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Uganda’s height of folly

How gross absurdities and misguided corruption fears have killed Uganda’s oil industry

THE LAST WORD | ANDREW M. MWENDA | Uganda has been trying to get oil of out the ground for the last 12 years, having discovered reserves in 2007. Last week Tullow ended its proposed farm-down to CNOOC and Total of 21.7% of its 33.3% shareholding in the Joint Venture Agreement (JVA) with these two firms. Then Total announced an indefinite suspension of the pipeline project plus planned investment in the oil production facilities. Both CNOOC and Total have begun a massive lay off of staff by about 70%. Tullow did this a long time ago.

As I write this article, Uganda’s prospects for oil are remote. The deadline for first oil has been shifting since 2011. Today we are eight years behind the first target for exporting oil. The prospect of oil can now be projected beyond 2027 at best. Incidentally the reason for these days is the extreme care government of Uganda has taken to avoid being accused of corruption and mismanagement of oil revenues. The result has been well-negotiated Production Sharing Agreements (PSAs) combined with a level of stubbornness that borders on absurdity leading to no production.

In many ways government delays to place its fingers on oil defies logic. Ideally governments, especially in poor countries that are under constant demand for revenue to finance many spending demands would forego many niceties to move towards oil production. This is because oil would bring revenue windfalls to finance both investment in infrastructure (which Uganda is doing on a massive scale right now) and pay for patronage. For whatever reasons, government of Uganda does not seem to be in a hurry, which ideally should be a good thing. However, when examined closely, it is the most absurd thing one can do.

What is the dispute between oil companies and government today? It began with Tullow selling its 21.7% stake in the JVA at $900 million to CNOOC and Total. It bought the oil block (“the asset”) it is selling from Heritage at $345m. It spent an extra $272 million to develop it. The National Petrolium Authority (who approves each and every cost oil companies incur) and the office of the Auditor General (who audits government books) agree to it as a “past cost”. This brings Tullow’s total past cost on this asset to $617 million.

When Tullow sought to sell this to CNOOC and Total at $900 million, it anticipated paying Capital Gains Tax (CGT) of $85 million. This was done by subtracting past costs of $617 from the sale price of $900 million, leaving capital gain of $283 million. In Uganda, CGT is 30% of extra value one realises above the purchase price of an asset when selling it. Assuming you buy a house at Shs500 million and sell it at Shs800 million, the capital gain is Shs300 million. So you pay 30% of Shs300 million as CGT. But if, after buying the house, you spend Shs200 million renovating it and then sell it at Shs800 million, your total cost would have been Shs700 million giving you a capital gain of Shs100 million. So CGT would be 30% of Shs100 million.

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11 comments

  1. Still in the woods here. You make it seem so cut and dried. I wonder whether it could be possible that someone is holding out so that there are an avalanche of jobs and growth and inflows when an announcement is made at the right time. Like near election campaigning time.
    WHO KNOWS?

  2. Dr. Eng. Kant Ateenyi

    The problem in Uganda is that we have over-emphasised caution in a situation of extreme (even misplaced) distrust and of pure ignorance! In Business optimisation problems, this approximates to ‘minimising costs’ while losing sight of ‘profit maximisation’. You get zero or minimal cost yes, but equally, zero or negative profit!. Quite often, you hear half illiterate arguments of equating cost minimisation with profit maximisation even from people you would expect to know better by virtue of their so called ‘education’.

    The lesson here should be to keep focused on what we want – and less on what we do not want. Expend more energy on positive decisions and actions even as we watch out for those we do not want. I have heard people calling that ‘positive’ energy, and the other (on controls and distrusts) ‘negative’ energy, which in itself is strictly not accurate, because energy, effort, time and resource expenses in both are actually physical exhaustible quantities! You see, part of the problem is we have people debating and legislating on issues a majority of them have little comprehension of: Thanks to our politics – that allows even comedians and loud mouthed ignoramus to claim leadership.

    More seriously, these delays and their causative agents are a clear indication of the folly of having a nation with largely technologically unskilled people. In different circumstances, we would not have to be involving these ‘foreign’ firms to extract the oil! Which brings me to a favourite crusade – Technical and Scientific training of the African masses. But that is a different topic altogether.

    Dr Eng Kant Ateenyi

    • Peterson Kato Kikomeko

      Thank you Dr. Eng Kant Ateenyi

      I wonder why all the fuss in ensuring that oil reserves are exhausted as fast as possible before Uganda as a nation develops the technological capacity to handle its oil-related matters. Come on people, we have survived without oil money before and we can surely still survive without it. In my view, it is better the nation takes time to develop its capacity in oil and gas-related issues before the actual extraction begins. Else, we surely risk being duped by the multinational companies and their related stakeholders.

      I was one of the happiest persons when in the early days the President seemed to stick to the idea of refining all the oil extracted here so that we use what we can and export the surplus in refined form. To me, this was so much in sync with the ideas of adding value to our resources for better profit. All of a sudden the government was cornered to a pipeline. I believe, we lost it at that moment and gave multinational companies leverage for exploitation.

