Business
Uganda and Kenya to introduce new round of licensing for oil & gas exploration
Oil rig in Uganda. PHOTO/Tullow Oil
Uganda and Kenya are both individually expected to introduce new licensing for oil and gas exploration in 2013. Uganda first discovered oil in 2006, while Kenya, in 2012 discovered substantial amounts of oil and gas in its northern region.
Investors (both local and foreign), and other key stakeholders eagerly await the details of the new licensing.
The year 2012 was characterized by a standoff between the government and opposition over the recently passed petroleum bill in Uganda. The granting of new licences, along with the setting up of institutions created by the Petroleum Bill, will be a test of the new law, drawing major interest from both the public and investors in Uganda.
The Uganda government has been pushing for tougher contractual terms with oil companies, additionally, it (the government), continues to insist on the construction by investors of a refinery over a pipeline to the Kenyan coast, resulting in a series standoffs with strongly entrenched positions by the government against private sector demands, causing almost no progress in the oil sector.
The year 2012 ended with several unresolved disputes over taxation. In London, a messy dispute with Heritage Oil & Gas over capital gains tax is awaiting adjudication. It arises from Heritage’s sale of its assets to Tullow Oil in 2010. Uganda spent thousands of dollars to field a legal defence of its claim for US$435 million from this transaction, whose root lies in apparent arbitration clauses in the Production Sharing Agreements (PSAs). These Production Sharing Agreements have been held in secret.
During the passage of the bill, Uganda’s President Yoweri Museveni spoke of battling it out on tax shields for oil companies known as “stabilization clauses”, which had subsequently held up Tullow Oil’s efforts to pass on the assets it had acquired from Heritage Oil & Gas. As its own relationship with the government suffered, Tullow Oil filed tax arbitration with the International Center for the Settlement of Investment Disputes, an arm of the World Bank.
The case, registered as ICSID No ARB/12/34, concerns value added tax. Tullow Oil and its partners Total E&P and China National Offshore Oil Corporation (CNOOC) have been de-registered for VAT purposes and have to pay tax on inputs for their national programs, meaning they will not be recoverable expenses anymore. This is a major write-off on the inventory of oil companies, which the government feels confident enough to revoke.
The new licencing scheme is intended to bring positive pressure to the bargaining table. A renewed focus on exploration, which so far has been successful, could potentially upgrade Uganda’s prospects, now at 3.5 billion barrels, to an estimated 10 billion barrels or more. The new discoveries strengthen the refinery option as well as the pipeline.
The Ministries of Energy in both Uganda and Kenya, in December 2012, both placed contractual bids for a refined petroleum pipeline, which can also carry crude, to connect the two countries. This signals a compromise reached by the two countries.
Mr. Museveni has hinted recently, that government policy will not look favorably at licensing companies from countries deemed “hostile to Uganda.”