How to clean up Uganda’s oil mess

Kampala

It is late February 2011. Against all the odds, despite suspected vote-rigging and localised violence, the election numbers are clear and the international community calls for the result to be respected. Uganda finally has a new president. He waves to thousands of opposition supporters outside State House and promises a new dawn for the country.

“Democracy, development and protection of our natural resources. We won’t repeat the mistakes of the past,’’ he promises. But the new president then begins to realise that the public policy documents that will do most to define Uganda’s economic and environmental future have already been set in stone. Four signed Production Sharing Agreements governing the oil extraction blocks at Lake Albert sit on the Presidential desk – they are badly flawed, gift billions of dollars to foreign companies, fail to protect Uganda’s sovereignty and last 25 years.

Representatives from the oil companies visit the president in the week he takes office and warn of dire consequences if he seeks to change their oil contracts. ‘’We’ll leave the country if you disrespect international investment law,’’ they state, but not without first proposing a middle position.

Tight agreements
The spectre of a new president’s hands tied by the mistakes of the past is all too real. The question the president and his policy team must ask themselves – before it is too late – is this: How can these apparently watertight legal agreements be modified? And if they can, what should they prioritise to ensure oil extraction causes the least damage to Uganda’s people, economy and environment?

Since PLATFORM, the UK-based organisation published Uganda’s secret contracts in February 2010 (at www.carbonweb.org/uganda), there has been a growing understanding that renegotiation is urgent and necessary. Contrary to the rhetoric of companies and commercial lawyers, PSAs are often changed in light of new circumstances – including the coming to power of new governments with greater democratic legitimacy than the administrations that originally signed the deals. Uganda committed to its contracts 10 years ago. Mistakes were made back then that no sovereign country has to live with.

The tables have turned since small companies sought to begin exploration in western Uganda. In the late 1990s, there was no certainty about the amount of oil to be found in the Albertine Graben. Now oil majors are desperate to come in. It’s inconceivable that the companies currently in place would leave simply because a new government – fairly and in good faith – requested adaptation of the outdated contracts by mutual agreement. The companies need Uganda more than Uganda needs those particular companies.

Limited reserves
Oil reserves are few while companies willing and able to invest in Uganda are many. The companies require everything from reliable regulatory structures to the security provided by the national army – in these ways, and many others, the Ugandan state facilitates their work.

The oil executives can’t afford a breakdown in their relationships with government and so will seek accommodation – especially if there is a groundswell of democratic support for changes. This means Uganda has the power now to set terms and plan for the future. That won’t need to happen by taking the companies to court (Uganda would lose there anyway because the contracts stipulate that disagreements go to ‘‘international arbitration”) because contract reviews are commonplace and, ultimately, in both sides’ interests.

An example: PLATFORM has already shown that the companies are set to achieve a massive profit rate of over 30 per cent in Uganda – anything above 12 per cent is regarded as a strong profit in the oil industry. Tullow denied that their profits would be excessive but it has since been revealed that in their Ghana PSA, where production is due to start this year, a special windfall tax kicks in when the company’s profit-rate hits 19% in recognition of the fact that the country, not the company, deserves the benefit of rising oil prices and production.

So in Ghana, Tullow admit it’s fair to pay extra tax when their profits are ‘high’ (19 per cent ) but in Uganda their profits can soar to over 30 per cent or indeed 40 per cent and beyond and no additional money goes to the Ugandan state.

A windfall tax is one way Uganda could easily modify the oil agreements to ensure a fairer distribution of revenue. Companies would be very unlikely to refuse this in a renegotiation – after all, they are still going to make a lot of money, and if they resist too much, there are plenty of other players who are willing to take their place.

As oil contract expert, Jenik Radon, argues: ‘Market conditions can change quickly. What initially appeared like a reasonable deal can suddenly look like a giveaway of a nation’s wealth. Therefore, contracts must ensure a sufficient degree of farsightedness to anticipate foreseeable future developments. Such renegotiations are not only fair but also feasible.

In times of skyrocketing energy demand, host governments are in a far more comfortable negotiation position than just a decade ago.’’ But there are other, more fundamental, aspects of the oil deals that need to change. The sweeping “stabilisation clause’’ in Article 33 of the agreements “freezes’’ Ugandan law on the day the contracts were signed. So the law that applies to Tullow in Block 2 is the law that existed here in 2001. Any changes made that affect Tullow’s profits would need to be compensated by the government.

This means that the new oil law currently in offing, and so loudly trumpeted by all sides, will not in fact apply to the contracts already signed. A new government should bring the contracts up-to-date with present Ugandan law and make sure that the country retains the right to make reasonable and responsible changes to the legal framework in which the companies operate.