU) responded saying “that Lumumba’s claim that Uganda got a bad deal from the oil and gas projects and will only earn US$5 per barrel is not only factually wrong but does not make logical sense.”

Ssekatawa said Lumumba had “ignorantly” mixed up the money from the extraction of the oil, what he called “upstream,” with the money from transporting the oil, the “midstream.” He said the money the government expects to get must be calculated separately for each of the two segments of the value chain.

He said the East African Crude Oil Pipeline (EACOP) which will transport the crude oil from western Uganda to the Tanzanian port of Tanga on the Indian Ocean coast is jointly owned by the governments of Uganda and Tanzania, and the oil companies.  They will jointly fund it and share the dividends based on their shareholding.

The agreed shareholding on the pipeline is Total with participation of 62%, CNOOC Limited at 8%, the government of Uganda through the Ugandan National Oil Company (UNOC) with 15%, and the government of Tanzania through the Tanzania Petroleum Development Corporation (TPDC) agreeing to take up to 15%.

Meanwhile, the money the government will get from oil extraction operations will depend on what is in the Production Sharing Agreements (PSAs) and Special Provisions on the Taxation of Petroleum Operations contained in the Income Tax Act.

Who gets what?

Ssekatawa said when production of oil starts, Uganda will first receive a royalty payment ranging between 5% and 12.5% depending on the level of production.  Next the oil companies will recover the costs they have incurred, which is capped at 60% to 70% of the remaining ‘oil’ after royalty deduction. The balance after these two deductions will be considered profit oil. This will be shared between the oil companies and the government as per the PSAs.

But the government will also receive corporate revenue tax of approximately 30% on the oil company’s share of profit oil.

Daily crude oil production rates have been estimated to range between 190,000 b/d and 230,000 b/d taking Uganda’s annual production estimates to between 69,350,000 barrels and 83,950,000 barrels of oil. Over the 25 year period that Uganda’s oil project is expected to last basing on the current oil resource inventory, Uganda could produce between 1,733,750,000 and 2,098,750,000 barrels. But the government says, the current inventory of recoverable oil reserves is between 1.4bn—1.7bn barrels.

“Government’s total take from the upstream, as per the current PSAs, therefore, ranges from between 65% to 80%, it increases over the years, and given that there will be fewer costs to recover,” Ssekatawa said.

Based on this Ssekatawa said the overall projected revenues from the sector to the government are estimated at between US$1.5bn to US$ 2bn per year.  The Ministry of Energy says the government expects to produce oil for at least the next 25 years which would put overall projected revenues from the sector to the government at between US$40bn and US$50bn.

But besides the revenues, Ssekatawa said, the expected investments of US$15bn over the next four years when construction of the infrastructure will take place, is an immense opportunity for the country through the provision of the required goods and services.

In addition, the oil and gas sector will have a positive economic impact on other growth sectors of the economy such as manufacturing, tourism, agriculture, health, among others.

“It is projected that these linkages will increase Uganda’s revenue/ GDP by US$ 8.4 billion before first oil,” Ssekatawa said.

Avoiding taxes

Although CNOOC and Total are operating in Uganda, for tax purposes, they are registered in The Netherlands under what have come to be called the “Uganda-Netherlands Tax Agreement” on double taxation.

According to Oxfam International which fights economic injustice across the world, these agreements are designed to deny Uganda its fair share of oil revenues.

Oxfam published a report last October titled ‘The Money Pipeline: Cursed by Design: How the Uganda-Netherlands Tax Agreement is denying Uganda a fair share of oil revenues.’

In the report, Oxfam said power relations between oil majors like Total and CNOOC and multi-national companies and national governments are imbalanced. It noted that falling oil prices and the global climate change which is structurally affecting energy markets are weakening the position of poor countries hoping to escape poverty based on money from oil. What does “cheap petrol” mean for the oil majors? “There is considerable uncertainty around future oil prices,” the study noted.

Therefore it is important to ask whether, the tax avoidance strategies adopted by CNOOC and Total as they search for cost optimization, will not result into lost revenues for the Ugandan government.

Civil society organisations in Uganda have also long been warning that Ugandan domestic revenues are plagued by a number of detrimental double tax agreements (DTAs) and that the country’s revenue collection is hampered due to the abuse of DTAs by multinational corporations.

The Oxfam report also said energy markets are quickly shifting as the transition to green energy becomes a more and more critical necessity embraced by governments around the world.

The government of Uganda has over the last 10 years been betting on future oil revenues to finance its Vision 2040 development agenda which aims at transforming Uganda into an upper/middle-income society. But if hopes are high – so could be disillusions for the new oil producer country, Oxfam said in its report.

Responding to Lumumba Amin’s concerns via the government-owned New Vision newspaper on April 22, Peter Muliisa, the Chief Legal and Corporate Affairs Officer at the Uganda National Oil Company (UNOC) noted that this is not the time to paint a gloomy picture of an otherwise praiseworthy project. Muliisa referred to Lumumba’s queries as “misinformation.”

Muliisa said that within the Production Sharing Agreements signed by both the government and the international oil companies in 2001 and 2004, Uganda has the biggest share from the crude oil that will be produced.

Although he also does not provide facts or evidence, Muliisa says the government of Uganda will receive more than US$40bn over the project’s life cycle.

