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Deal tilted in favour of oil companies.
Contract could make Uganda poorer
.

Insights into the tightly guarded oil production and sharing agreements signed by the government and international companies have finally leaked.

The 40-page report titled: Contracts Curse: Uganda’s Oil Agreements Place Profit Before People, that extensively quotes the agreements the government has kept under wraps, reveals that oil firms will reap extra-ordinary profits.

The report by PLATFORM, a London-based organization, says that as a result of this, extraction of millions of barrels of crude oil on Block 3A is most likely going to exacerbate poverty, increase human rights violations, entrench the power of military forces and distort the Ugandan economy.

The drilling on Block 3A is being undertaken by Tullow Oil which is seeking to acquire the entire stake by buying out Heritage Oil’s shares in a deal reported to be worth $1.35 billion.

In coming up with the report, PLATFORM says it reviewed the agreements and spoke to several people in Uganda and abroad, who are knowledgeable about the agreements. Last week court dismissed a petition filed by two journalists of The Daily Monitor seeking to access the oil production, prospecting and exploitation agreements. The case was brought under the Access to Information Act, the law that allows citizens free access to information.

Dismissing the case, the Nakawa Court Chief Magistrate, Deo Ssejjemba, said certain documents need to be kept confidential for proper functioning of the public service. The report that analyses clauses of the entire agreements concludes that the oil firms stand to reap more from the oil than the government or its citizens when oil production starts late this year.

SIGNATURE BONUS


Government will receive $300,000 (Shs 570 million) as signature bonus for signing the agreement. But the report notes that even if this represents hard cash paid up front, this money is little. “The Congo (DRC) government received a $3.5 million bonus upon signing Production and Sharing Agreements (PSA) for Block 1 in 2008,” the report notes.

REVENUE SHARING


According to the agreement, the government and oil firms will share the revenue according to the barrels of oil produced. According to the report, Uganda has come out with two models that cover two different scenarios.

Under the first model, government will take 68% of the revenue, leaving 32% to the firm if an oil field can generate a total of 800 million barrels of oil. Where a field can generate 1,500 million barrels, government’s share of the revenue will rise to 73%. The revenue could fall if the price of a barrel of oil drops and the reverse is true.

Such agreements, PLATFORM says, are highly profitable for the participating oil companies. In the most likely scenarios, Tullow Oil could make a 30-35% return on its investment. “This represents a very high profit level for the oil industry, even for risky projects.”

In the report, Reuben Kashambuzi, Uganda’s Commissioner at the Petroleum Exploration and Production Department, is quoted as accepting that that the existing PSAs damage Uganda’s national interest. He says: “We agree that the PSAs were not structured to take advantage of runaway oil prices being experienced worldwide today. Several attempts [to renegotiate] have not succeeded because of the perception that Uganda’s PSAs are very tough.’’

ROYALTY FEES


As for royalty fees, which is a set amount of money that the oil firm must pay to government annually as a percentage of its gross sales, where the production does not exceed 2,500 barrels of oil per day, the oil firm will pay a royalty of 5% and where production exceeds 2,500 barrels but does not reach 5,000 barrels, government will be paid a royalty of 7%.

Interestingly, the agreements make no mention of what the Bunyoro Kitara Kingdom, where the oil wells are located, will get. This matter has long been contentious. According to the contract, the Ugandan government could choose to participate in the oil developments with a 15% stake, without providing upfront investment.

The benefits of this option are that Uganda receives a greater proportion of revenues, shares in the private company’s profitability while ensuring a more even sharing of the potential ‘upsides’ - the chance that the project succeeds. However, the report notes that it appears government will not exercise this right.

“By refusing this possibility, the government is effectively handing over a significant portion of revenues to the private companies,” the report notes.

PIPELINE

The agreements give the oil companies the right to construct an export pipeline through Uganda and Kenya, to take crude oil to the port from where it can be collected by tanker. According to the report, while the contract explicitly states the oil companies’ rights to construct a pipeline and the government’s obligation to support such a plan, it does not include the opposite responsibilities.

That is, the contract does not state that the oil companies will conduct adequate impact assessments or strategic environmental plans or construct the pipeline to certain standards. Nor does it include a contractual right for the Ugandan government to investigate and oversee proposals prior to approval.

“Given the very high projected returns of 20-34% for the oil companies developing the fields along Lake Albert, there is a risk that the oil companies constructing the pipeline will aim for a similar return. The companies exploring for oil have consistently used the apparent need for a pipeline to justify their excessively favourable terms.

They have argued that because Uganda is a landlocked country, they are compelled to invest in oil transportation infrastructure and that this will affect their margins.”

