Uganda’s height of folly

[SIZE=7]Uganda’s height of folly[/SIZE]
ANDREW MWENDA September 16, 2019

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[INDENT]How gross absurdities and misguided corruption fears have killed Uganda’s oil industry[/INDENT]
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.

Uganda Revenue Authority refused to recognise the $272 million past cost Tullow had spent developing the oil field. It insisted it would charge CGT on the difference between $900 million (selling price) and $345 million (buying price) i.e. on $555 million. This brought the CGT to $167 million. Tullow insisted it would pay only $85 million, URA insisted on her position as well. The impasse lasted more than a year. Then CNOOC and Total, to end the standoff and allow the investment in oil to go ahead offered to pay the difference between Tullow’s offer ($85 million) and URA’s demand ($167 million), which came to $82 million.

Then a new dispute occurred. Sometime after Heritage’s sale to Tullow and Tullow’s farm down to CNOOC and Total, Uganda passed a crazy law saying that if one buys oil assets, past costs would not be transferred for tax deductibility purposes when calculating profit (corporation) tax. CNOOC and Total found this law bad. I am going to explain why I agree with them and it is counterproductive. They asked either parliament repeals the law or the executive gives them an exemption. President Yoweri Museveni refused. It is on this dispute that the negotiations hit a dead end.

Essentially this law is saying two absurd things. First if Tullow doesn’t sell, it will enjoy the tax deductibility. If it sells, the buyer will not enjoy the same. This means the law was made to discourage the buying and selling to Uganda’s oil assets – which is another way of saying that Uganda passed a law to discourage investment in her oil industry. This is even the more absurd because industry practice is that it is small firms that take the risk to come to our poor countries to prospect for oil. When they find it, they sell to big firms who then invest in the development and production of oil fields.

In passing a law discouraging the selling of oil blocks, Uganda has essentially blocked itself from a wide array of investors interested in prospecting for her oil. No wonder, mid this year when Uganda auctioned new oil exploration licenses, no small company with a good reputation for skills and knowledge in exploration showed up. I am informed that only three, most probably briefcase companies from Nigeria expressed interest in our mighty oil.
Secondly this law is absurd because it essentially means that one’s investment cost would be treated as revenue and therefore taxed. I do not know of any investor, except a fake one, who can accept this. All public officials outside of URA that I have talked to think Uganda’s position borders on madness. They are not willing to express their views on the matter for fear of being accused of having been bribed by the oil companies. The fear of corruption has led to an incredible absurdity – bad policy wins the day.

The reader should not think that the dispute over the $185 million in taxes is actually about a tax likely to be paid tomorrow. This is a hypothetical tax – that at some future date (it could even be ten years from now) when CNOOC and Total make a profit, this $617 million will not be considered a cost when calculating their profit tax. Essentially Uganda has blocked an investment of anything between $15 and $20 billion, which would also make our economy double in five years over a hypothetical tax of $185 million realisable ten years hence. If this is not the height of stupidity, what is it?

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[li]Comment[/li]Pastor Kaks
September 16, 2019 at 1:11 am

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.
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The reason why this Uganda oil production has halted and ug-tz pipeline has been suspended is not for one reason but many. That’s why its completely over for the short term. Maybe in the medium term it can be revived and repackaged afresh.

  1. URA Tax issue.
  2. Rivalry between Total and CNOOC on who will led the consortium as they have equal shares.
  3. M7 demanding a premium revenue share which is admirable.
  4. Low oil price currently.
  5. Lack of financier for Ug-Tz pipeline. Contrary to news articles neither the oil partner have signed on to fund it and Stanbic bank who were tasked to arrange for one have been unsuccessful for the last 3 years.
  6. Premium high costs for sovereign guarantees for any mining investment in Tanzania after megafools unilateral demanded $100 billion from its miners.
  7. Lack of independent judiciary in Ug or Tz that can resolve any possible litigation fairly should they arise.

You will see they are only talking of no 1 reason but overall all or any of this reason can halt those two projects. Its simply dead now.

My prediction is one oil major will withdrew and sell its shares to the other for them to start the oil production negotiations afresh. The pipeline will revert to Turkana and Lamu.
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Good things come to those who wait, unlike uhuru/ruto and their amateurish negotiating skills walitupeleka mbio na tamaa in the name of progress, then to add salt…still sell our oil for peanuts. Atleast M7 cares.

Well I get your sentiments but even ours is stronger. Negotiations only started in end of June 2019 for the cost of oil between what the oil companies will get and what we will get.

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However internally we have passed the Petroleum act. 75% of the oil revenues goes to national government, 20% to host county and 5% to the local community within 25Kms of the oil field. No where else in the world has this been done where local communities get their due share to develop themselves at the same time as national treasury. However the local community needs to organize itself, form a local organization for that purpose and elect their own to lead it. They in turn will hire an investment firm to guide them on how to reinvest that revenue to meet the community present-future needs.

What i like about your posts is they are accurate; one can rely on the info you give since its supported with facts #systemyafacts others are good at breaking even fake news

Really?? Up to now all agreements and negotiations relating to oil are secret. Every little conversation on oil is conducted in State House. All because of his extreme avarice and greed. It is very clear he doesn’t mean well. I think this is devine intervention to make sure he doesn’t get his grubby hands on that resource. Good riddance.