Saturday January 28 2012

Oil delay: Who wins, loses?

A crucible of oil

A crucible of oil  

By Isaac Imaka

Ever since the quintet of Theodore Ssekikubo, Abdul Katuntu, Gerald Karuhanga, Muhammad Nsereko and Wilfred Niwagaba threw a spanner in the works by bringing oil company bribery allegations to the forefront in October last year, Uganda’s promising-yet-troubled oil sector has been running up against a brick wall.

The last quarter of 2011 was characterised by endless court battles over the $404 million (Shs945 billion) capital gains tax – a case still awaiting final arbitration – which calls for transparency and resignation of government officials who were implicated in the bribery scandal. This was met by declarations from many that Uganda had fulfilled the predictions, and the oil curse had finally taken its hold.

The halting of oil exploration activities, the legal wrangling over contracts and finger pointing that came with it have spilled not only into politics, but into a renewed public’s distrust of government officials and oil companies alike.
“Before the MPs intervention, it was some kind of a stillbirth. We had as a country given up,” says Makerere University social researcher Dr Ntale Kisekka. “The sector had been shrouded in secrecy; contracts had been hidden away from both the Legislature and the public. We had seen the curse set in even before the first drop.”
He adds that last years’ oil wrangles are likely to change the political play too.

“We had come to witness a situation where the executive and the legislature had become fused to be one,” he says. “But because of the oil debate, it is no longer business as usual to transfer business from the executive the legislature.”

The brakes being put on Uganda’s fledging oil sector by Parliament has been by and large praised. Some say it will bring in a new era of individual responsibility. But in terms of costs to Uganda, was the tumult worth it in the long run?

In the Albertine Valley, work has stalled. Contractors, rigs and oil pipes lie idle, and the cost of them not being used will ultimately be paid by government in the form of lost profits, which oil companies can reclaim down the road.

Dr Kisekka says if the first parliamentary resolution of not signing any new agreements is adhered to until firm laws are put in place, it will help ensure that institutions are strengthened and that new laws will be well implemented.
But in the industry and business view if the companies have to end up to sit for another year waiting because of the moratorium, new Tullow oil Uganda chief Eoin Mekie says it will cost independent businesses the most. He argues that keeping people motivated is not easy, and that the service contractors who invested heavily in the belief that there will be a growing industry are being let down.

“They have borrowed money, they have brought in trucks and trains of international standards to support our operations, and we’ve been sitting idle,” Mr Mekie said.

“The point is this is not an industry you can just stop. It’s going to happen whether now, whether it’s in one year’s time, it’s going to happen - you can’t ‘undiscover’ it.”

The potential is huge, but as Uganda is constantly reminded, so are the risks. Invoking the ghost of the oil curse of Angola, Gabon, or Nigeria is nothing new. But Tullow executives say Nigeria for instance was undone in the 60s and that since, the industry has come a long way.

“Let’s not think ourselves into a Nigerian basket,” says Ms Trina Fahey, Tullow Oil’s regional external affairs manager for Southern and Eastern Africa, who cites Botswana and Malaysia as success stories never mentioned.

Key issues to iron out before exploration resumes

Key agreements still need to be ironed out. The government and oil companies have disagreed on the stabilisation clause – whether a change in policy or government down the road can affect oil profits.

The government argues that accepting to “top up” the profits of oil companies if they are negatively affected due to a change in law is not only bad, but gags Parliament’s authority to freely make laws. Most MPs are in support of this view, but Tullow Oil’s CEO Eoin Mekie argues the benefits from oil have to be thought of long-term.

“Obviously if you are a politician, you want action within your five-year term, whereas we are looking at the next 30 or 40 years,” he said.

Mr Mekie says Tullow is taking all of the risk, with government offering no guarantees. Big oil has failed before, and Tullow says it has already sank millions into a project that is still at least five years away from producing substantial amounts of oil, and that only then will they recoup those expenses.

“When we come to talk about production sharing agreements we need some sort of assurance on stability,” says Mr Mekie. “The economics of this investment is premised around a certain set of assumptions – around fiscal stability, government stability, legislation, et cetera.”

Tullow says they are in it for the long haul. Oil production will surpass presidents and MPs, and even legislation. At the end of the day, it will be the average Ugandan who will be living in a post-oil economy – but what that economy will look like, remains to be seen.

The efforts
Currently, Uganda boasts of an estimated 2.5 billion barrels, or 397.5 billion litres of crude oil and 7 billion standard cubic feet of gas. This is just from 40 per cent of the prospected Albertine Valley.