Status. This year started with a thunderous exposé- the presidential handshake in which 42 bureaucrats rewarded themselves with Shs6b for the role they played in the successful litigation against UK-based Tullow Oil PLC and Heritage oil—two cases which fetched about Shs2.4 trillion. The case opened a can of worms, which among others, also revealed that Uganda had so far received Shs2.7 trillion as revenues and already spent all, writes Frederic Musisi in the last part of our series.
Uganda is in a Shs3.6 trillion debt on expenditure spent by the international oil companies which will be reimbursed directly from oil windfall.
The monies relate to the oil-prospecting drills and associated expenditure between 2001 and 2011, according to industry insiders.
However, this liability is set to triple as the Auditor General verifies new Shs12 trillion ($3.3b) recoverable costs, claims the three oil firms, France’s Total E&P, China’s Cnooc and Anglo-Irish Tullow Oil, say are seismic data acquisition and exploration expenses over the past five years.
None of the three oil companies is willing to share its individual expenditures. One of the reasons, according to insiders, is that not all expenditure qualifies as recoverable cost.
The Office of the Auditor General is mandated to audit all claims related to oil expenditure due to the oil companies and submit the report to the Speaker of Parliament for review.
Insiders say six management letters have been drafted to the effect of ongoing audits; “meaning that several audit queries have been identified and are at various stages of receiving responses from management and verifications thereof.”
“Three cost recovery (implementation) statements have been scheduled for audit in January 2018,” insiders in the Auditor General’s office told this newspaper. The cost recovery implementation statement includes, among others, details of fees and methods for determining fees, exemptions and waivers.
The Production Sharing Agreements (PSAs) signed between government and the oil firms spell out the type of costs the firms can recover from government and those which are unrecoverable.
Although many of the provisions of the PSAs remain unknown after government declined to make the contracts public, officials have spoken openly about cushioning the oil firms 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.
Costs audited so far
For the PSAs signed between 2001 and 2011, Auditor General John Muwanga says he disallowed claims amounting to $70m (Shs250b) by the oil firms.
Mr Muwanga, in the audit report issued early this year, indicated that 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.
Sources in Mr Muwanga’s office told this newspaper separately that the ongoing audits for the last five years are likely to disallow “huge amounts” especially if some money relate to unbudgeted expenditures, cost overruns, penalties and fines.
Other ineligible expenditures include social responsibility and sponsorship costs, which are not directly related to oil exploration.
According to the PSAs, some of the costs that qualify as recoverable costs include surface rentals payable to government for the land in a contract area, labour and associated costs, office camps, warehouse and other facilities, interest and financial charges incurred on a loan to finance development operations and commissions paid to intermediaries unless they exceed levels usually paid in international oil industry.
The oil firms are required to submit all their annual budgets and work plans to the oil sector regulatory body, Petroleum Authority (PAU), for scrutiny and approval.
The PAU director for development and production, Mr Alex Nyombi, told this newspaper in an earlier telephone interview that “is from these work plans and budgets that we get a clear picture of the actual recoverable costs.”
“So the oil companies cannot undertake an activity whose budget has not been approved,” Mr Nyombi said. “We also review many of the contracts they sign with contractors to ensure that costs/prices are within range; sometimes we reject or revise them.”
The government signed the first PSAs in 2001 with Australia’s Hardman Resources and UK-based Energy Africa, with each being granted a 50 percent stake in Exploration Area 2, east of Lake Albert.
In 2004, Tullow Oil PLC bought off Energy Africa, taking over 50 per cent stake in exploration areas 2 and 3, with the other half belonging to Heritage. In 2005, Hardman drilled the Mputa-1 well, and found significant quantities of oil and gas in exploration area 2, which confirmed that Uganda had commercial oil deposits, an announcement that was publically made in October 2006.
In 2006, Tullow bought off Hardman, giving it a 100 percent stake in Exploration Area 2 and another 50 per cent stake, through the earlier acquisition of Energy Africa, in Exploration Area 3 (southern Lake Albert and Semliki).
