Uganda sets tougher rules for oil, gas PSAS

In the lat­est deal, the govt will also ap­prove the firm’s an­nual bud­get

The East African - - NEWS - By HALIMA ABDALLAH Spe­cial Cor­re­spon­dent

Uganda has set tougher terms for new en­trants in its oil and gas sec­tor, where prof­its and losses will be shared in line with pre­vail­ing oil prices. The new terms also re­strict in­vestors from re­coup­ing more than 65 per cent of their pro­duc­tion costs in a year.

In the lat­est Pro­duc­tion Shar­ing Agree­ment (PSA) signed last week, be­tween Uganda and Ar­mour En­ergy Ltd, the gov­ern­ment will also be ap­prov­ing the com­pany’s an­nual bud­get and ex­pen­di­ture.

The Aus­tralian Se­cu­ri­ties Ex­change-listed com­pany has been given an ex­plo­ration li­cence for the Kany­wataba block. Nige­ria’s Oranto Petroleum In­ter­na­tional Ltd will also get an ex­plo­ration li­cence and PSA for the shal­low and deep plays in the Ngassa area.

The two com­pa­nies met the fi­nan­cial, tech­ni­cal health, safety and en­vi­ron­ment man­age­ment re­quire­ments for the li­cences.

Uganda does not have cap­i­tal to in­vest in its oil and gas in­dus­try, so it en­ters into PSAS with com­pa­nies. Th­ese firms in­ject money for ex­plo­ration, field de­vel­op­ment plans and oil pro­duc­tion. How­ever, their ex­pen­di­ture is re­cov­er­able at the start of ac­tual oil pro­duc­tion for an agreed ra­tio.

“We have agreed that when pro­duc­tion be­gins, the com­pa­nies can re­cover 65 per cent of its pro­duc­tion costs ev­ery year in­stead of full ex­pen­di­ture in­curred for that year and the bal­ance will be shared as prof­its. But, if ex­pen­di­tures are high and rev­enues low, then we shall have zero con­sump­tion,” Per­ma­nent Sec­re­tary at the en­ergy min­istry, Robert Kas­sande told The Eastafrican.

This is a fun­da­men­tal shift from the pre­vi­ously signed PSAS, where the com­pa­nies’ re­cov­er­able costs took prece­dence while high ra­tios and prof­its were based on daily crude oil pro­duced. The old prac­tice also saw com­pa­nies first spend money and then the Au­di­tor-gen­eral came in later.

“The model we are us­ing means that when oil prices are high we get good money. The pre­vi­ous agree­ments did not pro­vide for this,” said Mr Kas­sande.

The is­suance of the ex­plo­ration rights sig­nals that the coun­try is on a steady path to in­crease its oil and gas re­source base and at­tract ad­di­tional in­vest­ments in the sec­tor. This is ex­pected to plug petroleum prod­ucts sup­ply gap in the medium and long-term.

While the 26-month long bid­ding process has seen the gov­ern­ment get $2.4 mil­lion for data de­vel­op­ment, suc­cess­ful com­pa­nies are pay­ing ad­di­tional fees, which will be kept at the petroleum fund held at Bank of Uganda.

For ex­am­ple, Ar­mour En­ergy paid $316,000 an­nual rent in ad­di­tion to $990,000 for per­for­mance guar­an­tee. Roy­al­ties agreed on will range be­tween 8.5 per cent and 21 per cent.

Ar­mour En­ergy intends to im­me­di­ately start its op­er­a­tions to keep pace with the two-year time­line the com­pany has been given to sink at least one well. For the first 12 months, Ar­mour group CEO, Roger Cressey, said the firm will be in­volved in re­search and in the sec­ond 12 months the com­pany will carry out seis­mic stud­ies.

“Our bud­get aligns with our com­mit­ments and we have se­cured $1.98 bil­lion to carry out the work,” said Mr Cressey.

Ar­mour en­ergy was un­til re­cently, an ex­plo­ration com­pany. It has how­ever in­cluded oil and gas pro­duc­tion in its op­er­a­tions.

Pic­ture: File

The gov­ern­ment is is­su­ing new pro­duc­tion shar­ing agree­ments with tougher terms.

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