Stand-off between govt and oil companies: What’s going on?

Sunday October 13 2019

Inspection. Journalists during a tour of the

Inspection. Journalists during a tour of the oil wells Hoima District in 2015. FILE PHOTOS  

By Timothy Kalyegira

Uganda’s prospects of exploiting its petroleum reserves in the Lake Albert region have recently hit a hurdle.
A dispute between the government and the energy companies engaged in the exploration of the oil fields led to an announcement in August by the companies that they were suspending their active operations.
Since the announcement of the discovery of oil in June 2006, the date for the commencement of petroleum production has constantly been put further and further back, and this is the latest.
The impasse over the petroleum, from the point of view of studying Ugandan history, serves as a reminder of why Uganda’s politics has unfolded the way it has since Independence.
There just is no institution, company, political party, individual or interest group strong enough, financially sound enough and organised enough to act as a true counterweight to the State.
Donor support, usually dispensed in collaboration with the government, further strengthens the hand of the government relative to the other interest groups and parties in the State and, in turn, further weakening the State itself.
The first misstep both by the government and the oil exploration companies took place almost right from the beginning.
Rather than take the long-term view and think of Uganda in totality, the oil firms took the pragmatic approach of dealing with the centre of power as it stood as present.
That present was of a Ugandan State that, in theory, is divided into a three-branched government made up of the Executive, Legislature and Judiciary.
In reality, Uganda since independence in October 1962, has functioned as a State dominated by the Executive branch and the two other branches of State, acting or regarded as subservient to the Executive.
Furthermore, when reference is made to the Executive branch across most of Africa, what is really being referred to is the all-powerful head of State, the president.
This is how it came to be that negotiations over the petroleum exploration contracts were conducted with the Executive branch of the State, usually with the President at State House and the details of the contracts kept secret for the first few years after 2006.
The only Ugandan entities that got involved or exerted some pressure on the Executive branch over the contracts were Parliament and the media. The Judiciary was almost entirely silent.
In this, the oil negotiations resembled the manner in which Africa’s modern nation-states were established during the late 19th Century.
European missionaries, administrators and explorers, would arrive in a territory, be ushered into the court of a king or chief, state their interests or demands, and all subsequent negotiations over territory, treaties and boundaries were conducted entirely between the African monarchs and the Europeans with next to no input from the local subjects.
Having accepted to deal with the present reality as it is, the oil companies set themselves up for the current impasse.
In effect, they had dealt with the person of President Museveni and not the impersonal State that is the Republic of Uganda.
The discovery of the Albertine oil reserves was presented as a great strategic breakthrough of the NRM government.
It was presented to the country as a political achievement of the NRM government and the result of President Museveni’s strategic thinking.
Production of oil would catapult Uganda into a middle income status and seal Museveni’s legacy as a historical figure.
The true national significance of this discovery was reduced to partisan politics.
In anticipation of future petroleum revenue, the government borrowed heavily on the international market and drew up major infrastructure construction plans.
The governor of the central bank, Emmanuel Tumusiime-Mutebile, and the Secretary to the Treasury, Keith Muhakanizi, have both recently warned that the country is getting dangerously close to the point where its debt becomes unsustainable.
This increased borrowing to build public works such as roads, bridges and hydropower dams pushed Uganda’s fiscal balance further into a deficit.
That, in turn, put pressure on the government to find as many sources of tax revenue as was possible, among which was an over-the-top (OTT) tax on social media use.
One of these sources of tax revenue was the capital gains by the oil companies themselves.
From the government’s point of view, it would be asking too much to expect it, desperate as it now is for any revenue, not to tax the large-scale business operation underway in the Albertine region.
Oil, it has to be borne in mind, is a highly profitable business. On average, oil companies make profit of about $50 for each barrel produced.
Even if Uganda’s oil production were put at a conservative 100,000 barrels per day, that would be $5 million (Shs180,000) in profit per day, a figure just too tempting for a cash-strapped government to resist taxing.
In addition, Uganda is concerned that the three oil firms exploring the Albertine basin – France’s Total, the UK’s Tullow, and China’s Cnooc – could take advantage of Double taxation Agreements (DTA) between Uganda and The Netherlands to evade taxes.
The DTA prevent income from being taxed twice, so many companies incorporate in The Netherlands where they pay low taxes and use that to pay few or no taxes in their main markets.
An oil company operating in Uganda could register its corporate name in The Netherlands, pay taxes there where it has next to no operations, and use that to pay no taxes in Uganda where most of its operations take place.
From the oil companies’ point of view, staking their investment in the complicated Ugandan oil fields is a risk enough.
Since Uganda is a landlocked country, the oil companies will have to construct a pipeline 1,443 kilometres long to take the oil to the Indian Ocean port city of Mombasa in Kenya.
It would make it the world’s longest oil pipeline.
The total bill for drilling and transporting Uganda’s oil is about $10 billion.
To the oil firms, the capital gains tax would eat into their profit margin, over which uncertainty already hangs.
Estimates in the oil industry are that “peak oil” – the point at which global consumption of petroleum could reach its peak and start to gradually tapper off – is around 2038.
The longer it takes to get Uganda’s oil from the ground and onto the market, the closer we get to 2038’s peak oil year and the uncertainty that faces the oil firms.
In summary, Uganda has a moral case over its wish to impose a capital gains tax on the oil firms, and the oil firms have a case over the approaching peak oil, the high cost and high risk of the project and the transition from hydrocarbon fuel to renewable energy.
The question is: How will the two sides negotiate their way out of this impasse?
The Museveni government, used to bullying the Opposition and the media, used to dealing with semi-literate rural and town folk, used to getting its way in domestic political matters, now finds itself facing global players that it can’t do anything about.
Negotiation of the oil contracts is an entirely different matter from the conduct of domestic politics.
These are multi-nationals, some with operations in more countries than Uganda has embassies.
They are not going to be threatened the way the Ugandan media or Opposition political parties are.
The “orders from above” that usually get things done by presidential decree in Uganda will not work in this instance.
There are no short- or medium-term solutions to this. The global oil industry and various financial entities are watching.
If Uganda were to cancel the current agreements with Tullow, Total and Cnooc, the same reasons that led to the cancellation will arise with future international oil companies.
Uganda lacks the money, the equipment, the manpower and the experience and organisation to create its own national oil firm that will drill the oil from the Lake Albert area and transport it to the Indian Ocean coast.
How best to go forward and get the petroleum production underway is a matter bigger than President Museveni, the NRM party caucus and State House.
The impasse over Uganda’s oil brings us to the heart of the matter.
It leads us to the questions Uganda has failed or refused to address since independence 57 years ago this month.
What is the role of a government? What is the role of the political Opposition, Parliament and the media?
Is it enough for a ruling party to win general elections and gloat or is it the purpose of a government to put the country’s strategic interests uppermost in its planning and thought?
The NRM government’s limitations have been laid bare by the collapse of its dealings with the oil firms and its failure to think, plan and foresee the market, the options and the trends to handle this to Uganda’s advantage.
Dominating State power and bullying one’s political rivals is the easy part.
Developing a sophisticated government that can handle complex international treaties, negotiate contracts and execute the operations of efficient government is the much harder part.

President Museveni is understood, according to highly placed diplomatic sources, to have lashed out at the petroleum companies accusing them of failing to appreciate the many concessions and infrastructural investments that the government has already made to facilitate development of the Hoima oil fields estimated to have 1.7 billion barrels of crude.