New Vision (Kampala)

Uganda: Oil a Strategic Resource

The Oil Exploration Bill

Points

1. Oil a strategic resource

2. Who has responsibility over strategic reserves of a country?

3. Separation of powers

4. Licencing versus procurement

5. Purpose of regulation

5. Clarity of authority

6. Avoidance of gridlock

OIL A STRATEGIC RESOURCE

In the many and lengthy debates we have had on the Petroleum Exploration and Development Bill 2012, oil has been equated with services and other resources Uganda has traditionally depended on for its national economy. There cannot be anything further from the truth than that proposition.

Oil is a strategic resource that contributes to economic opportunity and energy security for the global market. Oil plays a dominant role in meeting the world's energy needs, and this situation is expected to continue for decades to come.

Even with the investments countries are making in renewable energy, energy efficiency and other measures to support a low-carbon economy, the International Energy Agency's World Energy Outlook for 2009 still expects world oil demand to grow by one percent per year until 2030.

One Thompson, writing about the Middle East said that a strategic resource is one that is necessary to biological or economic survival. To be strategic, it must also be easy to cut off supply. Air is necessary to biological survival, but it is not strategic because the supply can't be manipulated.

Oil is necessary to economic survival at this point in history. Unfortunately, the supply is fairly easy to manipulate.

THE POLITICS OF OIL

Oil and gas are absolutely necessary to the world's industrial economies. Together, they supply two-thirds of the world's energy consumption. They also form the building blocks of over 30,000 different chemicals.

The United States consumes a quarter of all oil and gas produced worldwide. The US is facing increasing competition for petroleum from China and India.

These countries both have rapidly modernizing economies and populations of over 1 billion each. Twenty years ago, China was Asia's largest petroleum exporter. Today, it is the second largest importer in the world - after the U.S.

Some environmentalists claim that we should reduce our dependence on oil because we are in danger of running out. This is not a danger. Why? Supply and demand. As demand goes up, the price of oil rises.

When prices rise, the petroleum industry has the incentive to explore for new oil. Higher prices also promote conservation and the development of alternative energy sources.

Over the last couple of decades world's total reserves have actually gone up rather than down. If supply ever becomes a real issue, oil prices will rise sharply, spurring conservation as well as serious research into alternative energy.

Does that mean we shouldn't reduce our use of oil? No. Although we will probably never run out of oil and gas, there are plenty of good reasons to reduce our dependence on them.

The Power of the Persian Gulf

Two thirds of the world's oil reserves and a third of gas reserves are concentrated around the Persian Gulf. Saudi Arabia alone accounts for one quarter of these reserves. In 1960, Saudi Arabia and other Gulf states founded OPEC so that producing states could control the supply (and therefore the price) of oil and gas.

Members include the Persian Gulf States plus Algeria, Gabon, Indonesia, Libya, Nigeria, and Venezuela. In 1973, OPEC refused to sell oil to the United States because it was angry over U.S. support of Israel. OPEC lifted the embargo the following year, but quadrupled prices, sending the entire world economy into a tailspin.

The American Department of Energy estimates that OPEC has cost the U.S. economy over $7 trillion by manipulating supply and price.

Another new feature of Middle Eastern Politics was the assertiveness of the OPEC. The members of this oil cartel accounted for a large percentage of the world's oil reserves and wielded tremendous potential power over the Europeans and Japanese who relied on imports for more than 80% of their energy needs.

In the past oil prices had been kept artificially low by the Western oil companies through bilateral agreements with producer states. By 1970, however, most host governments had taken over ownership of their production facilities , and they saw in a drastic rise of oil prices a means of accumulating capital for development and purchase of arms, as well as a way to pressure the Western states into respecting their grievances against Israel.

Today much of international politics is driven by growing tension between those who have abundant sources of oil, and those who do not.