TRAINING LOCAL STAFF


This agreement sets out a responsibility for the oil companies to train Ugandan citizens to gradually replace expatriate staff and to train government personnel in oil operations. In many oil producing countries, contracts will set out strict percentage targets for local as opposed to expatriate employment, specifying necessary quotas for unskilled, semiskilled and skilled jobs.

However, Uganda’s contracts set no specific timetable or quota targets, merely stating “the Licensee will gradually replace its expatriate staff” (emphasis added). It appears that the government and the companies have created unrealistic expectations around the employment opportunities that will follow from oil extraction in Uganda.

While the oil exploration and production industry is capital intensive, it employs proportionately far lower workers than almost every other industry. While a number of unskilled workers will be needed during the development stages to construct roads, buildings and other infrastructure, these will mostly be short term, insecure and low-paid positions.

PROTECTING THE ENVIRONMENT

The report notes that the environmental impacts of oil and gas extraction are particularly serious along Lake Albert, as this is the most species-rich eco-region for vertebrates and one of the most bio-diverse areas on the African continent. However, Uganda’s Production Sharing Agreements reviewed by PLATFORM carry few specific or enforceable safeguards.

According to the agreement, where an oil company that causes environmental damage or fails to otherwise comply with these terms, the government’s sole resort is to “take action […] to ensure compliance” and “recover […] expenditure incurred in connection with such action”. This means that there are no fines at all for causing environmental destruction.

“Deterrent fines are widely recognized as crucial to preventing regular and large oil spills. A US academic study found that a fine increase from $1 to $2 per gallon for large spills decreased spillage by 50%. The 1990 Oil Pollution Act in the US laid out fines of up to $1,000 per barrel discharged.”

“That the contracts provide no basis for fines, while Uganda simultaneously lacks an effective regulatory regime for the oil industry, clearly represents worst practice.”

RESOLVING DISPUTES


Disputes between the oil companies and the government shall be referred to arbitration in London, according to the rules of the UN Commission for International Trade. This means that a conflict between the Ugandan government and a private oil company operating on Ugandan soil will be resolved not in Ugandan courts, but by an international investment tribunal.

Moving the resolution of disputes to London undermines Ugandan sovereignty, treats the Ugandan state as a commercial entity of equal standing to a private corporation, removing concepts of public interest, responsibility or sovereignty.

HUMAN RIGHTS VIOLATIONS


The agreements, according to PLATFORM, are silent on the relationship between the oil companies and the military or police forces. Thus it is unclear what promises and guarantees the Ugandan government has made to ensure security and what rights the oil companies have been awarded.

This leaves open critical questions, including: Do oil company security or private military contractors have the right or authority to arrest, injure or kill those they perceive as a threat? Do oil companies’ security have the authority to deal with protest or opposition to oil extraction projects?

Do the contracts include indemnification of the company against liability for any human rights abuses arising? Do military contractors have the right or authority to interact with foreign forces? Has the Ugandan government promised to ensure security? Is the Ugandan government financially liable if there is a breach in security?

Is the Ugandan government incentivised to prioritise security interests over the human rights of local populations? At the moment, the report notes that a battalion of the elite Presidential Guard Brigade is responsible for Uganda’s oil region. The report also notes that a new military base will be constructed on ten square miles in Hoima District.

Conclusion

In conclusion, the report notes that oil contracts in Uganda do not provide enforceable protection standards regarding the environment or the human rights of Ugandan citizens, relying on the oil companies to operate reasonably and altruistically.

In this context, it is clear that extracting the oil discovered in the Albertine Graben is highly unlikely to bring overall benefits in terms of economic development, let alone environmental protection or human rights to the region. The Ugandan government and companies have repeatedly criticised comparisons with Nigeria, Angola, Ecuador or other oil producing countries in the global south, asking why the focus is on those countries with negative social & economic outcomes from oil. 

Yet despite their promises of corporate responsibility, the oil companies’ foremost legal responsibility is to maximize profits for their shareholders – other commitments can be sacrificed to achieve this. This is made explicit in Heritage’s 2008 Prospectus to potential shareholders.

The failure of the contracts to protect Uganda is compounded in that national law and oil policies do not currently provide “enough specific and enforceable obligations to promote responsible regulation of [the oil & gas] sector, especially with regard to protection of the environment.

While the government claims that it will present a “new oil law” to parliament imminently, there is as yet no sign of it. Current negotiations over development plans with the oil companies continue to place the cart before the horse.

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Comments

 
0 #1 alemu 2010-02-07 19:09
With the insane level of greed for money and power in Uganda, this is not surprising. These guys are shameless, they feel they are more important than the country. It is all about them. They do not care about the people at all.

