Uganda: Petroleum Exploration Legislation Raises Governance Concerns
Thursday, 10 January 2013
Uganda’s parliament finally passed the controversial Petroleum (Exploration, Development and Production) Bill, 2012, albeit with a record case of absent legislators. |
It proved to be a bit of an anti-climax to the explosive debate that set the executive against parliament, with the former insisting that the minister in charge of the sector should hold most of the powers: The law gives the minister in charge of the sector powers to grant and revoke licences, negotiate and endorse petroleum agreements. Additionally, the minister is responsible for policy and guidelines as well as approving field development plans.
A number of MPs pointed out that this would concentrate power and, by extension, oil revenue in the hands of a small group of powerful individuals close to the president. This, they argued, was a recipe for disaster given the country’s corruption record as it failed to create checks on the executive’s notorious excesses.
It is baffling that such a large number of legislators chose to absent themselves on such a crucial piece of law: 198 were absent, 149 voted for, and only 39 objected. There were allegations that the National Resistance Movement (NRM) leadership had asked its 270 MPs to tow the party line. Most chose to be absent rather than vote against public sentiment and perhaps personal conscience with only five NRM MPs braving the tide to vote against.
The opposition had argued that most of these duties require technical expertise and thus the Petroleum Authority was best placed to execute them rather than the minister who was essentially a politician. Parliament would also be able to scrutinise the authority’s activities.
There are concerns that parliament’s exclusion further compounds Uganda’s perceived lack of transparency in matters oil. The country has also not yet sought to join the global transparency watchdog Extractive Industries Transparency Initiative (EITI). The Bill also contains a confidentiality clause that limits the amount of information accessible by the public besides gagging officials working in the sector even after they leave.
However, the passing of the bill however removes one of the major stumbling blocks to commercial production and the government is now likely to turn its full attention to the simmering row between it and the oil companies over the construction of a refinery and pipeline extension.
At full production, Uganda is expected to produce about 200,000 barrels per day (bpd). The government hopes to derive full benefits by refining the oil in the country. While this value addition would benefit the country and has even been affirmed by a feasibility study by Foster Wheeler, oil companies fear that this might limit their production capacity. Even a fairly large refinery of 180,000 bpd (an eventuality envisioned to be achieved by gradual expansion of the facility) would constrain production as the capacity would limit the companies’ output. Oil companies have also argued that an on-shore refinery in Uganda’s remote west was simply not economical. Investors are likely to prefer refining capacity at Kenya’s coast – especially so if the commercial viability of Kenya’s oil finds is confirmed. Due to its seemingly interminable delays, Uganda’s voice now carries less weight in the regional infrastructure debate.
Another sticking point are tax conflicts. While the USD404mn capital gains tax dispute with Tullow is under arbitration in London, the company and the government have opened a new battle, this time in the US in the World Bank-created International Centre for Settlement of Investment Disputes (ICSID), over 18% value added tax refunds on exploration materials. The London arbitration is expected to solve a long-standing dispute that arose from Tullow’s USD1.45bn acquisition of Heritage Oil’s Uganda assets which saw the government slap a 30% tax bill on the transfer. According to the Monitor , the VAT case could have serious ramifications for Uganda if the country was found to be violating bilateral and/or multilateral agreements relating to trade and investments.
Tullow Oil, Total E&P and China National Offshore Oil Corporation (CNOOC), the three main players in the country, were de-registered for VAT purposes, i.e. they have to pay taxes on some goods. The crux of the government’s argument is that Tullow does not qualify for VAT refunds as the company is not taxable under the VAT Act but according to reports, Tullow’s contract has clauses that make provisions for the refunds on certain materials.