Page 5 - AfrOil Week 09 2020

AfrOil COMMENTARY AfrOil
 He explained that President Yoweri Museveni and members of his administration had drawn up policies with the aim of ensuring that Uganda reaped most of the benefits accruing from its own resources.
Unintended consequences
More specifically, he wrote that the president had established a “highly competent team of top civil servants at the Ministry of Energy.”
Museveni took care to ensure that these offi- cials were insulated from political pressure and deal-making, he said. This helped the new team at the Ministry of Energy gain the confidence needed (and amass the data needed) to hold its own during talks with would-be investors, all while remaining relatively free of corruption, he stated.
Its efforts have been successful by at least one key metric. On average around the world, Mwenda said, international oil companies (IOCs) end up taking 52% of all revenues from their projects in new oil-producing states. Their shareusuallydropsto30%inmatureoilproduc- ers, he added. By contrast, he said, Uganda has already arranged to collect 78% of all revenues from oil and gas development.
This is an impressive figure. So far, though, it has had little concrete relevance, since Uganda is still waiting to begin commercial production at its fields near Lake Albert. Instead, Mwenda argued, it has mostly reinforced Ugandan offi- cials’ suspicion that IOCs were eager to swindle Kampala out of its fair share of oil revenues.
Reflexively adversarial
“[These] advantages were to become a major handicap when the country began moving from exploration and discovery to produc- tion,” he remarked. “Here the president and his team lacked the skills of a businessperson. They feared that IOCs were out to cheat Uganda. This became a chain around their negotiating heads. They saw in every effort by IOCs to limit state demands an effort to cheat the country.”
As a result, he said, Kampala came to assume an all-or-nothing stance when it held discus- sions with IOCs. “They approached negoti- ations with a zero-sum attitude – i.e., every concession to IOCs is a loss to Uganda, and every compromise is surrender to bullying by IOCs,” he commented. “So negotiations had to go Uganda’s way, or nothing would work. This destroyed the spirit of give and take that lies at the heart of business negotiations.”
The focus on division of revenues has helped to aggravate disagreements on other fronts, Mwenda said. He listed the ongoing dispute with Tullow Oil over capital gains from a failed farm- out deal as one example of this.
“Uganda [has] bogged herself [down] in endless negotiations over taxes, as if taxation was the main aim,” he wrote. “Our windfall is in the revenue share in PSAs, where we already did excellently, not in capital gains tax or the trans- ferability of past costs from a holder of a licence to a buyer. So we focused on pennies and forgot
the pounds.”
High stakes
According to Mwenda, the prolonged delays in bringing Ugandan oil to market have had a “devastating effect” on the country’s reputation. This is clear in light of the fact that most poten- tial investors stayed away from Uganda’s most recent licensing round in 2019, despite the fact that 88% of the wells drilled there had led to the discovery of hydrocarbon reserves, he said.
But it’s not just Uganda’s reputation at stake; it’s also the prospect of future economic success. In a recent publication, the World Bank said that the East African state’s finances would likely suf- fer if the deadline for first oil were to be pushed back beyond 2024.
“Subsequent delays in oil exports beyond 2023/24 could result in liquidity pressures, given the current heavy borrowing for oil sec- tor related infrastructure that is relying on an enhanced repayment, capacity from oil exports, and especially if more non concessional borrow- ingoccurs,”thebankwroteinits14thbi-annual Economic Update.
Richard Walker, a senior economist for the World Bank, said at a recent presentation of the Economic Update in Kampala that the stakes were even higher because world crude oil mar- kets had remained relatively weak.
Under current conditions, he said, Ugandan authorities “will not have an easy time convinc- ing investors to make final investment decision (FIDs) and move ahead with upstream develop- ment.” With oil prices at or below $54 per barrel, he said, IOCs have little incentive to move at a faster pace towards the FID and first oil stages. As a result, he remarked, they are not likely to change course unless the markets change first.
In turn, this inertia will render questions about Dutch disease moot for the moment.™
“ Uganda are
The stakes for
even higher because world crude markets have remained relatively weak
Oilfields in Lake Albert region (Image: CNOOC)
Week 09 04•March•2020 w w w . N E W S B A S E . c o m
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