Government rejects Shs290b oil firms cost claims

PARLIAMENT.

The Auditor General, Mr John Muwanga, has rejected a claim of Shs290 billion by oil companies as recoverable costs out of their expenses between 2011and 2004.

In his latest report on central government and statutory corporations, Mr Muwanga notes that the claims, whose details the audit report does not specify, do not qualify as “recoverable costs”.

According to the report, expenditures amounting to Shs140b or $39m out of the Shs3.5 trillion ($983m) that foreign oil companies claimed as recoverable costs did not comply with the provisions of the Production Sharing Agreements or PSAs.

The report is silent on specific expenditure heads, what was not complied with and whether all the three key foreign oil firms are affected.

Until early this month when UK’s Tullow Oil firm sold its majority stakes to French firm Total Plc, the two firms, alongside China National Offshore Oil Company (CNOOC), each owned equal stakes in the oil-rich Albertine region.

According to the audit report, another Shs149b ($41m) was determined “unclaimable” in accordance with the PSA provisions because, apparently, no commercial Oil and Gas reserve was discovered in the licensed exploration area.

“$902m [out of $983] was considered compliant with the provisions of the PSAs and is, therefore, recoverable from future oil earnings,” the AG noted in his report, referring to the PSAs which the government has kept under wraps.

The AG says it is now auditing recoverable costs for the period 2012-2015.

Although much of the provisions of the PSAs are unknown to the public, officials have spoken openly about cushioning to oil companies through a provision that allows them to recover overhead exploration expenditures where oil is found. Under the arrangement, a quantity of the oil pumped out when production begins --- technically called ‘cost oil’ --- will be a share for the oil companies to recover monies they invested.

To ensure that government is not cheated, the foreign oil companies are by law required to submit cost recovery statements to the Auditor General for audit to ensure their claims match the investments and are on items permitted under the PSAs.

While appearing before a Parliamentary ad hoc committee which was investigating the oil sector in 2011, the Auditor General at the time complained about government’s failure to control and monitor recoverable expenditures of oil companies.

Mr Muwanga notified the committee at the time that the PSAs signed with the oil firms did not have limits on recoverable costs and that a company could spend as much as it pleased on a particular recoverable item --- assured that the government would pay back. Some companies, he said, had submitted corporate social responsibility expenditures as recoverable cost item.

Some items that qualify for recoverable costs

A Surface rentals: These are dues payable to government as surface rentals for the land in a contract area.

Labour and associated costs: These include any personal income taxes to Uganda incurred by employees of the licensee and paid or reimbursed by licensee, travel and personnel expenses of employees of licensees and their families including those made for travel and relocation to expatriate.

Office camps, warehouse and other facilities: These cater for costs for establishing, maintaining and operating any offices.

Interest and financial charges: Charges incurred on a loan to finance development operations.
Commissions paid to intermediaries unless they exceed levels usually paid in international oil industry.
Transport costs: transporting employees, equipment, materials and supplies necessary for the conduct of the petroleum operations

Charges for services: These include all necessary appropriate, economical direct and indirect expenditures in support of petroleum operations including but not limited to ware house, piers, marine, workshops, water, community and recreational facilities, tools and equipment used in these activities.

Material: Purchase of material required for use in petroleum operations
Rentals, taxes, duties, and other assessments: they relate to short term rentals of drilling, motor vehicles as well as other equipment
Insurance and Loses: these relate to costs incurred by the licensee covering activities if itself and that of its employees and the subcontractors to meet obligations to third parties or to government that might arise in the event of damage or loss or injury caused by petroleum operations.

Legal expenses: all expenses in litigation and legal related services necessary or expedient for the producing, perfecting, retention and protection of the license area and in defending or prosecuting lawsuits involving the area or any third party claim arising out of activities under the agreement.
Training costs: these include annual training fees laid out in the PSA as well as other costs incurred by the licensee in training its personal and Ugandan Citizens

General and administrative expenses: they include all main office, field office and associated general administrative cost incurred in relation to petroleum operations.

Ecological and environment changes: relates to all measures taken to avoid waste and prevent damage or pollution in conduct of petroleum operations
Leasing expenses: Leasing property and equipment
Communication charges: charges incurred in hiring, acquiring and maintain communication equipment as well as other general costs such as courier, postage and telephone. Other expenses incurred by the licensee for the necessary and proper conduct of petroleum operations.

Research and development of new equipment material and techniques.