Oranto, Armour production sharing agreements introduce performance bonds.
Uganda ended its first competitive oil licensing round in October, picking two companies from the earlier seven that made the final shortlist, and revealing some crucial changes in the commercial terms within the country’s oil industry.
The change of the commercial terms in the sector, where the level of participation from the Uganda National Oil Company has gone up, points to a country that is becoming bolder in negotiations with the oil companies, some experts say.
Nigeria’s Oranto Petroleum Limited will try and strike oil in the Ngassa play where Tullow Oil failed to succeed and ended up booking a $67 million loss in 2013 before it relinquished the license back to the Uganda government.
While Armour Energy of Australia hopes it will be lucky and strike oil in the Kanywataba prospect after Cnooc failed to find any commercially viable quantities there in 2012. Oranto got two licenses for four years each, while Armour got a two- year license. Both companies acquired an acreage of 344 sq km with their licenses spread over four years.
But it is the commercial terms of the two separate Production Sharing Agreements (PSAs) that point to a Uganda government that appears to offer oil companies some relief.
A key change in the agreements is the cost recovery rate – where oil companies will be allowed to recoup the money they spent before sharing the profit with government.
In both the Oranto and Armour PSAs, Uganda pushed up the amount of costs that the oil companies can recover before profit oil to 65 per cent from the earlier official figure of 60 per cent.
While some experts interpreted the earlier 60 per cent as high by international standards, saying companies had been handed a sweet deal, the revelation that Uganda has decided to raise the figure further up means at least two things: the country is desperate to attract more companies to its oil industry at a time of depressed oil prices and limited access to capital on the international markets; and that companies have gradually gained strong bargaining power over the years.
The level of state participation is the other major change in the commercial terms. Earlier PSAs capped state participation at 15 per cent. That has now changed to 20 per cent, according to the PSAs government signed with Oranto and Armour.
This means that Uganda can own up to 20 per cent in the oil blocks. The increase in state participation by the Uganda National Oil Company means the Uganda government will share both the benefits and risks in the oil blocks.
A higher state participation will be interpreted as a level of confidence Uganda has in its oil industry. This should be able to attract other oil companies that might seek to enter the country through a farm-in.
In Uganda, the royalty – the amount of money generated from the sale of oil before costs are recovered – varies from one oil block to another. Uganda has decided to stick to its cumulative royalty model, where the figure for the royalty goes up as daily oil production ramps up. The way it works is that the lower the barrels of oil sold, the lower the royalty.
Earlier figures that government signed in other PSAs showed royalties creeping up from five per cent to a high of 15 per cent. That has now changed.
In the Oranto PSA, government will earn royalties of between 5.5 per cent and 18 per cent from the two oil blocks it licensed out in the Ngassa deep and shallow plays. Armour signed royalty rates of between 8.5 per cent and 21 per cent.
Depending on how deep the royalties might eat into the oil company pockets, the likelihood of keeping oil sales at a low is tempting. Oil companies might have to weigh whether to increase their oil sales and pay the price of a higher royalty or keep them low and save some money.
The introduction of a performance bond, a concept that is mainly in the electricity sector, is one of the latest commercial terms in Uganda’s oil industry. Uganda received a performance bond of $2.4 million from Oranto Petroleum.
Armour, according to Uganda’s ministry of Energy and Mineral Development, paid a performance bond of $495,000, which is at least half the mini- mum amount the company will need to drill one well.
(Armour, in its 2017 annual report, though, says it paid a performance guarantee of $837,000) Governments tend to request for performance bonds to limit the entry of speculators.
Uganda’s high demand for a performance bond in the
Ngassa play could be an indication that the country needed confidence that the Nigerian firm had the financial muscle to develop the offshore wells, which, with their complicated terrain where the prospective oil area lies beneath Lake Albert, requires a lot of cap- ital.
There has been little change in the signature bonuses, though. For the Kanywataba area, Armour paid a signature bonus of $316,000, nearly the same amount - $300,000 – that Cnooc paid in early 2012 for the same block. Oranto paid a signature bonus of $800,000.
Changes have been made to the income tax structure too. Recently, President Museveni signed into law an amendment that will see oil companies pay income tax at the start of oil production. The change differs from an earlier position where oil companies were expected to pay income tax after recovering their costs.
That change in tax policy could see oil companies restructure their operations in a way that could limit the amount of in- come they book in Uganda. Uganda has discovered about 6.5 billion barrels of oil resources, with about 1.7 billion of that amount said to be recoverable. Government insists that oil production will start in 2020.