A sign at the entrance of a primary school built by Heritage Oil and Gas in Buhuka, Hoima District in the area that hosts the Kingfisher Oil wells (Photo:CM)
Uganda’s oil industry received two belated Easter presents this week that, according to government officials, place the country on a solid path towards oil production.
Amidst jubilation following Uganda’s reported victory in the tax arbitration case against Heritage Oil and Gas in London on Wednesday; junior Minerals Minister, Peter Lokeris, revealed that President Yoweri Museveni had finally signed the Petroleum (Exploration, Development, Production) 2012 Bill, into law.
“The President signed this bill on March 21, 2013,” Hon. Lokeris told Oil in Uganda earlier today. “It is now an Act.”
Many industry experts had long blamed the slow progress of Uganda’s oil industry on, among other things, the absence of a law to regulate the sector.
But Hon. Lokeris said that with this law, government was ready for “take off.”
His counterpart at the same Ministry, Simon D’ujanga, also voiced similar sentiments, saying that the oil sector would now “continue with its programmes.”
Heritage ‘loss’ should set example for other multinationals
Reacting to news that a three-member arbitration team had ruled against all three core claims that Heritage had presented before it in London, Uganda’s State Minister for Economic Monitoring in the Office of the President, Henry Banyenzaki, cautioned investors who “think they can rip off Uganda’s natural resources and get away with it.”
“Taxes are Uganda’s biggest benefits and we are not going to allow any manipulation through tax evasion,” Hon. Banyenzaki said in a phone interview.
Minister D’ujanga, sounded the same warning, emphasising the need for multinational investors to follow Ugandan law. “Even though investors are welcome, the government of Uganda will ensure that they play according to the rule of law,” he warned.
Medard Segona, the Busiiro East Member of Parliament, reiterated that the reported win should serve as a lesson to both Uganda and international oil companies operating in the country.
Hon. Segona further urged the government to be transparent while dealing with investors to avoid similar tax evasion cases. “It took us a lot of effort to push the Attorney General to handle this case carefully, ” he told Oil in Uganda yesterday.
Teachers’ quarters built by Heritage Oil and Gas in Buhuka, Hoima District. The company later sold its 50% stake in this area’s oil blocks to Tullow for $1.45 billion, but refused to pay the 30 percent capital gains tax to the Uganda government (Photo:CM)
Bad precedent for oil companies and future investors?
This case sets a precedent that future transactions between international oil companies will be subjected to the 30 percent capital gains tax.
However, it also brings into question, government’s commitment to contracts it enters with investors.
During the proceedings, Heritage had argued that the agreements the company signed with government contained a stabilisation clause, which shielded them from such a liability.
The company also argued that the capital gains tax regime in Uganda was different when it signed the initial exploration contract with government.
A stabilisation clause is normally inserted into a Production Sharing Agreement or other contracts with government to reduce the risk to the contractor by protecting the company from future changes in, for example, tax laws or environmental regulations and standards.
While Heritage is seen by the average Ugandan as a company which walked away with a huge profit in comparison with what it had invested, the international business community is likely to be concerned by the Uganda government’s move to “disregard” its contractual obligation in this particular relationship.
Such incidents ultimately dent the country’s image as a conducive business destination.
Attempts to get comments from both Tullow Oil’s Ugandan subsidiary and Total E&P were futile as both companies’ publicists were unwilling to talk about the matter.
Ugandans happy with the ruling
Possibly fed up with the persistent allegations of corruption in the oil sector, most Ugandans Oil in Uganda talked to welcomed the ‘good news’, which they see as well deserved.
“The ruling is good for us as a country. It proves that we are not a backward country that anyone just manipulates, it protects our sovereignty,” said Lynn Turyatemba, Senior Programme Officer for Oil at International Alert-Uganda.
“But this does not make us totally safe, because, depending on the nature of their contract, Heritage may have room to appeal, probably in the Ugandan courts,” she noted.
She advised that such contracts include an ‘equilibrium clause’ which “creates a middle ground for oil companies to operate in a safe environment.”
According to her, an equilibrium clause would ensure that the State does not cause changes that destabilise the economic equilibrium of a company.
“Companies do not like operating in countries whose law can be easily manipulated anytime, such countries are not attractive to oil companies,” she said.
Another lawyer who preferred to remain anonymous told Oil in Uganda that he would have expected the agreement Heritage had with government to contain such a clause.
“The re-negotiation clause suggests that where there has been change of law which results in less economic benefits for the operating company, then there is need to renegotiate,” he explained.
Heritage stocks plummet
Despite a press release on its website assuring the public that the ruling had not affected the company’s cash position, Heritage stock fell seven percent at the London Stock Exchange on Thursday.
In the release, Heritage states that the case has not yet been concluded, and accuses Ugandan government officials of misleading the public and breaching the confidentiality requirements expected of both parties.
“The international arbitration will now continue and move to deal with the merits phase of Heritage’s contractual claims against the Ugandan Government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts,” read the release.
This case, which dragged in the names of President Museveni and some British government officials as Heritage attempted to portray Tullow Oil as having colluded with the government of Uganda to enforce the tax obligation, pitted contractual obligations against local tax laws.
It led some to question the line between sanctity of the law as far as taxation is concerned and that of a contract by itself.
For now, it appears that the sovereign law of the Republic of Uganda has carried the day.
But, Heritage has four weeks to present its argument that Uganda delayed to clear the transaction and depending on how compelling it is, Uganda’s ‘victory’ could be short lived.
By Oil in Uganda staff