Then in February 2012, Tullow farmed down (sold) 66.66 per cent of its interest to Total and Cnooc. In January 2016, Tullow announced plans to sell off the remaining stake to the former and exit the Ugandan market. The deal encountered a headwind later in March after Cnooc exercised its pre-emptive rights to acquire half of the shares floated to Total and two have since deadlocked on transactional modalities.
After approval of their work plans/budgets, Mr Nyombi said the oil firms are required to compile all the costs and submit them to the Auditor General.
What has been so far collected, spent
Uganda has bagged trillions of shillings so far in signature bonuses, annual surface rentals, sale of data, permit fees, withholding taxes, capital gains tax, value added taxes and royalties.
In 2015, President Museveni assented to the Public Finance Management Act (PFMA) that guides on spending [oil] revenues on the priorities in the budget.
The law also provides for a single Petroleum Fund in Bank of Uganda (BoU) where all oil revenue collections are deposited. The Fund has two objectives; financing the budget and saving/investment for the future generations.
The money in theory can only be withdrawn and used strictly for development, not recurrent, expenditure and upon parliamentary approval on a year-by-year basis. Oil revenues will be limited to funding the non-oil budget deficit agreed as part of the Budget process.
According to the PFMA, monies in the fund will be invested in accordance with the petroleum revenue investment policy issued by the Finance minister after consultation with Secretary to the Treasury, and on the advice of the Investment Advisory Committee.
An audit commissioned by Parliament’s Committee on Commissions, Statutory Authorities and State Enterprises (COSASE) in May revealed that Uganda had so far bagged Shs2.7 trillion in earnings on oil-related transactions, of which there was only Shs268.3b remaining in the Petroleum Fund as of June.
Tullow Oil was expected to make a Shs128b payment, the last installment of from Capital Gains Tax. Daily Monitor could not, however, ascertain if the payment has since been made. Both Tullow and BoU officials declined to comment on the matter.
During the COSASE hearings on the presidential handshake, ministry of Finance and BoU officials revealed that of the Shs2.7 trillion, at least Shs2.7 trillion had been transferred to the Consolidated Fund and spent on the Karuma and Isimba dam projects. The two dam projects cost an estimated Shs5.5 trillion.
According to the bilateral agreement between Uganda and China, the latter through its Export-Import (Exim) Bank was to foot 85 per cent of the two projects and the government 15 per cent on the two projects.
Last December towards Christmas, the ministry of Finance tabled a request to Parliament to approve withdrawal of Shs119b from the Petroleum Fund; the monies to be spent on construction of 600km of “critical oil roads” in the Albertine Graben, in mid-western Uganda.
The roads are required to be in place by 2020 to facilitate the different activities leading to oil production.
The Shs119b will be supplemented by a Shs2.2trillion credit line from China’s EXIM Bank.
The start of commercial oil production in Uganda, according to the World Bank, offers long-term prospects to diversify the economy and catapult it to upper middle income status by 2040.
With commercial production in full swing, the Bank postulated that the country, could earn up to $3b ( about Shs7 trillion) in revenues from exports of up to 60,000 barrels of oil per day.
These revenues have the potential to propel the economy between 7-10 percent forecast up from the current stagnation of 4 percent.
The World Bank, in echoing previous concerns, says this growth will only be possible if the oil cash is not pilfered by bureaucrats and the money used for infrastructure and human capital development.
Oil revenue & expenditure
Oil fund: Before the establishment of the Petroleum Fund, money accrued from oil companies was paid into the Oil Tax Revenue account. In the 2014/15 financial year, Shs1.6 trillion was transferred from the Oil Tax Revenue account into the Consolidated Fund and spent by the government through the national budget. More than Shs12b was spent on the two oil cases against Tullow and Heritage.
Expenditure: A total of Shs2.6t from the national forex reserves was spent to buy fighter jets in 2011 on orders of President Museveni on the promise that the reserves would be replenished when the Capital gains taxes were paid eventually.