Kampala — IN a bid to stimulate the debate on Uganda's newly discovered oil and the sharing of the oil wealth, Business Vision runs a series of articles by Professor Kasozi, the director of the National Council for Higher Education. In this week, he is focussing on how oil agreements are negotiated.

There have been fears, concerns and disatisfaction over Uganda's agreements with the oil companies prospecting in this country. Arthur Bainomugisha, Hope Kivenjere and Benson Tasasirwe in their 2006 ACODE publication "Escaping the Oil Curse and Making Poverty History" review Uganda's oil and gas policy and the legal framework for Uganda's oil exploitation. They point out a number of legal problems with the current laws on minerals, especially the 1985 Petroleum (Exploration and Production) Act.

Recently, The New Vision of Jan 23, 2010 and The Observer of Feb 8 - 10, 2010 carried articles on contract agreements signed by Uganda with oil companies.

Until section 59 of the1985 (Cap150) referred to above is modified to permit free access and disclosure to oil agreements the state signs with oil companies, it is against the law to fully discuss specific issues of oil agreements even if one had accessed them.

The purpose of this article is to alert those who negotiate on behalf of the Uganda of the presence of enormous literature concerning the science - or art - of negotiating oil agreements.

This article will contribute to these efforts by reviewing a single chapter by Jenik Randon entitled "How to Negotiate an Oil Agreement", being one of a number of chapters in a book edited by Macartan Humphreys, Jeffrey D. Sachs and Joseph E. Stigliz entitled "Escaping the Resource Curse" published in New York Press in 2007.

This chapter assumes correctly that mineral rich underdeveloped countries do not have the range of expertise needed to negotiate with highly skilled and informed oil companies.

Unfortunately, he suggests that these countries should hire expertise from developed countries to do such work. He does not emphasise the need for local training and building a local reservoir of highly skilled expertise with locally bred conceptions of the society for which they are negotiating.

However, this chapter identifies key areas in negotiations between an underdeveloped nation blessed with oil and oil companies.

He names issues which, the government as the guard of resources on behalf of the people, should have in mind, who should negotiate, the issues for discussion, the information context and the time horizon. He stresses the importance of negotiations because the "first challenges are typically negotiation challenges" whenever a nation tries to turn its mineral resources into cash.

Natural resources discovery, especially oil, "ignites personal and national dreams" of plenty, riches and happiness thereafter.

Astronomical increases of oil prices add to the fire in the hearts of populations. However, in Africa, the experience with oil in countries like Nigeria, Chad, the Sudan, Equatorial Guinea, Angola and Gabon have seen dreams of plenty and happiness turn to anger, frustration and poverty for the majority of the people as the oil curse devastates their lives. These countries have failed to overcome the challenges of managing plenty.

Oil rich underdeveloped countries must attract oil companies to turn their resources into cash, they do not have capacity to do so themselves. These countries are poor in both human and financial resources. On the other hand, oil companies have "greater financial resources, superior knowledge of oil and the mining industry" as well as far greater negotiating capacity. In terms of resources, he cites the example of Exxon Mobil's income of $371b, which exceeds Saudi Arabia's $281b GDP, to show how rich oil companies can be.

Further, most of the political systems of oil rich underdeveloped countries are institutionally weak, some of the leaders corrupt, which often leads to a struggle for control of the state in order to distribute resources.

These structural weaknesses undermine the ability of African negotiators to get good oil deals. For some countries like Equatorial Guinea, external agents have in the past attempted to remove an incumbent government thought to be obstructing deals favourable to foreign interests.

Randon correctly identifies the two negotiating parties as the government and the oil companies. Each of the parties has individual and both have mutual interests.

Both these interests must be protected to a point where negotiations do not break off. The government, as the guard of resources, must negotiate for the state. As such, the state must receive payment or "compensation" for the transfer of oil from the possession of the state to the oil companies.

The heart of the contract is, therefore, "the provision of what the government (or state) is to be paid". The rate of compensation or payment should increase, and be in harmony with increasing oil prices, provided an agreed threshold is set. That is, if oil prices pass a certain agreed level, compensation levels should change and vice versa. Mongolia has developed a "super tax" to address this eventuality.

