Oil & gas

Exclusive Analysis: How Oil Revenue Will Be Shared Between Government, Oil Companies

In August 2016, Uganda granted 8 production licenses to three oil companies on a range of joint ventures.

These companies were; Total E&P Uganda BV (TEPU), China National Offshore Oil Company (CNOOC) and Tullow Oil plc (TUL), all who owned 33.334% of the shares in the Albertain region.

If the $575m Total-Tullow deal, where TEPU aims at acquiring all Tullow’s 33.334% shares succeeds, TEPU will own 67% of the shares and her counterpart CNOOC will remain with 33.334%.

This is because CNOOC who has a 50% pre-exemption rights recently declared that it was not willing to pre-empt.

The transaction is likely to enable the companies to reach at a long awaited Final Investment Decision (FID), which is likely to bring in a between $15bn and $20bn investment, in the next three to five years, according to the Ministry of Energy.

This investment is expected to facilitate among others; the construction of the East African Crude Oil Pipeline (EACP) which shall connect Hoima (Uganda) to Tanga (Tanzania), develop infrastructure, which included; drilling and completing more than 400 wells, setting up two central processing facilities, laying off over 200km of in-field flow lines, laying approximately 150km of feeder pipelines, construction of base camps, minor access roads and carrying out the Front End Engineering Designs (FEED) before making their final investment decisions (FIDs) for the two central processing facilities(Tilenga and Kingfisher projects).

When all is done, the production of oil is expected to start in 2023, as projected by the government and is expected to bring in a revenue which amounts to $50bn in the next 20 to 30 years.

How the revenue will be shared

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The 2018 report titled ‘Getting a Good Deal? An Analysis of Uganda’s Oil Fiscal Regime’ that was published by the Centre for Research on Peace and Development (CRPD), indicates that oil revenue sharing between the government and companies shall be governed by the Production Sharing Agreements (PSAs).

The PSAs stipulate the proportion the government gets, how oil companies will recover their costs, how profits shall be shared and how taxes shall be levied.

Government

According to the 2012 PSAs, the government shall receive; Royalties which shall include (5%-12%) of the total production, it shall also get 67.5% of the oil profits and this will be done after recovery costs (deducted by oil companies) and royalties have been deducted.

The government shall also levy a 30% corporate tax on the 32.5% oil profits of the companies and 15% withholding tax of any distributions of dividends in the hands of the shareholders of the companies.

Royalties

On each of the 60,000 barrels that will be extracted, companies will pay 5% as royalties from the first 25,000 barrels, 7% on the second 25000 and 10% on the last 1000 barrels, according to the CRPD report.

“The royalty on gross daily production will be charged at rates between 5-12% depending on the level of production, while additional royalty on cumulative production will be charged at rates between 2.5-15%,” reads part of CRPD report.

Profits

In addition to the royalties, the government shall also earn from the profits of the ‘profit oil’. The 2012 PSAs give the government 67.5% of the oil profits. “This profit shall be shared after the companies deduct their recovery costs which is 60% on every production,” the CRPD report adds.

“The share of profit oil due to government will be received and marketed by the Uganda National Oil Company. The profit oil split will depend on the level of production; for example; as production increases so will the government’s share, as well as the decline,” CRPD report emphasizes.

Taxes

Another avenue where the government is likely to earn oil revenue is through taxing the oil companies.

These taxes shall include 30% corporate tax on the 32.5% oil profits of the companies and 15% withholding tax of any distributions of dividends in the hands of the shareholder of the companies.

Enock Twinoburyo, a senior economist and a policy analyst said that as the government looks at achieving the FID, oil companies may use COVID-19 pandemic to demand for more tax waivers.

“You discovered oil in 2006 and by 2020 you have not produced, this is not a positive. You may look at the taxes but companies are asking for wavers as companies continue to invest, a lot of recovery costs are being piled up,” Twinoburyo said.

Oil companies

According to PSAs, the oil companies shall deduct 60% of the total sales after the royalties have been charged to get their ‘Recovery costs’.

Recovery costs according to the CRPD analysis is the capital which the oil companies are injecting in industry.

Companies will also receive 32.5% of the profit oil.

“The 32.5% company oil profits shall be subjected to a 30% corporate tax and 15% withholding tax of any distributions of dividends in the hands of the shareholder of the companies; which is in accordance with the Income Tax Act,” CRPD report states adding,

“The negotiated profit split ratios between government and the oil companies give PSAs a built flexibility which helps offset differences between basins and licensed areas.”

Ali Ssekatawa, the Acting Executive Director of the Petroleum Authority of Uganda (PAU), via email told the ChimpReports that the government has continued with all the activities amidst the pandemic among which include; accurately estimating revenues, developments on upstream and midstream, even before collection starts.

“The Government has and continues to invest heavily in our production and revenue forecasting capacity within the PAU. The Authority continues to work closely with the Uganda Revenue Authority and the Office of the Auditor General to ensure the projected revenues will be effectively collected,” he said.

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