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.