Black gold: What investors should expect

Tuesday May 4 2010

An oil rig at one of the exploration sites in

An oil rig at one of the exploration sites in western Uganda. file PHOTO 

By Angelo Izama

According to the Oil Bill, the sector will be moderated by a minister who has been given special powers to oversee almost all activities in the sector as Angelo Izama reports.

Uganda’s infant oil sector is rearing for increased activity in the lead up to drawing its first barrel of oil from the ground.

Currently, the main transaction that will coalesce, the combined assets-putting the 2 billion barrels currently discovered, in the hands of a consortium is incomplete.
The three-way partnership of Tullow Oil, Total and CNOOC is awaiting signature to transfer the assets of wild cat explorer Heritage Oil.

This deal, according to Heritage, should be completed in the last quarter of the present financial year ending June. A hold-up on the transaction valued at Shs1.57 billion, according to informed sources, is the tax payable to the Ugandan government.

Heritage - sources say - has been “reluctant” to pay capital gains tax- approximately $400 million - on the transaction. In its annual report released recently - the company lists expected earnings of Shs1.5 billion and no liabilities.

Thus conceivably from June 2010, downstream activities could pick up with production schedules brought forward - and new licences considered.


The government of Uganda has also completed a draft Oil Bill which is expected to be presented before the Cabinet and Parliament in a matter of weeks.

Its proposals including- the creation of a National Petroleum Authority and a National Oil Company are the strongest indication yet, of the vision the government has for the oil industry.

For example - the sector will clearly be heavily politically supervised and tightly managed both for technical efficiency and the attainment of certain national goals including the participation of locals.
The draft was completed last month, a copy of which has been obtained by this newspaper.

The government has also migrated the financial aspects of the Production Sharing Agreements to amended sections of the Income Tax Act.

Read together with the new oil law [officially called the Petroleum (Exploration, Development, Production and Value Addition Act, 2010) - the activities of the oil companies and prospective investors will largely fall within the ambit of national laws and regulations.

The Petroleum [Bill], 2010
The current bill is probably one of the most expansive pieces of legislation in the docket. At almost 90 pages of it touches on a broad swathe of areas in the sector.

Besides establishing a regulator for the sector and a National Oil company, it covers licensing, regulates the commercial activities in the sector, deals with environmental issues, competition, payment of royalties and other levies, creates specific offences and provides for the winding down of the industry.

While providing specifically for pollution and damage from pollution - the law transfers in principle environmentally related matters to the National Environment Act.
It also places all petroleum rights in the hands of the government of Uganda on behalf of the “Republic of Uganda”.
The law will also repeal the present Petroleum (Exploration and Production) Act.

Matters touching licensing will be moderated by the minister for the sector (meaning a minister designated for petroleum activities).

The minister - a sort of oil Tsar - oversees almost all aspects of the industry and has wide-ranging authority. His office will be the point of call for permission to conduct oil related activities and most importantly - has been given power under the proposed bill to make regulations to give effect to the provisions in the law.

The regulation making powers of the minister, which will ultimately affect key aspects of the industry, cover 45 key areas in the bill.

The minister is responsible for the regulator in the sector and thus can directly and strictly influence the sector.
It’s to the minister’s office from where reconnaissance permits are applied for even if the permits are then issued by a Commissioner.

The reconnaissance permits have a duration of a year – are non-exclusive and several can be issued for different areas. Investors interested in a Petroleum Exploration License will also apply to his office. The license has a two-year shelf life renewable for another two.

The minister, however, may refuse to renew a petroleum license if its terms - including the payment of annual fees - are violated.

If a company with a petroleum license has discovered petroleum - like Tullow Oil has - it can apply for a petroleum production license from the minister on terms which include a due diligence test by the government.
The production license requires prospective applicants to, for example, disclose their partners. The minister can make “alterations” to the cooperative agreements between companies in partnership where one applies for such a license.

A production license once granted is viable for 15 years under the Bill and in granting it, the minister will appoint an operator for each license.
However, any change of operators requires his or her approval and the new law requires that an operator must be one of the licensees, unless deemed otherwise by the minister.

In the case of the present three-way partnership between Tullow, Total and CNOOC - one of them will have to operate the license or in other words be responsible for producing the oil.

The production license is renewable but a renewal can be refused based on violations of the law or the terms of the license.

Similar provisions apply to downstream activities in refining, processing gas, transportation and storage of petroleum.

Most activities require a license. For example a person cannot trade in crude oil or gas without a licence and due diligence requirements are also under the minister.
The law provides for objections to the grant of a license - but it is to the minister that such objections can be made [say not to a court of law or other institution] and under regulations to be determined by the minister.

The minister can refuse to grant a license, moderate its terms or cancel it under the law depending on certain conditions or in the public interest.

A licensee, however, is bound by his or her financial obligations even where a license has been withdrawn. The wide powers of the minister can be reflected for example in dealing with gas flaring.

It’s generally a discouraged practice but can be conducted on authority of the minister under particular conditions.
The minister also has power to determine under what conditions a company can use its license as security for financing.

A licensee can hold more than one license with regard to producing other petroleum products and exploration of other natural resources.

In managing the sector, the minister - under a provision of the proposed law - can whenever he requires ask for “full information concerning a licensees operations and for inspection of records and accounts of the licensee”.
Information is a key issue the law addresses - although not surprisingly - considering its importance in agreements in this sector.

Interestingly, in addressing supply and pricing of petroleum, the bill proposes that the “market price” shall be determined by a “Pricing Committee” in keeping with common practice.

The bill also sets up a “decommissioning fund” to deal with the winding down of petroleum activities and the associated cleanup activities.

Strict liability for pollution
According to the bill - where there is damage for pollution - “a licensee is liable” for that damage “without regard to fault”.

It also provides strict terms for cleaning up pollution. For example if the licensees fail to pay compensation then it can be extracted from the value of their participating interest.

Part 8 of the bill - which has for long been an issue on the Ugandan Parliament - deals in detail with how locals can participate in the industry.

Essentially, the government is a partner through its share of the licenses issued, however, the law also demands that foreign companies doing business in the sector employ Ugandans and buy Ugandan goods and services.

This is expected in any case where such a good or service is competitive or where a qualified Ugandan is available for a particular position.

Citizen’s consideration
Thus a section insists that foreign firms “shall give priority to the purchase of goods and services from Ugandans” and also “provide the Petroleum Authority with a report of its achievements and its contractors and subcontractors achievement in utilising” local goods and services.

Licensees are also required to create conditions where – in the event Ugandans are not qualified - they receive training. In a separate section within a year of receiving a license, a company must provide the minister with a training programme.

Secrecy clauses
In what appears to be deference to public outcry over information in government hands the new law nonetheless - the minister can make available information to the public depending on confidentiality but in accordance to the Access to Information Act.

They include details of agreements and licenses. However, the Act creates offences for non-disclosure operating on the principle that all information submitted by a licensee shall be kept confidential.

The sections operate like the official secrets act and binds people in the sector. Thus unless the information is already in the public domain its disclosure is discouraged and can be vetoed by the government.

Violations can lead to up to 5 years imprisonment.
Indeed the law states that it shall not be a defence that the information disclosed was already in the public domain.