      Now that plans seem not to be going as expected, it gives the government more time for reflection. As our representatives, please do not rush. The multinational companies need the oil more than you may think; even if they go, others will surely come in. Use the time for better planning and capacity development of our fellow nationals in oil and gas.

      • “The multinational companies need the oil more than you may think; even if they go, others will surely come in. Use the time for better planning and capacity development of our fellow nationals in oil and gas.”

        IT may be that, but hope you know that these oil companies act as a cartel, or call it a cabal, sometimes bordering on the criminal, and many times they act as one even if they appear as different entities and they do know how to share their spoils.
        They have more time, and many times more resources than our poor countries, and most times know the greed of our rulers and as you have seen, when Tullow took action, Total took almost similar action.

        Ultimately it will be our hapless rulers who will go back on their knees and tail between legs ( out of view/ sight of all of us of course), and then this time the stakes are even higher.

        Or else we shall end up running to the Chinese who will also extract their own pound of flesh.

        Right from the word go, most times the odds are stacked against us, and all this will have started with our own incompetence and greed.

  3. As a nation with Oil, we do not need to beg Tullow, Connoc or Total to develop the assets.

    Independence! Let’s go raise the money ourselves.

    I am at Uganda’s disposal to start fundraising!

  4. Gen. Salim Saleh knows a lot, I mean “a lot” when or whether not Uganda (Ugandans) will ever see “a single drop” of the said oil. In short, Saleh has all the “oil answers.”

    • THIS whole thing boils down to just one person, and you know who it is.

      EVEN a fool would know that the law regarding Capital Gains Tax is wrong, UGANDA is not a unique country to the extent that its laws differ significantly from those of other nations, in fact most of our laws are “cut and paste”in that they follow the template of laws from other nations, most notably for us , British/English law.And most laws are a matter of “common sense” which for once, rightly M9 said is not common.

      But then again , we may be dealing with the “law of cattle keepers”, whereby if I give you a calf and you keep it til it grows, you give back my fully grown cow/bull, regardless of the effort I have put in to raise your calf. It is the basis of “empano”.

      We all know that if they wanted the oil to come out of the ground tomorrow, it would laws or no laws. I have a feeling that it is not coming out is a result of one person who has never kept his side of the bargain all his life. HE may have taken a cut from the present oil companies and probably wants more over and above what was initially agreed, seeing as it is that these companies are making a “killing” by farming down their interest, and in so doing bringing on board a new party, or else he wants to frustrate these companies and then whatever new entities come in, the slate is wiped clean and they can start all over again.

      IN this case if it was a person involved in the deal, then that person would be made to meet their maker so that as they say “dead men tell no tales”.

    • Alifunsi Rwakatogoro

      The oil belongs to Museveni and his family and it will officially come out the ground and sold when it suits him. In the meantime we should be devising ways of getting rid of him and the parasites attached to his regime.

  5. 1.I have always known M7 to be an all rounder what has happened this time?
    2.Oil Business is not for the faint hearted;The big boys in this game like Heritage,Tullow made a small investment during exploration, made a good deal and fled.
    3.All the members in the National Oil Authority are 100% Ugandans where did they get the expertise to manage oil business?At some point Government had to hire expatriates to manage URA,NWSC cant they do the same for oil management?
    4.Should the capital gain tax dispute between govt and the oil companies bring oil production to a halt?its as if government is convinced that it will only make money through taxing the sale of oil blocks among the oil companies.
    5. Government is being so ambitious with her oil plans what do you call yourselves?mbu you want to build the longest pipeline in the world for example; why would we think of building an oil pipeline well knowing the risks of safety,theft and security across borders?
    6.Was the plan of an airport really necessary in Hoima?dont we know the limited cargo capacity of planes?
    7.If there is alot of pulling of strings during oil exploration stage what will happen during signing of operating agreements,Joint ventures, production sharing contracts and services?
    8.Why is that when the Pope ‘s plane flew over Uganda’s airspace his message was sent to M7 but when Kagame who normally sends the President/Ugandans greetings when his plane flies over Uganda’s Air space his messaged is not relied its coz the military is incharge of the airspace.

  6. Luttamaguzi Ahmed Babumba

    Hello M9,do you recall your show of news night on NTV?what happened to it?In my opinion ,it was a very informative show.Also,I have observed these days that your presence on Youtube has significantly reduced.My proposal is that for all your arrticles,please produce audio and video versions of them as few people take time to read your views in print

    I agree with your assessment that the law discourages transferability if tax deductibility of past costs to arrive at the taxable income of corporation tax during production to buyers This is not in Uganda’s interest.

    Foexample :assuming towards production,one of the Joint venture partners has a funding gap for Oil production or any other limitation that limits its participation in production,it is common sense that it should have incentive to sell its stake in a Company more capable .if transferability Of interests is not attractive , we run the risk that the Oil company can run short of its production targets to the detriment of both us and the oil company.

    It is also true that in the development cycle of any oil and gas project ,smaller companies take risk of exploration and towards production, they sell to more capable Oil companies .

    Thank you nevertheless for your article

  7. Luttamaguzi Ahmed Babumba

    Hello Comrades;There is a reason why the government past a law that discourages transferability if oil interests.what could be the advantages

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