And sadly, the majority of our people are plain ignorant. They do not know they are being exploited in broad day light. Keep singing "No Change"
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0 #2 MABO 2010-02-07 23:16
Having confirmed the commercial feasibility of ugandan oil by world reknown oil dealers/companies,ugand a as country made a break through. Wht is left now is "spicing" up & stream line the sector. The dynamics of the western world are so diverse regards trade & natural resources. As a new niche sector,may be mistakes were made,the focus now shld be how to make oil industry vibrant.Lets uganda train oil technocrats to handle future ventures/agreement ably. Am very certain Tullow,Heritage Neptune etc are not the only companies to come & invest,more will follow. Lets tie off the loose ends now. As we crying over spilt milk,lets plan to "milk the cow" to replace wht was spilt. Am sure to "cow"(vargin oil reserves) are still there/plenty in uganda. For God & my country
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0 #3 Job 2010-02-08 02:09
One of the dailies[monitor - to be precise]has already published the 'secret' deals. so my friends there is nothing new you are breaking to us! Do you read other papers???
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0 #4 tonny 2010-02-08 02:55
its a pitty for our leaders to deny the citezenz"patriots"to know wats going on in the dark sides of the deal in case the deal back fires it will b the press or opposition to blame not the president coz our president according to him is an angel who does no bad deal....i would think they should consult the people of uganda n the people of uganda will not let them down
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0 #5 hamada mulumba 2010-02-08 06:03
I think we still have time to revise the agreements because they seem to be unfavourable. am surprised the host kingdom is not mentioned at all.we really would ike to appeal to govt to revise the contracts they have signed with the oil companies to avoid uncertainty.should they they pay a deaf ear to our cries we shall not accept this nonsense and copy the ogoni people.
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0 #6 Bazibu 2010-02-08 06:17
its up to the people of uganda to stop this rot! of course these guys are just after their own personal benefits they have no feelings and concerned about the citizens. its heartening to see that the majority of people is business as usual & have no clue about the extent of such craze deal can do to the environment in the oil region & the potential conflict that will result as the big guns fight for the loot which seems to be the main objective of the oil expoloration. its important the knowldgeable educate the ill informed of this development and organise the masses especially the people of bunyoro to agitate for full transparency of this oil deal and a review of the agreements that will put people interest before the vulture's interests. the earlier its done the better for the future of uganda. save us from this "NO CHANGE" sick mentality!
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0 #7 Mpuro Emma 2010-02-08 06:55
As a concerned citizen i wish to add my voice to those voices of reason which the government of Uganda do not want to listen to:since when did oil become a private issue that our so called "leaders"deem the agreements they made with the companies that are going to extract oil to be confidential?the Ugandans need to know if the oil is for their development or for the development of the leaders.
I would think that by hiding the agreements away from the public about their stake in this oil it will create anxiety and the consequences God forbid might be like those ones being experienced in the Niger Delta.
our so called leaders need to show the stake that the people are to get instead of treating the whole oil issue as if it is a "family asset".if they are leaders not business people as they claim let them show what Ugandans are to benefit and show systematic accountability in the whole deal.for God and my country.
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0 #8 PAT 2010-02-08 07:02
All along people have been crying out let us have a glance at the agreements and the Govt was keeping it at their chest. They were not very knowledgeble but could not let others show them the pitfalls. You may not be supprised when you see that they "ate" at the expense of the country. People like MABO i pity you u are always there to cheer wrong doing.
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0 #9 Ssemuwemba Junior 2010-02-08 07:56
Why is it that of all people, its only Mabo that cannot see that we are being exploited?
I bet he is a mouth piece of someone or something. Dear Mabo, I have always read your comments in a lot of pain and agony! Style up pleaseee.
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0 #10 joash kaaro karungi 2010-02-08 09:41
Insights into the tightly guarded oil production and sharing agreements signed by the government and international companies have finally leaked.
Deal tilted in favour of oil companies.
Contract could make Uganda poorer.
Those oil mining companies were formed dubiously by Museveni & family offshore companies, in order to steal Uganda minerals, even after they have been forced out of power.http://peopleandplanet .org/navid9384
Bailed out Royal Bank of Scotland act as joint coordinators of a £925 million deal linked to a controversial project on the resource-war struck Uganda-Congo border - project alleged to have led to an escalation of violence, with oil companies accused of equipping troops, and allegations of corruption.
Bailed-out Royal Bank of Scotland have, along with financiers Merrill Lynch, led a deal worth nearly a billion pounds for controversial company Tullow Oil. The finance is closely linked to a project which is said to risk exacerbating violence on the border between The Democratic Republic of Congo and Uganda.
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0 #11 morris 2010-02-08 09:44
Is their anything good left of this regime? The deal was supposed to be debated in parliament before being signed. Now the parliament has been left to discuss the troubles the deal will cause.
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0 #12 Jim Kamezza 2010-02-08 10:40
There should be NO oil deals before the 2011 elections and all companies foreign and domestic must know that NO deals will be honoured by the New Government .m7 is selling Ugandan oil on speculative value terms and signing agreements which bound the state of Uganda, this conspiracy to rob the wealth of the state of Uganda , We must NOT allow this
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0 #13 Daddy 2010-02-08 12:23
Mr Kashambuzi is nolonger commissioner, does that ring a bell!!!
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0 #14 Cecilia Kinyo 2010-02-08 14:00
Mabo and his group of leeches will
not cease to sing Kisanja songs till exploration of oil in Bunyoro and minerals from Karamoja, has been
exhausted.

