Bank of Uganda to manage oil revenues

Aug 07, 2006 02:00 AM

Uganda is finalising the setting up of a Petroleum Fund to manage revenues expected from recently-discovered oil fields in the country. Several firms have presented prospecting proposals. The proposed fund is contained in a draft National Oil and Gas Policy to be managed by the Bank of Uganda. Exactly how the fund will be managed without political interference is yet to be worked out.
"This account can be housed either locally or internationally, taking into consideration local capacity to manage the fund and the likelihood of political interference," the draft says.

According to it, the central bank's role will be to control the inflationary pressures likely to emerge from the petrodollars earned, manage the exchange rate, and use the revenue collected to develop other sectors of the economy. However, the draft says that Uganda will not follow the example of countries such as Nigeria, which have taken advantage of the high oil prices to settle large chunks of their external debts.
"Thishas a downside in that it does not make sense to pay off lower-cost debt today when there is an expectation to borrow at a higher cost in future. In addition, it would not make economic sense to use funds from a non-renewable resource for debt repayment," the draft says.

Uganda's debt has fallen from $ 4.5 bn a few years ago to around $ 500 mm as of May. The country benefited from the Highly Indebted Poor Countries and other forms of bilateral debt relief from the World Bank, the International Monetary Fund, and the African Development Bank, among others. The country's debt had previously been growing at an average of $ 108 mm annually.
Two foreign firms, Australia's Hardman Resources and Tullow Oil, recently announced that they had discovered oil deposits near Lake Albert in western Uganda. Hardman Resources, which has drilled three wells so far, said tests on one of the wells had revealed a higher-than-expected flow rate of about 12,000 barrels of light oil per day.

The company is carrying out more tests in the area to establish whether the oil deposits are commercially viable. Company officials say early indications are promising.
After the oil find, according to a production sharing agreement, Hardman Oil would get almost 70 % of any oil discovered, which will include cost-recovery allocations and profit splits, while the government will get 30 %.

Officials from the Ministry of Energy said the figures given did not include tax revenues from the oil, nor a sliding-scale equation under which an increase in volumes will lead to an increase in the government's stake, which will rise to as high as 70 %. However, the government officials refused to release details of the 2001 agreement signed with the firm, arguing that it was confidential information.
Meanwhile, news of the oil find has sparked off a rush among firms seeking exploration licenses, as well as individuals buying large chunks of land in areas that potentially have oil fields, hoping to cash in on any further discoveries.

A senior Ministry of Energy official told that the scramble has forced the government to invite bids for exploration licenses to get the best deal.
"The demand for licenses has boomed ever since we confirmed the oil reserves," Fred Kabagambe-Kaliisa, the Permanent Secretary in the Ministry told. "We get at least one inquiry every day, so we have decided to use the open bidding system to get the best deal."

The official said some of the inquiries were from international oil companies, which he declined to name citing business confidentiality. The proposal has the backing of Energy Minister David Migereko.
"We are now tendering out the exploration areas (EAs) in a process which is more competitive and encourages transparency," the minister told.

Previous exploration licenses were privately negotiated between the government and interested parties, such as Hardman Oil. The open-door licensing used over the past years was due to the potential areas for petroleum production being considered high risk, being virgin and frontier areas according to the international oil industry.
Two companies, Hardman Resources and Heritage Oil, acquired their licences by open-door licensing. The operators paid $ 2.5 per sq km for land in the exploration area, surface rental fees of $ 5 per sq km per year, training fees of $ 12,000 and a signature bonus introduced recently that varies according to negotiations.

Signature bonuses are payments made upon signature of either exploration or production licences and they help eliminate sham applicants. These cost between $ 200,000 and $ 300,000 in Uganda. Only Heritage Oil has paid for a signature bonus and all other companies that apply for the remaining licenses will be required to pay the bonus.
The plan is to licence the remaining EAs in the country at improved terms since Uganda is no longer considered virgin territory by the international oil industry, said Mr Migereko. Four out of the six available EAs have already been licensed to international companies including Heritage Oil and Gas, Neptune Petroleum now called Tower Resources, Hardman Resources and Tullow Oil Company.

Mr Kabagambe-Kaliisa said open bidding will enable the country to get companies with the best programme in terms of technology transfer, capacity and institution building, transparency and protection of the environment and health safety.
The programme will also have the best data gathering and dissemination. The amount of money the governments get after signing the production sharing agreement (PSA) will count as well.

Officials in the Ministry of Energy say all the data collected, however, will be the property of the Republic of Uganda, and will revert to it after the petroleum companies relinquish their rights and licences over exploration areas.
Uganda has six defined EAs in the country: EA1 in Pakwach Basin; EA 2 in Lake Albert Basin; EA 3A in Semliki basin; EA 3B in Semliki basin; EA 4 in Lakes Edward-George Basin and EA 5 in Rhino camp basin, all in the Albertine Graben region. The region forms most of the northern part of the western arm of the East African Rift Valley system.

Research shows that rift basins constitute only 5 % of the world's basins but contain 12 % of the world's proven oil reservoirs.
"Our thinking is that the EAs have equal prospective. The difference between them is that some have had more exploration work done on them than others. Four out of the six EAs are licensed and six wells have so far been drilled in the two licensed EAs," the ministry said.

Bunyoro Kingdom, where Lake Albert is found, has also set up a land committee to closely monitor the exploration, and has demanded a percentage of oil royalties.
However, Hardman Oil officials told that the area needed for exploration and production of oil is quite small as they use small pipes to drill through the ground. This, they said, will not require large tracts of land, so they do not expect to buy the same.

Source: The East African
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