“The US$ 12.77 a barrel to be paid is a tariff to the EACOP Company and not a transit fee to the government of Tanzania.”

But the government officials also appear to suggest that Uganda got a better deal because the Tanzanian government also waived the requirement for any transit fee.  Muliisa said while the government has prepared for production that will generate significant revenues, it has already demonstrated it is able to fight for and attain what Uganda is entitled to.

“The government has so far generated more than US$ 1bn of revenues from oil and gas before the first barrel is produced,” he said.

He gives the example of the Capital Gains Tax cases that brought in about US$ 700 million as very good examples of the government’s firmness and focus.

“Ugandans should avoid misinformation and focus on understanding how to participate in the sector,”he said, “The opportunities are significant and the law is on your side.”

Still unconvinced, Lumumba noted on April 22 that he had noticed that the government agencies rarely give precise figures when it comes to overall profits or even recoverable oil reserves.

“One could easily suspect an attempt to confuse rather than clarify,” Lumumba said.

“Though they actually confirm my concerns about Uganda getting a pittance from its own oil, after the oil companies, the oil brokers and everyone else has got their share.”

“The average Ugandans are wondering as to why it is not easy to calculate the share of oil revenues for the oil companies established as a fixed percentage, say 50% for example, which does not leave a whole 10% grey area (between 60% and 70%) that could be a loophole for corruption and kickbacks.”

“Despite oil being a highly technical industry, these are the questions that the ordinary Ugandan needs to hear answers about in the simplest understandable language. There must be a transparent and inclusive process for the country’s oil production and sales activities. The people of Uganda deserve that at the minimum.”

Samuel Okulony, the programme officer, natural resources governance at Transparency International-Uganda told The Independent on April 23 that Lumumba raises key issues surrounding the oil industry. He said Lumumba “represents the worry of millions of other Ugandans out there.”

According to Okulony, the Petroleum Authority and other government agencies responsible should rather focus on addressing the issues raised than coming from the defensive angle.

Okulony says although the Petroleum Authority of Uganda gives very critical statistics and information on how Uganda shall benefit from the oil industry, it still leaves the lion’s share in the hands of the oil companies.

“We must not forget that the Ugandan section of the pipeline is only 296km out of the 1,443 Km and this leaves 1,147km to go to the Tanzanian side thus more money on Tanzania’s side and thus; Uganda will get just a fraction from.”

“Portraying that Uganda’s benefits on the sector are guaranteed is expecting too much,” he said.

According to him, currently, as the world fights the impact of climate change and moves toward renewable energy, Uganda’s oil has already lost a significant share of its value.  Since 2013, the value of Uganda’s oil reserves has fallen more than US$40bn (70%) to US$18bn. Under a low-carbon transition aligned with the Paris goals, the value of the oil could drop further, to 88% of its value seven years ago.

The US$4bn in capital costs for the Kabaale refinery substantially reduces the potential profits from oil production.  The experts say expecting oil to meet it is highly the anticipated return on investment will inevitably lead to disappointment and economic loss.

Secrecy hurting oil industry

Ssekatawa called Lumumba’s analysis a “faulty and bizarre thesis.”

“It is important that the information shared should be based on facts,” Ssekatawa said, “A cursory look at any of the PAU/UNOC/MEMD websites would reveal these basic facts.” It is, however, not clear how Ssekatawa expects Lumumba to base his analysis on facts when the facts are hidden away in secret PSAs.

Okulony told The Independent that the secrecy surrounding the Production Sharing Agreements and other agreements that Uganda has signed continues to hurt the industry.

“If Ssekatawa who I assume is privy to these agreements had not come out, some Ugandans would not even know some of the details in them,” he said.

He added: “The PSA has remained a secret to the public for which the resources are meant to benefit. We must not forget that Uganda is a signatory to the Extractives Industries Transparency Initiative (EITI) which mandates govt to publish all contracts and revenues it gets from the extractives industry but this has not been complied with.

“As long as the Agreements remain secret, the public will be forced to consume all kinds of information. I challenge the govt to publish the agreements and relieve the fear in Ugandans.”

Meanwhile James Muhindo, the national coordinator of the Civil Society Coalition on Oil and Gas (CSCO); a consortium of local and international NGOs that advocate for transparency and accountability in Uganda’s extractives sector told The Independent on April 23 that he is “excited” that ordinary citizens like Lumumba are increasingly becoming vocal on oil and gas matters.

“While, with all due respect, I find some of Hussein’s arguments misguided as he uses the midstream agreements to explain Uganda’s stake in the upstream developments, the fact that one can write such detail is proof that Ugandans are watching.”

Muhindo said that Lumumba’s misinterpretation of the contracts coupled with the government secrecy around oil agreements calls for more transparency by the government.

“When the people fail to access the right information, they naturally speculate and arrive at their own conclusions. As to the contents of the documents whose information they can’t access. So, if some of those speculators have a following and the ability to disseminate the speculative claims that becomes the genesis of misinformation.”

“If they (government actually know that they hold natural resources in trust for Ugandans, it is then incumbent upon them to disclose the information to the true owners of the resources. Adopt a receptive as opposed to a defensive stance towards such discourse,” Muhindo said.

“The argumentative and defensive stance that the government officials use to respond to these comments only serves to make it look like there is something they are covering up even when they are being honest.”

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