The manner of payments could be in form of taxes, royalties, license fees, bonus payments, profit sharing arrangements, and taxes on equipment, imports and workers. Whatever form of payment is selected, meticulous negotiating teams must scrutinise agreements so that they are not disadvantageous to the state. In making such contracts, Random adds, negotiators must make sure that oil agreements or contracts do not contradict national (and local) laws, regulatory frameworks and accepted community norms and concerns.

The second party are the oil companies. Oil companies are partners in development. They take the risks of exploration and they have the expertise to turn resources into cash.

Oil companies are, therefore, entitled to recover their money and make a profit on money invested. But like any other trading relationship, oil companies will take advantage of foolish or uninformed negotiators. They will, naturally, design agreements that favour their side of the bargain.

Randon examines the crucial question of "who" should negotiate for the government.

Governments need loyal negotiators. Governments also needs to constitute well-informed teams with people qualified in all aspects of an oil economy management from upstream to downstream activities including the social and political impact of oil.

Oil agreements must be comprehensive as they have immediate and lasting impact on society. As he puts it, "oil agreements cover a wide range of complex factors, from technical construction to equipment depreciation schedule, not to mention commercial and legal matters", the environment, local community concerns etc.

He laments the absence of these experts in oil rich underdeveloped countries. The Uganda government's option of training locals and starting an oil institute to teach oil technicians at Kigumba is the best option.

One area of oil agreements that is a matter of hot debate is transparency. Transparency defined as "disclosure of the terms of an oil contract and the payments to be made there under", he argues, is beneficial to both the government and the oil companies.

First, it prevents government from agreeing on terms that are politically incorrect and could be negated by future governments, cause social strife and bring financial loss to both.

Secondly, transparency increases long-term social ownership, as "the public becomes a stakeholder not only in the negotiation process but in the activities of the oil industry".

Thirdly, transparency checks corruption as the population is aware of the deals being made by governments on their behalf.

Lastly, transparency enhances the quality of contracts. Public participation can improve drafts, fill gaps and weakens the criticisms of the transactions by opposition groups.

However, the writer also admits that "complete disclosure is an illusion" for two reasons.

First, certain company information such as exploration data "paid for" by a particular company cannot be released because competitors may access it. Secondly, in the Third World volatile political situation, such data could be used as a political weapon by the opposition.

However, there seems to be no strong argument to hide sections of contracts concerning finances and compensation.

A critical decision by negotiators and the country to note is the type of contractual system to use. Oil contracts can be signed through a number of contractual arrangements including production sharing agreements (PSAs), concessions, license, joint ventures, service agreements or other innovative relationships.

Governments which sign PSAs put themselves in "direct and immediate conflicts" with themselves. As profit earners in the oil deal, the signing government is a participant, an owner in the business.

However, the major role of a government is to keep the integrity of the state, the peace, to protect life and property. In that case, how can it act against an oil company that might be destroying the environment, abusing the integrity of the state and undermining the livelihood of the people when it is a beneficiary of the profits made by a company that gets these profits by undermining the very principles that governments are constituted for?

License agreements are used by some countries whereby an oil company is "granted a right to explore, develop, sell and export" oil from a specific area to which it has exclusive right. A concession, on the other hand is like a license due to the exclusivity of a given area. It is often of a longer duration.

The state, in a concession, often loses its sovereignty to make laws. Some countries opt to go far Joint Ventures where the oil company and the state work jointly, take equal risks and share profits on an agreed formula.

However, in such a relationship, developing nations with low expertise and resources are always the junior partners. They only get the crumbs, not the main courses of the products.

Finally, some countries opt to use service agreements where an oil company is paid a fixed amount for specific tasks specified in an agreement. The government retains ownership and key management decisions.

Another critical ingredient negotiators must consider is social responsibility. Agreements must respond to, and care about issues of social responsibility. Oil companies should guarantee enhancing instead of undermining political stability and positively contributing to social and political development, preservation of the environment and cleaning the mess they may cause.

Agreements must specify the obligations of the oil companies to the health and environment of host countries clearly indicating how damages will be compensated for.

The author advises countries to sign agreements with main companies and not with local subsidiaries. Agreements should bind the main international company, which can legally and financially manage all responsibilities instead of subsidiaries with limited powers and resources.

Finally, agreements must have a termination clause which detailes the conditions of separation if one of the parties or both are no longer interested in the relationship.

Prof Kasozi is the Executive Director of the National Council for Higher Education