Uganda will earn sh922m per day from oil

By Ibrahim Kasita

Tullow Oil company and its partners have pledged to start producing 10,000 barrels of oil per day by 2015.

“This timeline is technically feasible. It is possible within 12 to 24 months,” Eoin Mekie, the Tullow Uganda operations general manager, said.

The projected production rate is quite small, but would substantially improve Uganda’s revenues.

 At 10,000 barrels, Uganda would earn $394,640 (sh922m) per day if the crude price is $100 (sh230,000) per barrel. It is currently at $108 (sh240,000) on the international market.

Royalties

The agreements signed between the government and the oil industries indicate that between 5% to 12.5% of the oil (in cash or kind) will be deducted in royalties.

The percentage varies depending on the level of production. If production is less than 2,500 barrels a day, then 5% goes to the government.

If the level hits 5,000 barrels a day, the percentage of royalty payable is 7.5% and above 7,500 barrels a day, it will rise to 10%. When production hits 10,000 barrels per day, which is expected to be the starting production rate, royalties will go up to 12.5%.

The Petroleum Bill tabled in Parliament provide for the creation of the National Oil Company (NOC) that will manage Uganda oil royalties, even if they are secured in form of oil.

Recoverable costs

After royalty has been deducted, the next item to be considered is “recoverable costs.” These are costs that the companies will have incurred during exploration, appraisal, development and production and they are entitled to recover.

“The oil business is highly risky, but also highly rewarding. So, if they are lucky and find oil, they must recoup back their investments as well as get returns. But if they do not, they will pack and go,” says Ernest Rubondo, the commissioner in the petroleum and exploration production department.

But the production sharing agreements (PSAs) are negotiated in a way that the costs recoverable are capped up to 60%.

“This is because if you allowed investors to recover their costs at once, it will take a long time for Ugandans to benefit from the oil proceeds,” Rubondo explained.

Stephen Mukitale, the chairman of the parliamentary committee on national economy said the challenge is how to monitor and regulate the recoverable costs.

“The higher the recovery costs, the less benefits Uganda will get from its oil resources,” he said.

However, Peter Lokeris, the state minister for energy and mineral development, said oil agreements require the formation of an advisory committee.

“The committee consists of representatives of the government, Tullow and partners to review and approve all annual exploration work programmes, budgets and production forecasts,” he explained.

Sharing profit oil

After royalties and recoverable costs have been removed, what remains is known as profit oil. This is to be shared between the government and Tullow and partners through a pre-agreed profit sharing arrangement.

The government takes the bigger share of the profit oil, sources privy to the agreements said. Its take is almost 67.5% and the oil companies are likely to take 32.5%.

But even then, the government will levy 30% of corporate tax from the profit oil that the companies get.

Revenue expected

If production starts at 10,000 barrels a day and the price is $100 per barrel, Uganda will get $125,000 in royalties.

Net revenue of $875,000 will be left. Of this, 60% will go to the companies as recoverable costs. This will translate into $525,375.

What is left now is the profit oil. Let us assume that the government takes 67.5% and Tullow-CNOOC-Total joint venture take 32.5% of the profit oil net revenues, Uganda will take $235,200 while Tullow and partners bag $114,800.

The Uganda Revenue Authority (URA) will then demand 30% of the profit oil share of Tullow- CNOOC-Total ($114,800) and this will translate into $34,440.

Uganda’s revenue will thus be $125,000, plus $235,200, plus 34,440, which is $394,640 per day.

If production is sustained, Uganda will earn $11,839,200 (sh28.4b) per month.