While Uganda is eyeing to establish its position as an oil producing nation after a series of hits and misses since its discovery in 2006, there is a new hope that the first barrel of crude will be mined out soon. Oil deposits were discovered in Lake Albert, in western Uganda in 2006. The reserve is estimated to be close to one billion barrels. But the mining got stumbled due to a number of reasons particularly over disagreements between the government and oil companies over tax matters.
The tax disputes are on account of transfer of assets and the indecision of the government as to how to tax the transferred assets. There are three companies involved in the oil exploration in the country viz. Total, a French conglomerate, CNOOC, a Chinese state firm, and Tullow, an independent company headquartered in London. In 2017, Tullow wanted to sell most of its interests in the Uganda project to its two larger partners, thereby reducing its own stake to 11.76%. The deal was for US$ 900 million. As the government continued with its parleys as to how to tax the transferred asset, the sale agreement got expired and the deal was off.
In August this year, the companies and the government could still not agree how the US$900m deal should be taxed, even though the sales agreement between the companies got expired and the deal was off. Now, after a gap of three years of being the project in a limbo, the Ugandan energy minister said that a decision will be reached by April 2020. To compound the matter further, Total has suspended activity on the 1,445km pipeline that will carry Ugandan oil to the sea mouth in Tanzania.
Africa’s oil discovery is nothing new. Over a century ago, the British got the inkling about the oil beneath Lake Albert. But that remained only in papers till the recent days. In 2010 Heritage, the company that had done much of the initial exploration work, agreed to sell its assets to Tullow. The government imposed a US$434m capital gains tax on the company’s asset, which Heritage disputed. A Ugandan court and an arbitration case in London both ruled in favour of the government. Later, Tullow sold part of its stake to Total and CNOOC on the basis of an out of court agreement in 2015.
Another bout of dispute happened when Uganda wanted to refine oil locally while the oil companies wanted to take the oil out to refine it on the plea that it was uneconomical to refine in the home country since the country lacked refining infrastructure to process the crude. After long deliberations between the government and the company, it was decided to refine a part of production-60,000 barrel a day- which works out to a quarter of the total production. The company wanted to take the rest to Tanzanian coast by building a pipeline and from there to countries, where it can be refined.
While experts are discounting the possibility of mining crude in the immediate future, even if the problems are successfully resolved since a new agreement has to be cobbled up among the parties, which may take time. But it is in the interest of Uganda that they arrive at a settlement at the earliest since the economic recovery of the country very much depends on the anticipated income from the oil sales. The country has indulged in heavy investments in infrastructure sector thinking that the oil revenue would be flowing and would account for close to 75% of the non-tax revenue of the government. Some estimates say that close to US$ 20 billion will flow into the country as oil revenue annually. That is a lot of money, which can really make Uganda. On the absence of revenue flow of such magnitude, it can play havoc on the country’s fragile economy.
