Lessons from Uganda on oil agreements with investors

Earlier this month Uganda announced that it had signed the much delayed oil production agreements with Tullow Oil, the main investor in the upstream oil and gas sector.

The agreement details production sharing formulae and applicable taxation regime. The signing now enables Tullow to enter the crucial stage of wells development and production.

It also opens the way for a three-way joint venture between Tullow, Total and China National Oil Offshore Company. The latter two will be expected to bring in much needed development capital and technology.

What is of interest is the inordinate length of time it has taken to reach this stage. Oil was found in Uganda six years ago, and it may be another four years before the first cash inflows from oil are received , making it nearly 10 years from discovery to resource monetisation .

Legal and tax tussles between the government and investors caused much of the delay as Uganda groped for experience in handling a totally new industry. Apparently, the government was also not willing to be rushed into signing deals that would have given the country less value for their oil than is justified by best practices around the world.

The lengthy time it took to come up with appropriate sector laws and institutions also caused the delay.

For oil and gas policy, which was ready in 2008, the corresponding Bill has just been tabled in parliament this month. The new Bill proposes a National Oil Company and an Authority to independently handle the sector and reduce direct government involvement. The political and civil society groups may also have contributed to delay as they sought accountability and transparency in the management of oil resources

Here then lie lessons to be learned by countries aspiring to become oil and gas producers. Updated policies and laws must be in place to guide the management and governance of the upstream oil and gas sector. Presence of an effective sector legal and regulatory framework reduces perceived investor risks and expedites regulatory and investment decisions.

Specifically for Kenya, which has recently experienced heightened activities in oil and gas exploration, it helps to be proactive and anticipate conflicts and delay such in the case of Uganda. Kenya has a Constitution that now requires parliamentary review and approval of all deals pertaining to natural resources.

This constitutional requirement may need to be reflected in a revised sector law.

We also have a civil society groups increasingly empowered by the Constitution .

It will not be a surprise to see the civil bodies engage the government on transparency and resource accountability as has happened in Uganda . A more independent and emboldened judiciary is likely to be generous in issuing civil injunctions that can slow down resource development.

It helps to anticipate these constitutional developments and prepare accordingly so that when oil is discovered delay in development will be minimised.

Uganda has also confirmed that they will refine the initial crude oil production, pushing the crude export pipeline option to a later date when more oil is confirmed. The Foster Wheeler feasibility study conducted in 2010 made this recommendation.

The study report proposes a two-phase refinery development, with an initial 60,000 barrel per day (bpd) complex those later increases to 120,000 bpd capacity as more oil is confirmed.