Legislation for the Nascent Oil and Gas Sector in the EAC: Uganda
Wednesday, 11 July 2012
Uganda’s oil discoveries have put East Africa on the map as a frontier oil region and after recent promising oil finds, Kenya awaits confirmation of the commercial viability of those finds. These discoveries have transformed the East and Horn of Africa region from a hydrocarbons backwater into a frontier market, but the countries all face a similar challenge: Sector legislation is outdated and insufficient. In Uganda, the exploration efforts have lost momentum with the persistent delays in completing the necessary legal and institutional environment. By Gideon Kiarie

Pending Bills

With commercial viability confirmed in 2009,Uganda is – or should be  in a race against time to enact the necessary laws to create a stable legal and regulatory framework for investors in the country’s nascent oil sector. After repeat delays, this was further complicated by protests over the quality of bills finally presented before Parliament.There are currently three bills stuck in parliament; two petroleum bills and Finance Bill 2012, Part VII of which defines procedures for petroleum revenue management.

According to Reuters
, in February 2012 the government brought two petroleum bills to the house:
  • The Petroleum (Exploration, Development and Production) Bill, 2012 will govern upstream petroleum activities, including procedures for licensing, environmental safeguards, transparency rules and the government’s institutional set-up;
  • The Petroleum (Refining, Gas Processing and Conversion, Transportation and Storage) Bill, 2012, which will govern downstream activities.

The proposed legislation will establish the National Oil (NATOIL) and the Petroleum Authority of Uganda: The Authority will supervise the activities of petroleum contractors while NATOIL will handle Uganda’s commercial interest and manage the business aspects of state participation.

The bills were given to the natural resources committee for a 45-day period, but the committee has said that it would require more time to analyse them and they are only expected to be brought back to the floor towards the end of July 2012.The problem, according to the committee’s chairman, was that there were several contentious issues for which they needed to consult widely. In addition, they needed to educate MPs on the new oil sector.

Executive Influence Versus Independent Oversight

The core shortcomings of the bills, according to critics, wasthat they vested too much power in the executive through the Minister of Energy in disregard of the institutions that they also set up, and a failure to legislate firewalls that will curb corruption:
  •  “The Bills put significant power to control the relevant institutions, dictate future regulations and negotiate the terms of licenses and agreements in the hands of the minister. This risks politicising the management of the petroleum sector,” argues a Global Witness report.
  • A Stanford University paper points out that the proposed legislation gives theminister control over the Petroleum Authority that should, however, be anindependent authority. There are concerns that with such substantial influence by the minister and limited parliamentary oversight, the executive may misuse the accrued revenues. President Museveni’s acquisition of Russian fighter jets worth USD750mn against future oil revenues has been cited as an example.
  • Weak institutional controls are also seen as a loophole that may be exploited in the future for corrupt purposes. Further, it is proposed that a separate tax law for the sector be enacted to avoid uncertainty – Heritage Oil’s and Tullow Oil’s tax disputes with the government have contributed to the delays in exploration and production.
  • Other gripes with the drafts include a lack of parliamentary oversight in matters of the sector, unnecessary confidentiality clauses leaving the public in the dark over the production and revenues generated, and the clauses allowing the minister to accept direct bids instead of a bidding process.
As the sector is so young, Uganda has limited technical expertise on oil exploration and production, which also raises concerns over the push to give a stronger oversight role to parliament: Fears that oil revenues will be misused are justified, but it is doubtful whether parliament a stronger role: To date, MPs also have limited understanding of the industry, and recent disputes between the president and parliament are not wholly driven by technical issues, but are a reflection of the power struggles between President Museveni’s NRM and the opposition, but also of internal divisions in the NRM.

The deteriorating governance under President Museveni’s de-factoperma-presidency does not help. The president continues to micro-manage the oil sector much as he has interfered elsewhere, with seemingly little interest to build strong and independent institutions that would reduce his patronage system. This may land him between a rock and a hard place: Uganda’s public finances are under pressure, as the significant slowdown in GDP growth has affected revenue collection in the just ended fiscal year 2011/2012. State House in particular is notorious for overspending, and the deteriorating quality of public spending, especially in the run up to the 2011 elections, have again tested donors’ patience. It would therefore be in Uganda’s interest to speed up work on the legal framework –but at the same time, a well regulated, well supervised oil sector that would encourage investor confidence would also limit the president’s ability to directly intervene.

As Uganda’s oil reserve estimates rose, the legal and regulatory progress slowed down. This has contributed to repeat delays in exploration and production- a potentially valuable lesson for Kenya on which mistakes to avoid. And as the East Africa and Horn of Africa region gains more traction as a frontier market and exploration firms and their suppliers build a regional footprint, Uganda’s dithering will no doubt encourage companies with regional operations to consider the more developed Kenya as a regional headquarter. Tullow Oil have emphasized that the Kenya discoveries will not change their plans for Uganda, but this is unlikely to be a universal position.

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