13/10/2011
Ugandaʼs contracts – a bad deal made worse
Preliminary analysis of Ugandaʼs Production Sharing Agreements by PLATFORM
SUMMARY
• There is currently no transparency over Ugandaʼs oil contracts, on the part
of the Ugandan government or the foreign oil companies. This will prevent
positive development outcomes while enabling corruption and
environmental degradation on the part of the oil companies. Past
experience indicates that without public debate and accountability, the
“resource curse” is largely inevitable.
• The Production Sharing Agreements signed in Uganda do not represent
the great deal publically claimed by the government. Internal figures
modelled by the government indicate that the state will receive 67.5% -
74.2% of total revenue. A Credit Suisse analysis of Heritage Oil predicts
government take of between 55% and 67%. PLATFORMʼs assessment
indicates the government will received between 47.4% and 79.5% of
revenues, depending on the price of oil, size of fields, development costs
and other factors. The highest figures will only be achieved if the
government takes up the possible 15% state participation. These figures
are all below the 80+% regularly trumpeted by the government and the oil
companies.
• The contracts are highly profitable for the participating oil companies. In
the most likely scenarios, Tullow Oil could make a 30-35% return on its
investment. This represents a very high profit level for the oil industry,
even for risky projects, and indicates excessive profit-taking at the
expense of the host government. Even in the least promising (and less
likely) scenarios, Tullow would received a 12-14% return – a comfortable
profit margin.
• Compared to contracts in other countries, Uganda is receiving a worse
deal. Modelling the same field under the terms of Heritageʼs contract in
Iraqi Kurdistan (a more dangerous environment) indicates that the
Kurdistan Regional Government will receive a greater proportion of
revenues than Uganda, while Heritage will receive a higher rate of return
in Uganda.
• Ugandaʼs contracts fail to capture increased rent as the oil price rises.
This is a major flaw, especially in light of the recent high oil prices. As
prices rose through the 2000s, there was a recognition amongst producer
governments that the state has a duty to its citizens to capture the rent
from higher prices and that the private companies do not have a right to
excessive profit-taking. As the oil price rises, the oil companies make a
higher and unlimited profit. However, the state take plateaus at under
80%. Thus the oil companies will take close to one quarter of oil revenues,
whether the oil price is $70 or $200 – raking in enormous profits.
• Most of the risks lie with the Ugandan state, not the private companies.
Price risk lies primarily with Uganda, with the private companies virtually
guaranteed a profit even at low prices. While project risk (eg increased
costs) are shared between both, Ugandan revenues will fall significantly
further if the project runs over-budget.
CONTEXT
Oil in Uganda
Lake Albert in Uganda was considered an attractive oil prospecting region for a
long time, especially given the natural oil seepage in the area. BP and other
companies explored in the 1930s with the first well in 1938, but World War II
intervened.
The late 1990s and early 2000s saw renewed interest in Ugandaʼs potential
natural resources, with contracts signed with Hardman Petroleum, Energy Africa,
Heritage Oil. Exploration Area 3 was licenced to Heritage in 1997, in the form of a
Production Sharing Agreement (PSA). This was renegotiated in 2004 with
Heritage and Energy Africa (now owned by Tullow). Another PSA was signed in
2001 with Hardman Resources (now owned by Tullow), covering Exploration
Area 2. Exploration Area 1 was licensed in 2004 to Heritage and Energy Africa.
The licenses around Lake Albert have since been consolidated: with Blocks 1, 2
and 3A held by Tullow and Heritage. The same oil companies also hold licences
on the Congo side of Lake Albert, although these were disputed in recent years
following military clashes.
Exploration activity by Tullow and Heritage led to major discoveries across the
Lake Albert basin from 2007 onwards. Kingfisher was discovered in Block 3A in
February 2007, with 200 million barrels of confirmed oil. Kasamene in Block 2
followed in August 2008 with high flow rates, and Buffalo/Giraffe in December
2009 proved 350 million barrels of oil equivalent. These have since been
expanded, and drilling continues. Tullowʼs August 2009 Factbook predicts
reserves of 1,700 million barrels for Blocks 1 and 2.
Oil Contracts in Uganda
Uganda licensed oil exploration and extraction through contracts known as
Production Sharing Agreements (PSAs). See Appendix 2 for background on
PSAs.
Existing PSAs in Uganda are:
Block 1 Heritage (50%), Tullow (50%)
Block 2 Tullow (100%)
Block 3A Heritage (50%), Tullow (50%)
Block 4B Dominion Uganda
Block 5 Tower Resources & Global Petroleum
