What oil laws will achieve

An oil well in Kasemene 1 Bullisa. Uganda’s oil laws have streamlined the process of acquisition of oil licences in Uganda PHOTO/eronie kamukama

Summary

To foster stronger growth beyond the lifetime of oil production, Uganda’s oil laws place greater emphasis on the use of local content policy instruments to extract more economic value, Denis Kakembo writes.

The business community is eagerly awaiting the final investment decision (“FID”) expected before the end of 2020. At a recent meeting for its investors in Paris, Total announced that it would sanction three oil projects globally including the one in Uganda by the end of the year. The requisite project agreements with the governments of Uganda and Tanzania have now been concluded and the evaluation of major project tenders is ongoing. Investment is expected to ramp up in the second half of 2021 as construction of the necessary infrastructure for crude oil production commences.

Regulatory framework

Whereas the business community desired expedited exploitation of the crude oil discoveries, the delay has enabled Uganda to put in place a robust regulatory and institutional framework for the oil and gas sector. In 2013, Uganda enacted the Petroleum (Exploration, Development and Production) Act and the Petroleum (Refining, Conversion, Transmission, Midstream and Storage Act and the regulations thereunder.  Tax laws have been amended severally to cater for sector specific issues while the Public Finance Management Act was passed in 2015 providing for amongst others the framework for the utilisation of petroleum revenues.    

Uganda’s oil laws aim to implement the country’s policy aspirations mindful that a well-run oil and gas sector can boost economic development. Historically, the sector has been characterised by a constant struggle between host countries (“HCs”) and the international oil companies (“IOCs”) that have divergent objectives. IOCs wish to maximise profits for their shareholders while HCs desire to optimise economic and social benefits for their citizens. It is a delicate balance managing these conflicting objectives between these two principal stakeholders for the greater good of the sector.

To encourage continuing exploration activities to replenish the crude oil reserves exploited, Uganda’s oil laws have streamlined the process of acquisition of oil licences in Uganda. The licences were initially acquired on a first come first serve basis meaning that entities that reached out or applied first were the beneficiaries. Greenfield oil licences are now obtained through a transparent licensing process with interested companies bidding for any available oil acreage.  

To maximise fiscal returns from the exploitation of Uganda’s hydrocarbons, the oil laws incorporate a number of fiscal tools for this purpose. These include the levying of royalties, imposing bonus payments and annual fees among others that enable the government to optimise revenues from the sector.   Supplementary tax laws such as the Income and Value Added Tax Act amongst others also help in this respect. To ensure that oil revenues are utilised well to benefit both the current and future generations in accordance with the intergenerational equity principle, the Public Finance Management Act was enacted. It established the petroleum fund with elaborate guidelines on the appropriation and use of funds therefrom that must be sanctioned by Parliament.

Many developing countries have little value to show from oil production. While they have earned direct revenues from the sale of crude oil and collected the supplementary fiscal levies, there has been minimal if any trickle down impact on their domestic economies. To foster stronger growth beyond the lifetime of oil production, Uganda’s oil laws place greater emphasis on the use of local content policy instruments to extract more economic value. Some sector opportunities have been reserved for Ugandan enterprises. Oil companies and their subcontractors must not only help Ugandans scale up their capabilities but must also employ them as well facilitating technology transfer.

Uganda’s oil laws do not overlook the sustainable development agenda. Oil exploration and exploitation activities must conform to standards that protect the environment and biodiversity.

As Dominique Strauss-Kahn, former managing director of the International Monetary Fund once remarked, there are few areas of economic policy making in which the returns to good decisions are so high and the punishment of bad decisions so cruel as in the management of natural resource wealth. Rich endowments of oil have set some countries on courses of sustained and robust prosperity; but they have also left many others riddled with corruption and persistent poverty with little of lasting value to show for squandered wealth. While the current regulatory framework covers key areas, its effectiveness will be tested when crude development commences and oil revenues start to flow. 

Law

Oil laws

Historically, the sector has been characterised by a constant struggle between host countries (“HCs”) and the international oil companies (“IOCs”) that have divergent objectives. IOCs wish to maximise profits for their shareholders while HCs desire to optimise economic and social benefits for their citizens.

The author is the managing partner, Cristal Advocates.