5 key aspects the government should consider before signing future oil contracts

Parliament of Uganda

Parliament of Uganda

The government is in the process of entering another phase of oil deals in which they will sign Production Sharing Agreements with oil companies for the production of oil in given wells. Here are some of the five key considerations the government should make before sealing those deals. 

Confidentiality clauses

Clause 36.1 of the 2012 contracts requires that the contract in its entirety be kept confidential which means that the terms of the agreement are to be kept secret by the parties to the contracts unless there is requisite consent from both the parties to the agreement.

On the other hand Section 152 and 153 of the Petroleum (Exploration, Development and Production) Act, 2013 requires that information which the companies submit to the Government is kept confidential except for cases where the parties agree otherwise. Nonetheless the law bars parties from unreasonably withholding or delaying grant of consent for access to such information.

The law as it is a significant disincentive for publishing of information that is in the public interest. Therefore to circumvent the challenges, the government should open up and publish these contracts in the publish media forums. Alternatively, laws requiring government to publish these contracts should be enacted such that the government is left with no option but to publish those contracts in adherence to that law.

Stabilisation Clauses

 Stabilization clauses are clauses designed to insulate companies against regulatory changes which are likely to impact on the profitability of a project, particularly in countries which they consider higher risk. They are common in PSAs because companies bear the upfront costs and therefore risk and so seek to secure their investment return.

The 2012 stabilization clauses do not require the Government to compensate companies for costs accrued from applying new laws and regulations (with the limited exception of tax laws). This is extremely important as it allows Ugandan policy makers to identify weaknesses in these contracts and plug them with future laws and regulations without risk of compensation claims from companies.

Secondly, they specifically allow the Government to introduce new “windfall taxes” on additional profits that is higher than expected profits resulting from higher oil prices, higher than expected production or lower than expected costs.

Given that they have agreed to the stabilisation clauses in the 2012 contracts the companies should also agree to amend the pre-2008 contract stabilisation clauses. This is an important clarification of the contracts which would allow the Government to adopt more robust environmental and social protection measures without fear of compensation claims from the companies governed by the pre-2008 contracts.

Arbitration

 Arbitration is a private system of adjudication where parties resolve their disputes outside of any state judicial system. Arbitration hearings and outcomes are typically confidential.

The Government of Uganda has learned from its experience in recent tax disputes and stipulated in its 2012 PSAs that companies will pay capital gains tax  under Clause 24.7 and that companies will not be able to settle tax disputes (stemming from the terms of these contracts) in international arbitration as per Clauses 14.2 and 26.1. However, companies will be able to resolve other kinds of disputes such as those relating to compensation for pollution damage in international arbitration.

It is unlikely that companies would be willing to sign contracts without arbitration clauses, as the tendency of internationally operating companies is to prefer international arbitration to local African courts. However, the government and companies should commit in future contracts to holding arbitration tribunals in public and waive the confidentiality which deprives citizens of the right to information.

Signature bonuses

A signature bonus is a one off payment paid by a company to the Government on signing a new contract. Signature bonuses can run as high as the hundreds of millions of dollars in more established markets. The signature bonus in the Kanywataba contract is US$300,000 while the 2012 EA1 contract has a signature bonus of US$200,000. This is similar to the pre-2008 contracts. Given the overall contract terms, these deals are fair.

However, it is not currently possible to track payments by international oil companies into government accounts with Tullow Oil being the only company voluntarily publishing disaggregated payments to the Ugandan Government. This creates the risk that any theoretical tax avoidance by companies or embezzlement by government officials may go unnoticed. This will be increasingly important as oil production begins and more and bigger payments begin to flow into government accounts.

Litigation Costs

Under Annex C of the 2012 contracts all costs and expenses of “defending or prosecuting lawsuits involving the contract area or any third party claim arising out of activities under the Agreement” are recoverable. Only costs of arbitration or expert determination under the PSA itself are excluded under Annex C 4.2 d. This means that the company has less incentive to operate at high standards in order to avoid costly litigation. The Government should therefore consider excluding litigation expenses from the list of recoverable costs in future contracts.

Compiled by Tiberindwa Zakaria from A good deal better? Uganda’s secret oil contracts explained a report published by Global Witness in September 2014

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