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Uganda’s oil contracts could be flawed

By Vision Reporter

Added 23rd January 2010 03:00 AM


UGANDA’S oil production sharing agreements point towards a resource extraction programme designed for company profit.


UGANDA’S oil production sharing agreements point towards a resource extraction programme designed for company profit.



UGANDA’S oil production sharing agreements point towards a resource extraction programme designed for company profit.

The exploration and imminent production of oil in western Uganda is being seen as just that – an easy answer to complex problems. Both the Uganda government and the oil companies involved have been busy painting a rosy picture of bumper revenues and a country transformed. Forget the intricacies of agricultural reform, social ownership and political liberalisation; Uganda, we are told, will be turned into a middle-income country by $2b a year.

But the problems facing Uganda are almost certain to be exacerbated rather than solved by oil. Last month, the campaigning group PLATFORM published three of the production sharing agreements (PSAs) the Uganda government has spent years keeping a closely guarded secret.

The deals point towards a resource extraction programme designed for profit, not development, and contain a series of provisions that undermine any hope of changing course.

Our analysis reveals that the international oil companies, including Tullow Oil, backed by a $1.4b loan arranged by the Royal Bank of Scotland (RBS), and Heritage, run by former mercenary Tony Buckingham (which had been due to finalise a sale of their licences to Italian firm ENI for $1.6b, although these may now be bought by Tullow), are set to reap huge sums at Lake Albert – as much as a 35% return on their capital investment. That’s three times what’s internationally recognised as a fair profit.

State risks
The oil contracts are structured so that price risk lies primarily with the state, while the private companies are virtually guaranteed a healthy return even if the market slumps. As the oil price rises, investors will make a higher and unlimited profit, taking close to one quarter of oil revenues, whether each barrel is fetching $70 or $200.

Even the Norwegian experts advising the Government have expressed serious reservations: a review of Uganda’s contracts commissioned by the Norwegian Agency for International Corporation in 2008 concluded that the profit–share model adopted “cannot be regarded as being in accordance with the interests of the host country”.

The 20–year contracts, consistently weak or completely silent on human rights protection, also include a sweeping “stabilisation clause” – article 19 requires the Uganda government to compensate the companies for any future change in the law that affects their profits – designed to militate against improvements in environmental standards.

Legal disputes between the two sides will not be resolved in Uganda, but in London: at the Energy Institute, whose president will pick the all–powerful arbitrator. For those in any doubt about the biases of the institution, it is currently headed by James Smith, chairman of Shell UK.

Still the leading player in Uganda, Tullow Oil had consistently claimed that its contracts with Kampala were “the best deals in the world” for the Government.

Since our report was released, senior Government figures have now accepted that the PSAs are flawed and need to be altered; but Ugandan civil society remains deeply concerned that the contracts allow no room for renegotiation.

The ingredients for the so–called “resource curse” are all in place: contract secrecy, Government corruption, commercial disinformation campaigns, with environmental protections ignored, and a simmering border dispute with the Democratic Republic of the Congo frozen rather than resolved.

Moreover, British taxpayers find themselves unwittingly complicit in this unfolding disaster.

The World Development Movement, along with PLATFORM and People and Planet, will return to the courts this month to continue their challenge against the Treasury’s decision to finance RBS, but ignore the government’s own environmental and human rights criteria – contained in the Treasury’s Green Book – when providing funds for investment projects around the world.

Our appeal for judicial review, filed on December 9, 2009, argues that the Treasury, majority shareholder in RBS through UK Financial Investments, has unlawfully failed to assess the environmental and human rights impact of RBS investments, including its role as Tullow Oil’s lead backer in Uganda.

Rosa Curling, solicitor at Leigh Day & Co, says a successful appeal will give the UK Government no option but to reconsider its position.

‘’Legal proceedings have already resulted in a significant victory. Having strenuously resisted the suggestion that the treasury should even consider applying environmental and human rights standards to the way in which public money is used by banks such as RBS, it has now conceded that it does have to, and indeed has, undertaken an assessment on whether such standards should be imposed.

“However, the wholly inadequate assessment they carried out concluded that when it comes to considerations such as climate change and human rights it would be unlawful for the Government to require RBS to go beyond what is narrowly in the ‘commercial’ interests of the company.

“Lawyers will argue that conclusion contravenes the duty of directors, under Section 172 of the Companies Act 2006, to take the impact of their business on the environment and the community into account.’’

Urgent action
Given the companies involved and the Ugandan Government’s reluctance to change course, the urgency could not be greater. The UK is supporting oil exploitation while turning its back on the problems it will generate, refusing to use its role as financier to ensure a meaningful impact evaluation is carried out.

Uganda stands on the brink of entering production with no Strategic Environmental Assessment (SEA) having been carried out. A coalition of NGOs in Kampala is now calling for a suspension of exploration drilling in protected areas of Murchison Park while the effects on wildlife remain so uncertain.

For all the work of the country’s 8,000 NGOs, the 30% budget support from donors and the rhetoric of international aid, it is these botched contracts and the financial interests of oil companies that will do most to define Uganda’s future. While increased oil revenues give the impression of superficial growth, the sudden influx of cash distorts the economy and exchange rates, undermining alternative sectors, including agriculture and industry that employ and feed far greater numbers.

Taimour Lay is a PLATFORM campaigner based in Uganda and the Democratic Republic of the Congo.

This is an edited version of a story that was published in
The Guardian newspaper
in the UK

Uganda’s oil contracts could be flawed

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