23 July 2012

Uganda Government Advised to Re-Negotiate Oil Contracts

Kampala — A senior international economist has advised that Uganda can re-negotiate its oil contracts if it feels they are bad.

Mr. Joseph Stiglitz, a professor of Economics at the Columbia University USA told the 20th Joseph Mubiru memorial lecture in Kampala that the country should ensure that it gets the most benefits from its oil resources.

Stiglitz was responding to a question regarding Uganda's oil sector and the contracts the government signed with the oil exploration and production firms.

There are four oil companies, Tullow Oil, China National Oil Offshore Corporation (CNOOC), Total and Neptune that were given licenses to explore for oil in Uganda.

It is said that the contracts are highly profitable for the participating oil companies. According to reports, it is alleged that one company Tullow Oil could make a 30-35% return on its investment.

"This represents a very high profit level for the oil industry, even for risky projects, and indicates excessive profit-taking at the expense of the host government.

"Even in the least promising (and less likely) scenarios, Tullow would receive a 12-14% return - a comfortable profit margin," claim some reports.

However, Stiglitz was optimistic that the Uganda government can re-negotiate and sign new and better oil contracts if they feel the one signed earlier are bad.

The Production Sharing Agreements signed indicate that the state will receive 67.5% - 74.2% of total revenue while some assessors allege that the government will receive between 47.4% and 79.5% of revenues, depending on the price of oil, size of fields, development costs and other factors.

"The highest figures will only be achieved if the government takes up the possible 15% state participation. These figures are all below the 80+% regularly trumpeted by the government and the oil companies," say the assessors.

Stiglitz cautioned the Uganda government on squandering the oil revenue resources saying it should invest the money in development projects.

"Oil won't create many jobs so the government should seriously ensure sustainable investment of the oil money into other projects where many jobs can be created," he said.

Stiglitz also warned the Bank of Uganda of raising the Central bank rate or using the monetary policy tool to control inflation, arguing that this can destabilize Uganda's economy.

"The good thing you have had food inflation coming down which is driving headline inflation downwards but I don't think the monetary policy rather than the fiscal policy is the right remedy to curb inflation," said Stiglitz.

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