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PLATFORM leaks Uganda’s oil contracts – not such a rosy deal after all

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Held secret by the Ugandan government and oil companies Tullow Oil and Heritage Oil, PLATFORM today is revealing the terms of the contracts for oil operations by Lake Albert on the Uganda-Congo border, and their economic implications.

For the first time, one of Uganda’s Production Sharing Agreements is available to the public to read, after a leaked copy was placed online. PLATFORM’s analysis of the contract reveals that the repeated claims by the Ugandan government and the oil companies that Uganda has received a very good deal and the best in the region are not only a fiction, but were reliant on the real terms of the contracts being kept secret. While the contracts will deliver vast profits to Tullow Oil and Heritage Oil, the contracts will prevent the Ugandan people from receiving their due benefits. The terms of the contracts and the lack of openness are placing Uganda on a track set for the “resource curse”.

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“A Bad Deal Made Worse – How the PSAs are ripping off Uganda” - PLATFORM’s preliminary economic assessment of the contract

(A full qualitative and quantitative analysis will follow at a later date)

Leaked copy of Heritage’s Production Sharing Agreement for Block 3A signed in 2004: Part 1 Part 2

Summary of “A Bad Deal Made Worse – How the PSAs are ripping off Uganda”

* There is currently no transparency over Uganda’s 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%. PLATFORM’s 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 Heritage’s 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.

* Uganda’s 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.

“Worst kept secret? Tullow Oil’s contract” in Uganda

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Great article by Taimour Lay in Uganda’s Independent:

The full release of Uganda’s Production Sharing Agreements (PSAs) with Tullow Oil and Heritage Oil & Gas is the fundamental first step towards forging a democratic and socially responsible extraction of oil in the Albertine rift.

Instead, Ugandans are being subjected to a disinformation campaign coordinated by the government and the oil companies, consisting of selected leaks to state-owned newspapers, off-the-record briefings to chosen NRM Parliamentarians, and disingenuous public statements from ministers and company executives alike.

The latest stage in this deliberate attempt to throw Uganda’s growing opposition off the scent came last weekend with Tullow Oil founder Aidan Heavey’s ‘’exclusive’’ interview with New Vision (‘’Details of oil deal revealed’’, September 26), in which the chief executive claimed that ‘’for every 10 barrels of oil the Ugandan government gets eight, which is 80%.’’

Heavey, who earned $46m in the last financial year, also – astoundingly – asserted that ‘’the [production sharing] deals have been published. There are IMF reports about it.’’ The interviewers allowed this manifest untruth to go unchallenged.

Given that the PSAs are still secret, why was Heavey able to ‘’reveal’’ the 80% figure so freely? Now that these details are being thrown to the public piecemeal through unofficial channels, it makes the government’s current position – that it is bound by a strict confidentiality clause – increasingly untenable.

This isn’t the first time parts of the contracts have supposedly been released at a politically sensitive juncture beneficial to the government; ‘supposedly’, since FDC members of the Parliamentary Natural Resource Committee still vehemently deny they were shown the PSAs in June 2008. As MP Beatrice Atim directly told a Ministry of Energy representative at an oil conference on September 10: ‘’We have not seen the PSAs. [NRM] MPs lie and say ‘we were shown it’. But I can assure you we were not.’’

As recently as September 22, Mitzi Westwood, finance director at Heritage Oil & Gas, used the Daily Monitor to complain that high rates of tax in Uganda were affecting the company’s ability to attract new investment partners. That Heritage is contractually obliged to pay corporation tax at 30% came as news to observers who had repeatedly been given to understand that such details were part of the ‘’confidential PSA’’. Why are the oil companies free to release key information when it suits them but Ugandans still have no right to a full view of the contracts that their government has signed?

And now we have Heavey using a newspaper to proclaim the 80% profit-oil share – ‘’Best deal in the world’’, the frontpage headline unabashedly declared. The reality is that the ‘’80%’’ figure – even if superficially true – confuses more than it clarifies. The PSAs will reveal the relative share of ‘profit oil’ between the government and the companies but these complex agreements cannot be reduced to a headline figure in this way, however much Heavey would like us to believe otherwise.

The profit oil percentage is merely one measure – and a misleading one at that – of whether the existing contracts are a good deal for the country. The terms of a production sharing contract determine not just how the extracted resources will be shared between state and investor but also the legal rights and obligations of both parties. The devil is all in the detail: it is of the greatest urgency that Ugandans are informed of the PSA clauses over duration, cost recovery, economic risk, and where financial responsibility will lie in the event of economic delays and environmental problems.