Some of the milestones in the world oil market are the creation of OPEC, the oil boycott of the 1970's, the Islamic revolution in Iran, the dramatic change in the oil market in the middle of the 1980's, Saddam Hussein's attempt to annex Kuwait in 1990 and its failure, the removal of Saddam in March 2003; US oil policy - strategic outlooks: American demand, major suppliers, the strategic importance of the gulf and the securing of its oil resources, including the victory over Saddam; Saudi Arabia's oil market policy: its position and its oil utilization strategy; the Iraqi oil market - current position and future potential; future trends, i.e. the world dependency on oil and the uncertainty in the oil market, and different possible scenarios in the oil market; Geo-political and security significance of the oil to many world powers in the 21st century.

The True Cost of Oil

The cost that we pay at the pump for gasoline is a small fraction of the true cost. These costs include the military costs associated with defending the supply of petroleum and environmental and health costs associated with the burning of fossil fuels. These extra costs are borne by people worldwide.

Military Costs

According to the Institute of Petroleum, U.S. consumers spend $11 billion each year for Persian Gulf oil; however, U.S. taxpayers spend another $40 billion to $50 billion annually to defend the region. These figures do not include the costs of the war in Iraq.

Almost 300 American military died in the first Gulf War and another 500 were wounded. There are no statistics available for the number of veterans suffering from Gulf War Syndrome.

As of March 28, 2007, 2812 American military had died in the second Gulf War and more than 23,924 had been wounded. These figures do not include contractors or non-Americans. (John Hopkins researchers recently reported that over 600,000 Iraqi deaths are attributable to the war.)

The world over, therefore, from whatever angle one looks at it, oil is a strategic resource that not only the highest authority controlling the territory in which the resource is found must take charge of but world powers must have a say. Oil is, therefore, not comparable to coffee or matooke and must as such be given special treatment.

There has been the question whether licencing is a procurement or not. The answer depends on what is being licenced. Under the Investment Code Act, Cap. 92, investment means the creation of new business assets and a licence authorizes the holder to make all arrangements necessary for establishing the business enterprise.

This is different from a procurement even by licence of public assets. Licencing for investment therefore does not in my opinion fall under PPDA. It is not a procurement that falls under the PPDA.

In Uganda the Constitution provides in article 244 that all minerals and petroleum is vested in the Government and that subject to that Parliament shall make laws regulating its exploitation. Under articles 98 and 99, the President is the Head of the Government and the executive authority is vested in him.

As we all know, Constitutional Government requires a division of power among several organs of State. By dividing power between the legislature, executive and judiciary, it ensures the presence of restraints and checks and balances in the political system.

And all laws must be in conformity with the constitutional provisions. In this case all executive authority is vested in the President which he exercises in accordance with the constitution. The President appoints Ministers and the members of the Cabinet are politically responsible to him.

In this case he exercises that authority through the Minister. So removing the Minister is tantamount to removing the President from control of the oil resource.

Regulation:

Regulatory agencies are usually a part of the executive or they have statutory authority to perform their functions with oversight. They enforce standards, safety, or generally enforce compliance with the codes in force. It is not usual for the regulator to be at the same time the licencor. It is in fact wrong. It tantamounts to one checking oneself!

Regulatory agencies perform their statutory functions outside executive supervision. Hence their independence in the performance of their statutory obligations. Clause 9 as it stands now brings the proposed licencing of oil exploration into the ambit of executive supervision, which negates the independence of the Authority in the exercise of its duties. It contradicts clause 15.

Whenever any power is to be exercised, it is critical that those given that authority must be clear. In this case it must be clear who has the authority to grant and revoke licences. Is it the Minister or the Authority? Supposing the Minister refused to approve or the Authority refused to grant what would happen?

Supposing the Authority revoked the licence and the Minister refused to approve the revocation, what would then happen? We would have a gridlock in the oil sector! So it is paramount that the one with final power to grant licence is clear to avoid a jam in decision making.

The original provisions of the Bill, therefore, where the Minister grants or revokes a licence with advice of the Authority is in tandem with the Constitution of Uganda and conforms to the best international practices the world over.

I beg colleagues to fully support the amendment of clause 9.

Writer is the Prime Minister of Uganda

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