Uganda discovers loopholes in oil agreements

Nov 22, 2009 01:00 AM

Uganda settled for relatively unfavourable terms from agreements she signed with companies currently working the huge oil fields discovered in western Uganda, according to a new report to be released.
According to the report which was compiled from data gleaned off copies of the original draft contracts eventually signed between the government and several oil companies, the oil companies are set to make "three times what's internationally recognised as a fair profit".

This is the first time the Production Sharing Agreements (PSAs) are made public. Some of the MPs admitted to this newspaper that to-date they remain confused about whether Uganda got a good deal or was taken for a ride.
In an attempt to collaborate the findings, the figures and analysis in the report by Platform, a UK-based environment and governance watchdog, were provided to the Petroleum Exploration and Production Department (PEPD) of the Energy ministry.

Figures confirmed
The head of PEPD, which is also government's technical agency heading the national petroleum programme, Ernest Rubondo, confirmed that the figures are the same ones contained in the PSAs. He, however, contested some of the conclusions of the report.
A loose minute written by the Permanent Secretary at the Energy Ministry Kabagambe Kaliisa spells out the specific terms contained in agreements with Heritage Oil and Gas and a company called Energy Africa Uganda.

The letter written on September 2, 2004 is a key statement of fact about the terms agreed to in the oil agreements. None of the oil agreements have been re-negotiated since. While Ugandan officials stood by the agreements, the Platform report says there is valid cause for concern. After financial remodelling, the Platform report concludes that the oil companies have gotten a much better deal than the Ugandan government.
In particular, the report says, oil companies will reap exceptional profits relative to that of the government as oil prices rise. This is in part, say experts, because the government did not insist on terms allowing it to re-negotiate the terms in the event that world oil prices went up.

Commenting on a review of the oil programme last year, Mr Reuben Kashambuzi, the then head of PEPD, said: "We agree that the PSAs were not structured to take advantage of runaway oil prices being experienced worldwide today. Several attempts have not succeeded because of the perception that Uganda's PSAs are very tough."
His comments are contained in a due diligence report following a review commissioned on behalf of the Norwegian Agency for International Corporation (NORAD) and carried out by Arntzen deBesche -- a Norwegian law firm specialising in international transactions. Arntzen deBesche was critical of government's PSA model and called for its reform.

Comparing producers
The Platform report says compared to similar oil production sharing agreements in Northern Iraq and Libya, Uganda got a worse deal.
"Indeed, Heritage's agreement with the Kurdistan Regional Government [in northern Iraq is a better deal]. The KRG isn't even a recognised state, doesn't have legal authority to negotiate and remains under military occupation," the report says arguing that often companies use state disadvantages to get the better of unsuspecting countries.

But Mr Rubondo said that the report's authors selectively chose particular countries to compare the Uganda's agreements.
"At the time they were negotiated no one knew there would be commercially viable deposits," he said.
Mr Rubondo also said while Uganda did not stipulate a provision to re-negotiate at higher future oil prices it was nonetheless better off.
"The structure of our agreements is that they are incremental. If the companies pump more oil the government share is more -- and would increase especially after the companies have recovered their initial investment," he said.

He also ruled out a re-negotiation while the price of oil was between $ 80-$ 100 per barrel. But the Platform reportinsists the companies would earn excessive profits. For example, the report says the claim -- made by both the government and at least one of the oil companies (Tullow Oil) that Uganda will get 80 % or that the agreements "are the best in the world" are false.
But Buliisa MP Steven Birahwa Mukitale, who seats on both Parliament's Natural Resources and National Economy committees, and whose constituency is in the oil exploration area, says some of the challenges Uganda is facing would be ironed out in upcoming legislation.

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