Heavey is predicting two billion barrels of reserves on the Ugandan side of Lake Albert. In 5-10 years, the country could be producing 100,000-150,000 barrels a day. But before we can begin to assess what this means in dollar terms for the national treasury, the 80-20% profit-oil split has to be viewed in the context of the ‘cost recovery’ provisions which will dramatically reduce Ugandan proceeds in the short to medium term. This means that in the first years of production, the company will be taking up to 60% of the profits to recoup the capital it has invested over the exploration period. Only once that money has been made will the ‘normal’ profit split become relevant.

Moreover, the profit-oil split is designed on a sliding scale which reduces the government take as a whole. Using the draft PSA negotiated with Hardman Petroleum Africa (taken over by Tullow two years ago) for Block 2 in 2001 – it is of course unclear how this was modified prior to final signature – the highest government share of 65% only kicks in for each barrel produced over the 40,000 mark. In other words, at potential production of 100,000 a day for that particular block, it is not simply a case of dividing total profit by, say 80%, to find the government share. Rather, Uganda’s incremental proceeds will be levelled down as a whole.

If President Yoweri Museveni has signed good deals, then he has nothing to lose by making them public – now, and in full, as opposed to the current cynical drip-drip of leaked information. If, as many now fear, the government is simply desperate to conceal the terms of PSAs that are dangerously skewed in favour of international companies, maximum democratic engagement and participation must be brought to bear to ensure amendment before it is too late.

New oil discoveries to drive future conflicts in West Africa?

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New oil finds off the coast of West Africa raise fears of oil corporations causing increased militarization in a region not yet touched by the crude resource curse.

In mid-September US corp Anadarko and Irish/British company Tullow announced a major oil-discovery off the coast of Sierra Leone. The FT’s map below shows how this find coupled with Tullow/Anadarko’s existing Jubilee field off Ghana

”established a whole new, active hydrocarbons system that spanned at least 1,000km to the coast of Ghana and perhaps all the way to the Latin American nation of Guinea.”

According to the FT, Tullow & Anadarko have snapped up the right to explore much of the coastline between their Ghanaian field and the Venus well off Sierra Leone. We might also see the larger oil majors like BP or Shell trying to buy their way into this new basin, expanding their existing operations in the Niger Delta further west.

”The basin could be a game changer for the industry. Analysts at Sanford Bernstein believe it could attract big companies which are not present there.”

Tullow Oil is attracting attention both for its rapid expansion in Africa and for concerns over its role in feeding conflict and militarization. In 2008 the Congo-DRC government accused Tullow of enlisting the Ugandan army to cross the border into North Kivu to conduct prolonged military operations inside its territory, and as a result confiscated Tullow’s licences in the region.

However, Tullow was allowed to return to Congo (DRC) after a March 2009 agreement between Pres Museveni of Uganda & Pres Kabila of DRC covering military co-operation & collaboration in exploiting oil discoveries by Lake Albert (on the border). The agreement and joint Ugandan & Congolese attacks on militias in the area in spring seemed to leed to response attacks from the rebels.

In Uganda itself, there has been increasing government talk of the “threat” to the Lake Albert region and oil operations there from “new groups”. This is probably partly to justify the building of “oil surveillance posts” – army bases – being built near to Tullow & Heritage’s oil operations. To construct a new base near Hoima, the government plan to evict 2,000 families living on 10 square miles surrounding a refugee settlement. While local residents & MPs have promised to resist the eviction, an empathetic army spokesman said “They [the refugees] are lucky we are not charging them with criminal trespass.”

Increased conflict connected to Tullow is not restricted to onshore oil extraction. The company owns a 32% stake in offshore oilfields on the Bangladeshi-Burmese border, which have led to recent naval escalation between gun boats over maritime boundaries.

While the Niger Delta’s ongoing conflict is very specific to its history of environmental exploitation and repression of local communities, the role of both the state and oil companies in creating & feeding the conflict is clear. Liberia and Sierra Leone are still recovering from civil wars fuelled by resources destined for European and American markets, including diamonds & timber. The seeming militarising impact of Tullow’s operations elsewhere does not bode well for Sierra Leone, Liberia or Ivory Coast.