Worst kept secret? Tullow Oil’s contract

By Taimour Lay

The full release of Uganda’s Production Sharing Agreements (PSAs) with Tullow Oil and Heritage Oil & Gas is the fundamental first step towards forging a democratic and socially responsible extraction of oil in the Albertine rift.

Instead, Ugandans are being subjected to a disinformation campaign coordinated by the government and the oil companies, consisting of selected leaks to state-owned newspapers, off-the-record briefings to chosen NRM Parliamentarians, and disingenuous public statements from ministers and company executives alike.

The latest stage in this deliberate attempt to throw Uganda’s growing opposition off the scent came last weekend with Tullow Oil founder Aidan Heavey’s ”exclusive” interview with New Vision (”Details of oil deal revealed”, September 26), in which the chief executive claimed that ”for every 10 barrels of oil the Ugandan government gets eight, which is 80%.”

Heavey, who earned $46m in the last financial year, also ” astoundingly ” asserted that ”the [production sharing] deals have been published. There are IMF reports about it.” The interviewers allowed this manifest untruth to go unchallenged.

Given that the PSAs are still secret, why was Heavey able to ”reveal” the 80% figure so freely? Now that these details are being thrown to the public piecemeal through unofficial channels, it makes the government’s current position ” that it is bound by a strict confidentiality clause ” increasingly untenable.

This isn’t the first time parts of the contracts have supposedly been released at a politically sensitive juncture beneficial to the government; ‘supposedly’, since FDC members of the Parliamentary Natural Resource Committee still vehemently deny they were shown the PSAs in June 2008. As MP Beatrice Atim directly told a Ministry of Energy representative at an oil conference on September 10: ”We have not seen the PSAs. [NRM] MPs lie and say ‘we were shown it’. But I can assure you we were not.”

As recently as September 22, Mitzi Westwood, finance director at Heritage Oil & Gas, used the Daily Monitor to complain that high rates of tax in Uganda were affecting the company’s ability to attract new investment partners. That Heritage is contractually obliged to pay corporation tax at 30% came as news to observers who had repeatedly been given to understand that such details were part of the ”confidential PSA”. Why are the oil companies free to release key information when it suits them but Ugandans still have no right to a full view of the contracts that their government has signed?

And now we have Heavey using a newspaper to proclaim the 80% profit-oil share ” ”Best deal in the world”, the frontpage headline unabashedly declared. The reality is that the ”80%” figure ” even if superficially true ” confuses more than it clarifies. The PSAs will reveal the relative share of ‘profit oil’ between the government and the companies but these complex agreements cannot be reduced to a headline figure in this way, however much Heavey would like us to believe otherwise.

The profit oil percentage is merely one measure ” and a misleading one at that ” of whether the existing contracts are a good deal for the country. The terms of a production sharing contract determine not just how the extracted resources will be shared between state and investor but also the legal rights and obligations of both parties. The devil is all in the detail: it is of the greatest urgency that Ugandans are informed of the PSA clauses over duration, cost recovery, economic risk, and where financial responsibility will lie in the event of economic delays and environmental problems.

Heavey is predicting two billion barrels of reserves on the Ugandan side of Lake Albert. In 5-10 years, the country could be producing 100,000-150,000 barrels a day. But before we can begin to assess what this means in dollar terms for the national treasury, the 80-20% profit-oil split has to be viewed in the context of the ‘cost recovery’ provisions which will dramatically reduce Ugandan proceeds in the short to medium term. This means that in the first years of production, the company will be taking up to 60% of the profits to recoup the capital it has invested over the exploration period. Only once that money has been made will the ‘normal’ profit split become relevant.

Moreover, the profit-oil split is designed on a sliding scale which reduces the government take as a whole. Using the draft PSA negotiated with Hardman Petroleum Africa (taken over by Tullow two years ago) for Block 2 in 2001 ” it is of course unclear how this was modified prior to final signature – the highest government share of 65% only kicks in for each barrel produced over the 40,000 mark. In other words, at potential production of 100,000 a day for that particular block, it is not simply a case of dividing total profit by, say 80%, to find the government share. Rather, Uganda’s incremental proceeds will be levelled down as a whole.

If President Yoweri Museveni has signed good deals, then he has nothing to lose by making them public ” now, and in full, as opposed to the current cynical drip-drip of leaked information. If, as many now fear, the government is simply desperate to conceal the terms of PSAs that are dangerously skewed in favour of international companies, maximum democratic engagement and participation must be brought to bear to ensure amendment before it is too late.

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-ABOUT THE AUTHOR: Taimour Lay is a Platform researcher based in Uganda. He can be reached on email: taimourlay@gmail.com