Uganda oil sharing deal still clothed in secrecy
Dec 10, 2008
AS Uganda prepares to drill its first barrel of crude oil next year, the oil revenue and production sharing agreements remain secret. Although the ministry of energy and mineral development asserts that the country will receive 70% of all revenue generated during the oil production period, the asser
By Ibrahim Kasita
AS Uganda prepares to drill its first barrel of crude oil next year, the oil revenue and production sharing agreements remain secret. Although the ministry of energy and mineral development asserts that the country will receive 70% of all revenue generated during the oil production period, the assertions cannot be verified independently because the agreements have never been released to the public.
Even the data provided have not yielded the desired debate and discussion on oil revenue sharing because the statistics are fragmented, threatening Uganda’s ability to avoid the oil curse.
“Failure to disclose the revenue and production sharing agreements creates suspicion, however good the projects are,†explains Frank Muramuzi, the executive director of the National Association of Professional Environmentalists (NAPE).
“This makes it difficult to evaluate and monitor promises about future effects of oil production on the Ugandans livelihood.â€
He points outs that the Access to Information Act stipulates the disclosure of oil contract contents to win confidence of the public and various stakeholders.
“If you don’t disclose the information, stakeholders become suspicious and begin thinking that you are exploiting them,†asserts Muramuzi.
“Publish what you earn, what you pay for, what you exploit. We want to know more about the revenue distribution from our resource.†He says oil revenue sharing agreements, pollution and environmental protection are the major concerns the public would want to know about. Such concerns are contained in the oil production sharing agreements signed between the Government and the oil firms exploring for oil and gas in the Albertine Graben.
However, the Government and the oil companies have refused to release copies of the agreements they signed way back in 2001 for public scrutiny and debate claiming “the confidentiality clauses†and “protection of commercial interests.â€
The fragmented revenue sharing percentages. The energy ministry says that the oil firms will initially stand to gain between 50 and 60% of the revenue from the production and sale of the Lake Albert oil.
This type of revenue is categorized as cost recoveries to the oil firms for the financing they provide to engage in oil exploration and geological research before actual production begins.
The Petroleum Exploration and Production Department (PEPD) under the energy ministry asserts that the calculations show that Government will be indebted to these companies for approximately three-years, after which the cost recovery will be complete and the revenue will return to Uganda .
In addition to the 50-60% cost recovery estimate, royalty payments that will go to Government amount to approximately 5-12.5% of total revenue from the sale of oil.
Royalty payments are traditionally used to compensate the country for the removal of finite resources such as minerals or petroleum from the land.
Government will take another 15% of the total revenue to account for the state’s general share of the oil production businesses. The remaining revenue, which could range from as little as 12.5% of total revenue after cost recoveries are complete, will be divided between the government and the oil firms through what is called production sharing.
Production sharing occurs when the state and oil companies literally divide the barrels of crude oil pumped each day, and sell the oil separately.
Energy ministry senior officials said the distribution of crude oil between the state and the oil companies will vary over time, depending on the average number of barrels produced during a particular period.
Variations in revenue based on production suggest a ceiling within the agreements, in which the oil firms engaged in extraction are essentially guaranteed a set amount of revenue for each day of production.
Anything beyond the capped amount becomes revenue for Uganda. From the statistical analysis, the distribution of crude between the oil firms and Uganda will vary between low production days (in which as little as 40% goes to Uganda, while 60% goes to the oil company) and high production days (in which as much as 75% goes to Uganda while only 25% goes to the oil company).
Low production days will most likely occur during the industry’s infancy in the first years of production, which could render total state revenues fairly small in the early years.
However, according to officials, those revenues will be augmented by a 30% tax that the state will levy on all revenue received by the oil companies.
Over the course of the 25 years in which Uganda is expected to produce oil, the state will receive approximately 70% of all revenue from oil extraction with the remaining 30% going to the companies engaged in drilling.
