Secret oil deals leak

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Sunday, 07 February 2010 21:44

Written by Edris Kiggundu

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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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