The assertion that Uganda cut bad deals for its oil and gas projects, made by Hussein Lumumba Amin, and will earn only $5 [Shs18,085] per barrel is wrong and makes no logical sense.
Mr Amin seems to be ignorant of the economics of the upstream and midstream oil projects and mixes the two. To understand the government’s expected revenue from the oil and gas industry, these two sectors of the oil and gas industry operations must be explained separately.
But first, let us look at his faulty thesis, which is reproduced fully below.
“Let us do the simple maths in five seconds.
“Today a barrel of oil costs $60 [Shs217,0.6]. Now, the oil companies will get 70 per cent of that which is $42 [Shs151,911]. Meanwhile, the Tanzanian government charges $12.77 as transit tax for each barrel of oil passing through the Tanzanian potion of the pipeline.
“The oil companies and Tanzanian government take $55 [Shs198,931] from the $60 of each barrel, leaving Uganda with $5 dollars from each barrel of its own oil.
“Even a kid will know they have gotten a bad deal.”
If we begin with the midstream sector, the agreed commercial structure for the East African Crude Oil Pipeline as per the shareholder’s agreement is that the project is jointly funded and owned by the governments of Uganda and Tanzania, and the oil companies. The agreed shareholding is Total with a participation of 62 per cent, the China National Offshore Oil Corporation at 8 per cent, the Uganda government through the Uganda National Oil Company with 15 per cent, and the government of Tanzania through the Tanzania Petroleum Development Corporation with a 15 per cent stake.
Mr Hussein missed a turn when he presumably added up the 62 per cent shareholding of Total Holdings International B.V. and Cnooc’s 8 per cent in the pipeline company, arriving at the 70 per cent and confusing it with the revenue share of the oil companies from upstream activities.
Equally important to note is his mistaken claim that the agreed tariff of $12.77 is payable only to Tanzania. The pipeline company, in which Uganda is a shareholder will receive the tariff – a transportation charge, essentially – which means that Uganda will receive dividends from the company. In any case, Tanzania exempted the pipeline company from paying a transit fee.
Uganda’s revenues from the upstream operations of the oil and gas sector include royalties, a share of the profit oil [explained in subsequent paragragh below; Ed] state participation due to the governments’ ownership stake in oil projects, and taxes. Let us look at what each of these revenue streams means.
As a rule, governments sign production-sharing agreements (pdf) with foreign oil companies as contractors to provide technical and financial services for petroleum exploration and development. The agreement stipulates a share of the oil produced, both for the government and the company as a reward for the risk taken during exploration and the services rendered.
When oil production starts, the government will receive a royalty payment of between 5 per cent and 12.5 per cent depending on the level produced. The rest, capped at between 60 per cent and 70 per cent, goes to the foreign oil company so it can recover its costs. The remainder from gross production is known as profit oil and is shared between the government and the oil company at a share stipulated in the PSA. The government will also receive corporate tax, 30 per cent, from the oil company’s share of profit oil.
Clearly, the revenues the government receives from the oil and gas operations, as provided for in the PSAs, are substantial and far exceed the misleading figures published by Mr Amin.
Uganda’s projected annual revenues from the oil and gas sector are estimated at between $1.5bn and $2bn. Besides the revenues, it is expected that about $15bn will be spent in the country over the next four years on construction and other activities as the oil companies set up the required infrastructure for production. Uganda stands to earn from those big investments through goods and services provided to the industry by local companies and businesses, jobs created by the sector, in addition to tax revenue.
Furthermore, the oil and gas sector will have a positive multiplier effect on other sectors of the economy such as manufacturing, tourism, agriculture, health, among others. It is projected that these linkages will increase Uganda’s gross domestic product by $8.4bn before oil production starts.
We appreciate and welcome the public’s interest in the development of the sector. However, it is important that the information shared should be based on facts. If Mr Amin had visited any of the websites of the petroleum authority, national oil company, or the ministry of energy and mineral development he would have found these facts, even with a cursory look. It also doesn’t hurt to ask for further details from the necessary authorities.
The oil and gas sector has the potential to cause positive social and economic transformation in the country, and therefore requires objective discourse.
The writer is the director for legal and corporate affairs at the Petroleum Authority of Uganda.
For more information, contact Gloria Sebikari, corporate affairs and public relations manager at the Petroleum Authority of Uganda.
Email: [email protected]