Implications While the statistics suggest a high cost recovery for oil firms during the early years of production, it is useful to note that these numbers do not necessary mean that the terms set within the production sharing agreements were poorly negotiated on behalf of Uganda.
Depending on the amount of investments made by a firm during the planning phases of the drilling process, recovery costs can be quite high for oil firms during the initial periods of production. But because the Government has chosen not release the full PSAs to the public or Parliament, no expert can weigh in and offer the public the benefit of an additional opinion or independent assessment.
The complexity of the economic models alone, and the many varied outcomes possible, highlight the need for individuals with the expertise at hand to adequately summarise the possible outcomes that different stakeholders throughout the country can expect to see.
For instance, no independent parties have publicly verified the assertions that Uganda will receive 70% of all total revenue generated during the life of oil production in Uganda .
The data provided by the ministry is too fragmented. Consider too, the potential loopholes involving customs duties (which determine what oil companies will be able to import duty-free into Uganda ) and income tax policies could have a large effect on the size of the revenue in question, with serious consequences for the net revenue generated by the state.
While the Government says it will tax the revenue of oil firms at a rate of 30%, it is not clear what the Production Sharing Agreements define as taxable revenue. Such details could amount to huge sums of money gained or lost for Uganda.
Land owners Individual landowners, according to officials in the energy ministry, suggest that their revenue split is provided for within the Mining Act that will be the model that drives the distribution of oil revenues.
In the Mining Act, 80% of state revenue goes to the central government, 17% goes to local governments and 3% goes to the landlords The Early Production Schemes (EPS) The efforts to promote Uganda’s oil and gas potential have led to intensified exploration work being undertaken in the Albertine Graben.
This has culminated in the confirmation of the existence of commercially reserves of oil and it is apparent petroleum will be produced. Over 300 million barrels of oil are estimated to be in place in the Kaiso-Tonya areas where the Waraga, Nzizi and Mputa discoveries were made.
Plans are underway to produce 4000 barrels of oil per day from the reserves. This production will feed an early production Scheme scheduled to start producing kerosene, diesel and heavy fuel oil during 2009.
The heavy fuel oil will be used to generate 57MW of electricity to alleviate power shortages. Kerosene and diesel will be distributed directly into the existing market.
AS Uganda prepares to drill its first barrel of crude oil next year, the oil revenue and production sharing agreements remain secret. Although the ministry of energy and mineral development asserts that the country will receive 70% of all revenue generated during the oil production period, the assertions cannot be verified independently because the agreements have never been released to the public.
Even the data provided have not yielded the desired debate and discussion on oil revenue sharing because the statistics are fragmented, threatening Uganda’s ability to avoid the oil curse.
“Failure to disclose the revenue and production sharing agreements creates suspicion, however good the projects are,†explains Frank Muramuzi, the executive director of the National Association of Professional Environmentalists (NAPE).
“This makes it difficult to evaluate and monitor promises about future effects of oil production on the Ugandans livelihood.â€
He points outs that the Access to Information Act stipulates the disclosure of oil contract contents to win confidence of the public and various stakeholders.
“If you don’t disclose the information, stakeholders become suspicious and begin thinking that you are exploiting them,†asserts Muramuzi.
“Publish what you earn, what you pay for, what you exploit. We want to know more about the revenue distribution from our resource.†He says oil revenue sharing agreements, pollution and environmental protection are the major concerns the public would want to know about. Such concerns are contained in the oil production sharing agreements signed between the Government and the oil firms exploring for oil and gas in the Albertine Graben.
However, the Government and the oil companies have refused to release copies of the agreements they signed way back in 2001 for public scrutiny and debate claiming “the confidentiality clauses†and “protection of commercial interests.â€
The fragmented revenue sharing percentages. The energy ministry says that the oil firms will initially stand to gain between 50 and 60% of the revenue from the production and sale of the Lake Albert oil.
This type of revenue is categorized as cost recoveries to the oil firms for the financing they provide to engage in oil exploration and geological research before actual production begins.
