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What do leaked oil contracts mean for Uganda’s future?

Governments should be open about the deals they do, and show that they have put safeguards in place to protect people and the environment.

Global Witness Cover PageBy George Boden

Revenues from Uganda’s oil sector could help lift millions of people out of poverty. But that will only happen if the fledgling industry is managed carefully.

Poor management could just as easily entrench corruption and poor governance, damage the environment and spark local conflicts.

To make sure oil is a blessing not a curse, governments should be open about the deals they do, and show that they have put safeguards in place to protect people and the environment.

Production Sharing Agreements (PSAs), or oil contracts, are key documents which dictate how revenues are shared and what protections are in place, but in Uganda, these documents are not made public. This means the people have no way of knowing what deal has been struck for their oil or if their rights have been secured.

In September of this year, Global Witness published two PSAs signed by the Ugandan government and international oil companies in 2012. Our report – A Good Deal Better shows that the government has secured a good financial deal whereby they will collect over 80% of oil revenues, and improvements on the 2008 financial terms such as ensuring that companies will pay capital gains tax on lucrative sales of assets in Uganda. But there are still significant weaknesses in the oil contracts and laws that could leave people and the environment at risk.

There is a window of opportunity to correct this, but it is closing fast. The companies currently operating in Uganda are due to receive production licences before the end of the year paving the way for production in 2018. The government will also hand out new PSAs next year. It is finalising its model PSA, which will form a template for these future deals, and further regulations to protect people and the environment.

Global Witness has identified a number of weaknesses in the existing contracts and oil laws which should be urgently addressed.

Where is the oil money going?

The Ugandan government has succeeded in securing more money for its oil in the 2012 contracts – which could bring in hundreds of millions of dollars in additional revenue. But people cannot currently follow the money.

Under new EU and US legislation all three major oil companies operating in Uganda will soon have to publish the payments they make to the government, and Tullow Oil already is. However it is not possible to trace those payments into government accounts, which makes it very hard for citizens, MPs and journalists to know how the money is spent. The government should publish revenue information divided by type, project, source and date.

Where are the key documents?

There is currently no guarantee that key documents such as oil contracts, environmental impact assessments and, safety inspection reports will be made available. This makes it extremely difficult for ordinary people to make informed decisions about how oil operations will affect them, or to hold government and companies accountable.

Protecting Uganda’s people and environment

Much of the drilling is taking place in, or adjacent to, national parks and other protected areas. The Albertine region is of international environmental importance and millions depend on it for their livelihoods. Global Witness’ analysis shows that weak provisions in the contracts and laws could place people and environment at risk.

Companies are not required to draw up plans or put aside funds for decommissioning and clean up at an early enough stage. This means companies could ‘cut and run’ potentially leaving the government to foot the bill for environmental damage left behind.

Global Witness also identified a lack of community consultation and the absence of an effective system for resolving disputes with companies. There is no guarantee under the contracts or laws that communities will be able to claim adequate compensation to rebuild their lives if they lose their livelihoods or are victims of environmental damage.

In addition, under the PSAs, companies can recover litigation costs from oil revenues before they are split with the government. Perversely, this means that if a community pursued a company for damages, the legal costs would be borne, in part, by the Ugandan people.

More positively, revisions to the 2012 contracts allow the government to apply tighter environmental and social safeguards to companies without fear of compensation claims. This offers the opportunity to fix the issues raised by our analysis.

Security and Human rights

Oil operations are taking place on the border with DRC in areas with existing social tensions. Yet the contracts and laws say nothing about human rights or regulating military and private security contractors. Experience shows that careful regulation and mitigation is necessary to avoid human rights violations.

Transparent allocation

A competitive bidding process for oil contracts will help to secure the greatest possible benefit from the country’s natural resources. The current oil laws state that the process ought to be ‘open, transparent and competitive’ but don’t spell out what this should look like. Before any more contracts are allocated, regulations are needed to ensure open bidding and full disclosure of documents, so that the public and parliament can see what’s happening.

Our experience is that citizens in oil rich countries seldom benefit from the wealth beneath their feet, but Uganda has a real opportunity to buck that trend. The government has opened up space to negotiate good deals with reputable companies and put in place safeguards to protect people and the environment. Policy makers, civil society and international donors must now pull together to plug the gaps in the regulatory framework so that all Ugandans can benefit from oil wealth.

Mr. Boden works with Global Witness as Campaigner-Uganda Oil Team