The 2012 Oil Contracts: a good financial deal for Ugandans but without human rights and environmental safeguards

Global WitnessThe Government of Uganda achieved a better deal, at least in the financial sense, for its oil in the Production Sharing Agreements that the government signed in 2012.

The terms of the 2012 agreement are far more financially beneficial to Uganda compared to the agreements made before 2008, a report by Global Witness, an Oil Advocacy Organization based in the United Kingdom reveals.

“Global Witness has seen two further oil contracts dated February 2012 between the UK-listed international oil company Tullow Oil and the Government of Uganda for Exploration Area (EA) 1 and the ‘Kanywataba Prospect Area’ located in EA 3A (henceforth the 2012 contracts).” Reads a statement in the report

According to the report, these contract areas are jointly owned by Tullow Oil Plc, giant state owned China National Offshore Oil Company (CNOOC) and French Oil Major Total E & P which have gone into partnership in Uganda.

The EA1 area is operated by Total3 while the Kanywataba area was operated by CNOOC until it was relinquished back to the Government in August 2012 after the company failed to discover oil in the area before its exploration licence expired

Much of the extraction of oil discovered to date will continue to be governed by pre-2008 PSAs. These contracts share many weaknesses with the 2012 PSAs as they are based on the same model.

The Report indicates that despite the improved financial terms the contracts still have significant weaknesses that need to be addressed.  The contracts appear to lack some important human rights and environmental safeguards.” The Report notes

This is of particular concern due to the unique habitats of the oil region in Uganda which sits on the DRC border and in an area through which the Nile River runs.

Indeed the improved financial terms in the contracts could earn the state hundreds of millions of dollars in additional revenue and secure the Government a very high percentage of the oil profits.

“This is positive, but there is a danger that any economic benefit will be undermined by detrimental social and environmental impacts unless better protections are put in place.” The Report argues

The Report highlights that there is no legal obligation on ministers to publish impact assessments, mitigation plans and other key information, resulting in Ugandans being kept in the dark about what has been agreed or how much money is being put aside for their protection. But even then, the confidentiality clauses in these contracts may prevent the Government from publishing such information.

“Gaps in the laws and now in the contracts risk leaving communities affected by oil drilling or pollution without the compensation that such communities need to rebuild their lives.” The Report asserts

Besides it is noted in the Report that the contracts make no provision for a conflict resolution mechanism to resolve disputes between communities, government and companies.

Apart from that there is no requirement in the PSAs or Ugandan law for companies to set aside funds for decommissioning at an early stage. This creates the risk that companies could ‘cut and run’ leaving the Government to foot the bill for rehabilitating extraction sites do not mention the unsatisfactory “cost recovery” provisions that could leave the Ugandan Government paying some of the bills for company lawsuits, even in disputes that involve Ugandan communities affected by pollution.

The only good news is that unlike the pre-2008 contracts which allow companies to seek compensation from the Government for any additional costs resulting from more robust environmental and social protection measures, the 2012 contracts do not.

Global Witness hopes that this report will provide useful guidance as the Government of Uganda develops a new “model contract” for future deals and further regulations for the sector, as prescribed by its new petroleum laws.

 

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