The Petroleum Exploration and Production Department (PEPD) under the energy ministry asserts that the calculations show that Government will be indebted to these companies for approximately three-years, after which the cost recovery will be complete and the revenue will return to Uganda .
In addition to the 50-60% cost recovery estimate, royalty payments that will go to Government amount to approximately 5-12.5% of total revenue from the sale of oil.
Royalty payments are traditionally used to compensate the country for the removal of finite resources such as minerals or petroleum from the land.
Government will take another 15% of the total revenue to account for the state’s general share of the oil production businesses. The remaining revenue, which could range from as little as 12.5% of total revenue after cost recoveries are complete, will be divided between the government and the oil firms through what is called production sharing.
Production sharing occurs when the state and oil companies literally divide the barrels of crude oil pumped each day, and sell the oil separately.
Energy ministry senior officials said the distribution of crude oil between the state and the oil companies will vary over time, depending on the average number of barrels produced during a particular period.
Variations in revenue based on production suggest a ceiling within the agreements, in which the oil firms engaged in extraction are essentially guaranteed a set amount of revenue for each day of production.
Anything beyond the capped amount becomes revenue for Uganda. From the statistical analysis, the distribution of crude between the oil firms and Uganda will vary between low production days (in which as little as 40% goes to Uganda, while 60% goes to the oil company) and high production days (in which as much as 75% goes to Uganda while only 25% goes to the oil company).
Low production days will most likely occur during the industry’s infancy in the first years of production, which could render total state revenues fairly small in the early years.
However, according to officials, those revenues will be augmented by a 30% tax that the state will levy on all revenue received by the oil companies.
Over the course of the 25 years in which Uganda is expected to produce oil, the state will receive approximately 70% of all revenue from oil extraction with the remaining 30% going to the companies engaged in drilling.
Implications While the statistics suggest a high cost recovery for oil firms during the early years of production, it is useful to note that these numbers do not necessary mean that the terms set within the production sharing agreements were poorly negotiated on behalf of Uganda.
Depending on the amount of investments made by a firm during the planning phases of the drilling process, recovery costs can be quite high for oil firms during the initial periods of production. But because the Government has chosen not release the full PSAs to the public or Parliament, no expert can weigh in and offer the public the benefit of an additional opinion or independent assessment.
The complexity of the economic models alone, and the many varied outcomes possible, highlight the need for individuals with the expertise at hand to adequately summarise the possible outcomes that different stakeholders throughout the country can expect to see.
For instance, no independent parties have publicly verified the assertions that Uganda will receive 70% of all total revenue generated during the life of oil production in Uganda .
The data provided by the ministry is too fragmented. Consider too, the potential loopholes involving customs duties (which determine what oil companies will be able to import duty-free into Uganda ) and income tax policies could have a large effect on the size of the revenue in question, with serious consequences for the net revenue generated by the state.
While the Government says it will tax the revenue of oil firms at a rate of 30%, it is not clear what the Production Sharing Agreements define as taxable revenue. Such details could amount to huge sums of money gained or lost for Uganda.
Land owners Individual landowners, according to officials in the energy ministry, suggest that their revenue split is provided for within the Mining Act that will be the model that drives the distribution of oil revenues.
In the Mining Act, 80% of state revenue goes to the central government, 17% goes to local governments and 3% goes to the landlords The Early Production Schemes (EPS) The efforts to promote Uganda’s oil and gas potential have led to intensified exploration work being undertaken in the Albertine Graben.
This has culminated in the confirmation of the existence of commercially reserves of oil and it is apparent petroleum will be produced. Over 300 million barrels of oil are estimated to be in place in the Kaiso-Tonya areas where the Waraga, Nzizi and Mputa discoveries were made.
Plans are underway to produce 4000 barrels of oil per day from the reserves. This production will feed an early production Scheme scheduled to start producing kerosene, diesel and heavy fuel oil during 2009.
The heavy fuel oil will be used to generate 57MW of electricity to alleviate power shortages. Kerosene and diesel will be distributed directly into the existing market.