Oil clause binds Uganda on legislation, says report

Kampala       
Heritage oil secured economic protection against future oil legislation, a confidential audit report accessed by the Daily Monitor has revealed.

The April 2009 Ernst & Young report compiled for the Government of Uganda reveals that Article 33 of the Production Sharing Agreement between Uganda and Heritage Oil & Gas specifies that “if there is any change, or series of changes, in the laws or regulations of Uganda which materially reduces the economic benefits” of the company, the government must make substantial economic compensation.

It is understood that these contracts, which the government refuses to publish, will be inherited by any company that buys out Heritage's oil interests, the focus of immense speculation in recent weeks.

“We are shocked by the breadth of this stabilization clause. It undermines the Ugandan ability to legislate in any area that affects company profits such as the environment, workers’ rights or any other standards,” said Taimour Lay, a researcher for international pressure group PLATFORM, which released the documents.

This clause may impact upon the pending Oil Bill.
But Minster of State for Energy Simon D’Ujanga said, “The PSA cannot override the law... There is another clause in the agreement which says the PSA can be revised with mutual agreement.”

The report, commissioned by the Ministry of Energy and Mineral Resources, also expressed concerns regarding Heritage’s accounting between 8 September 2004 and 30 October 2006.

For example, it found that while Heritage attempted to claim US$31,777,351 (about Shs63bn) as recoverable expenditure, only expenditure amounting to US$31,190,840 was eligible, a discrepancy of US$586,511.

The findings are part of a wider investigation by PLATFORM and a coalition of 14 Ugandan non-governmental organizations.

Detailed research by the coalition uses draft oil contracts, backed up by leaked government minutes, accounting audits and international studies to criticize the arrangements secured in PSAs signed with Heritage and Tullow Oil.

Modelling various scenarios, the report said the PSA contracts allocate a comparatively low share of profits to the government, ranging from as low as 47% to 76% for Block 2, owned by Tullow Oil, depending on oil prices. In contrast, the report found that the oil companies have secured extremely favourable returns for their investment, citing 30-35% as the most likely scenario, compared to a 12% to 20% industry standard.

The report concludes, “In examining what Uganda’s PSAs mean in terms of government take and corporate IRR, we can see that Uganda’s loss in terms of government revenue will be the oil companies’ gain.”

Brian Glover, Business Unit Manager for Uganda and East Africa, said, "Tullow firmly rejects the conclusions of the recent Platform report."

He said commercial confidentiality prevented him from discussing details regarding the PSAs but he told Daily Monitor, "I can assure your readers that the PSAs are in-line with best practice around the world."