Kampala. President Museveni and his Tanzanian counterpart John Pombe Magufuli have signed the East African Crude Oil Pipeline Agreement (EACOP), which now paves way for construction of the proposed crude oil export pipeline from Hoima, in mid western Uganda to Tanzania’s Indian Ocean port of Tanga.
The agreement, signed on Sunday almost a year after Uganda under the thrust of Total E&P snubbed Kenya’s Lamu port for the Tanga route, also contains agreed points on the sticking tax issues over which technocrats from Uganda and Tanzania had been split for months, according to sources privy to the pact.
The two countries operate different tax regimes and the major fear was that high construction and operational costs occasioned by an uncoordinated tax policy would render the project uneconomic and spark jitters among international lenders.
Under the signed agreement, Value Added Tax (VAT) should be deemed paid during the three years of the construction phase.
Depreciation should be 5 percent straight line throughout the lifespan of the pipeline and the application of Branch Profit Tax by the two states when the pipeline structure is complete and communicated.
In 2015, Uganda amended the VAT Act 1996 to remove VAT incurred during the investment phase, after protest by the international oil companies.
In Tanzania an investor is required to pay VAT and claim a refund later.
However, this poses risks of foreign exchange rate fluctuation and is subject to bureaucracy. After months of haggling a harmonised position of VAT exemption was adopted.
On depreciation, the two countries opted to use the commonest method of “straight line” against other approaches such as “sum of years digits or double-declining balance.”
The straight line method means that the “scrap value” of the pipeline at end of its lifespan will be subtracted from the value of the original cost to compute a depreciation rate.
The 1,445km pipeline, according to earlier estimates, will cost $3.5b (about Shs12 trillion).
Discussions are ongoing to form a Special Purpose Vehicle (referred to as Pipe Co), to construct, own and operate the pipeline and will also negotiate the Shareholders Agreement, Project Financing Agreements and Transportation Agreement between Shippers of oil from Tanga port to the international market. Pipe Co will pay back the (international) lenders from the project returns.
Therefore, pending formation of Pipe Co, the agreement the two presidents have signed holds that Branch tax (on repatriation of profits) cannot be applied.
Pipe Co shareholders will fund the pipeline through a mix of equity and project financing, seeking to achieve between 60 percent and 70 percent of external debt.
However, the financing plan is still subject to discussions pending engagement of a “transactionary adviser” and completion of the Front-End Engineering Design (Feed) for the pipeline. The process is ongoing.
Early in January a contract for FEED was awarded to the Houston-based Gulf Interstate Engineering to study technical requirements that will give a clear picture of the project and lead to Final Investment Decision (FID) before end of the year. FID will lead engineering, procurement and construction, which are expected to start next year.
According to the Uganda-Tanzania agreement, the two presidents also directed their respective Attorney Generals to urgently finalise an Inter-Government Agreement (IGA) to operationalise the terms agreed upon and harmonise laws of the two countries that will apply to the project.
The heads of state also directed the IGA to be signed by Energy ministers, Irene Muloni for Uganda and Prof Sospeter Muhungo of Tanzania, not later than next week.
The IGA will be followed by the Host Government Agreements (HGA) that defines the rights and obligations between each State on the project, and will be ratified by the respective parliaments.
“A date for the two heads of state to lay a foundation stone either at Hoima or Tanga should be arranged as soon as possible,” the agreement reads in part.
At the signing ceremony at State House in Dar-es-Salaam, President Museveni was flanked by Energy minister Irene Muloni and the PS Stephen Isabalija, Deputy Attorney General Mwesigwa Rukutana, acting director of Petroleum Directorate Robert Kasande and Dr Josephine Wapakhabulo, executive director of Uganda National Oil Company (Unoc).
The Tanga route, according to feasibility studies, was deemed the cheapest for Uganda to transport its oil from the production point in Hoima to the international market.
It has convenient flat terrain, not interrupted by other activities, has lowest environmental challenges, and provides the shortest schedule for Uganda to seeing the first oil export - earliest mid 2020.
Besides Tanzania’s convenient land tenure system of no freehold ownership, President Museveni said at the signing that the choice of the Tanga route was premised on the country’s political stability.
“This oil pipeline shows the importance of integrated decision-making. The Chinese have been able to move and become the second biggest economy in the world,” Mr Museveni noted.
President Magufuli commended Uganda for choosing the Tanga route for the pipeline, which he said will not only create employment but also be a source of revenue for both countries.
Construction of the pipeline, expected to commence early 2018, is projected to take 36 months with prospect of between 6, 000 and 10, 000 jobs created. Uganda’s current oil reserves stand at 6.5 billion barrels with 1.7 billion recoverable from the ground.