Mabo, continue sucking the carcass.

I pity you greedy lot!
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+1 #15 MABO 2010-02-08 14:17
My dear Jr,name calling & taging others will not take us far. I hope you know that in society pessimists & optimists do exist. Personally I strive to be in the later group.

Am not denying tht mistakes or exploitation could have happened,all that said & done wht is the way foward? Should we now conclude tht there is nothting tht can be done to stream line things? My answer is no. Either we or subsquent generation have a duty to make things better.

As we say in buganda that losing a dear one is not a guarantee for you to turn a cementry to a bed room!! Lamenting & banishing every body is counter productive. Lets all go out to serve & make uganda a better place to live in.Am however grateful tht you have been reading my comments.

Both of us may be wishing uganda well,its the approach tht divides us wch is normal pointing. Wht I would have expected from you was to also specify your way foward regards oil sector in uganda.However am sorry if my comments hurt you,feel free to express your self as well.

Am always ear & eyes to read the observer. For God & my country.
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-1 #16 joash kaaro karungi 2010-02-08 14:20
Our analysis reveals that the international oil companies, including Tullow Oil, backed by a $1.4bn loan arranged by the Royal Bank of Scotland, and Heritage, run by former mercenary Tony Buckingham (which had been due to finalise a sale of their licences to Italian firm ENI for $1.6bn, 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.http://www.guardian.co.uk/katine/katine-chronicles-blog/2010/jan/18/uganda-oil-profits
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0 #17 katsigazi geoffrey 2010-02-08 15:34
Please dont let us back i realy wonder why the goverment of uganda can go ahead and make acontract with such a company realy how comes .

how can you make acontract where only few indivuals will gain in it lloks like there are more truth hiden under the contract .we have been hoping that our economay will grow high and ugandans will benefite in but thay gonna be poorer .

how comes the contract does not specifies the period of foreigner workers on uganda's soil,why is it that the contract does not allow uganda to be charged in our court instead of foreign tribunals board wat about our enviroment where adeveloping country like uganda can do the best to change the enviroment .

realy do we have goverment or colonalists compare uganda with congo on the share after signing tha agreement .take alook at the transpot interms of contract

time will come .wat i know the goverment is trying to entise the foreigners in order to safe pressure from the european and americans
squander the goverment resources but time will tel us wat to do with this .
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0 #18 ronnie 2010-02-09 04:36
I think the poeple of Bunyoro will wake up and support the Federo goverance,where some profits stay in the area for development,not the central government to decide what to give you

if m7 was really a true ugandan i dont think he would do this,poeple keep on praising Kagame,but they forget that the guy is in his country,and he loves it.Mainly,I care about the environment,tha t I think will be destoyed after the fact.Do you know what really happened in Central America after one american company left?

It is a sad story,but there is still time for all ugandans to demand the truth,about this deal,what will our kids say?
For God and my country
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0 #19 ronnie 2010-02-09 05:23
I cant believe that many Ugandans know what is going including our elected MPs but they are just writting and discusing a "must solve" issue before oil comes out.

This is a national matter regardless of where you come from in Uganda,and for Bunyoro i think you must embrasse the federo system where some share stays within a communities to improve their living standards,not the government to decide what portions to give the communities.

I think if m7 was really a ugandan he would not do this kind of deals to his country. People praise Kagame because the guy loves his country more than himself.I care about the environment but i dont think it is protected at all,and there is no way of knowing.

After an american oil company left central american the destruction is being felt everyday,but how will it be in a country where the law is bought by the highest bidder. What will we tell our kids with all this information we have?
For God and my country.
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-1 #20 Jim Kamezza 2010-02-09 06:38
Companies worth only few hundreds of dollars are selling assets in Uganda based speculated value of their share in ugandan oil at time of production ,

it might be that oil will fall in value then and Uganda may come to pay for air again.One wonders why m7 makes such deals ,Naguru estate , workers house house ,Nsimbe estate have turned out to be disasters , why should a leader consipire to fleece his country ? Isnt that TREASON ?
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