SPECIAL SERIES: Uganda and Extractives
ACME Explainer 1
- Parliament passed the East African Crude Oil Pipeline (Special Provisions) Bill 2021 on 9 December to formalise the East African Crude Oil Pipeline (EACOP) Company. It was gazetted as an Act on 24 December.
- The shareholders of the EACOP Company are France’s TotalEnergies with 62 per cent, Uganda National Oil Company at 15 per cent, Tanzania Petroleum Development Corporation at 15 per cent, and China National Offshore Oil Company (CNOOC) at 8 per cent.
- The crude oil pipeline project is expected to cost $3.5 billion, with 60 per cent coming in as debt and the remaining 40 per cent as equity.
- The law was introduced to harmonise the different pieces of legislation that would affect the pipeline project between Uganda and Tanzania.
- The law dedicates an entire section to national content and outlines 15 services that have been ring-fenced for Ugandan companies.
- The law is not only generous to Ugandans but offers some incentives to the EACOP Company, especially tax exemptions.
Uganda passed the East African Crude Oil Pipeline (Special Provisions) Bill 2021 in December, one of the final major requirements that financiers of what will be the world’s longest underground heated crude oil pipeline needed before committing money to the project.
In passing the EACOP Bill on 9 December 2021, Parliament handed the oil industry an early Christmas package that could stimulate the use of local resources and labour, lay the foundation for a more predictable tax regime, and boost the confidence of investors willing to pump $10–$15 billion into the different oil projects over the next five years. The bill, now law, also allows for the formalisation of the East African Crude Oil Pipeline Company, through which a large chunk of these investments will be channelled.
The shareholders of the EACOP Company are France’s TotalEnergies with 62 per cent, Uganda National Oil Company at 15 per cent, Tanzania Petroleum Development Corporation at 15 per cent, and China National Offshore Oil Company at 8 per cent. The crude oil pipeline project is expected to cost $3.5 billion, with 60 per cent coming in as debt and the remaining 40 per cent as equity.
After Parliament passed the bill, Ms Ruth Nankabirwa, the minister of Energy and Mineral Development, took to her Twitter handle to crow: “Today we have unlocked the potential of the country from a Banana Republic to an Oil republic as Parliament has passed the EACOP (Special Provisions) [Bill] 2021.”
Mr Ali Ssekatawa, the director of legal and corporate affairs at the Petroleum Authority of Uganda, took to Twitter as well to chime in: “In a show of patriotism, Parliament today passed the EACOP bill 2021. Thank you for putting the interests of Ugandan[s] above politics. Tanga here we come first oil 2025.”
The bill, which President Yoweri Museveni signed into law and was consequently gazetted on 24 December 2021, was introduced to harmonise the different pieces of legislation that would affect the pipeline project between Uganda and Tanzania. The pipeline will stretch over 1,443km from Hoima in western Uganda to the Indian Ocean seaport of Tanga in Tanzania. The pipeline will run over 1,100km within Tanzanian territory.
Uganda is looking to commercialise between 1 billion to 1.4 billion barrels of crude oil by early 2025, nearly 20 years after making the first discovery. To increase the size of the country’s reserves, the government is currently negotiating with two companies – Australia’s DGR Global and the Uganda National Oil Company – over the possible award of licenses for the exploration of two oil blocks.
Uganda intends to export much of the crude to the international market and refine some at home. The Albertine Graben Refinery Consortium, a team of companies developing the refinery project, is completing a different set of studies such as those on the environment before proceeding to make a final investment decision, with a schedule of achieving that later this year.
But it is the crude oil pipeline to Tanzania that has gathered momentum and attracted attention.
While Uganda and Tanzania had earlier signed several legal frameworks for the crude oil pipeline such as the Intergovernmental Agreement, the Host Government Agreement, the Tariff and Transportation Agreement, and the Shareholders Agreement, it is the EACOP Act, when fully effective, which aligns all these agreements between the two countries and becomes the overriding instrument for much of the project activities.
The Act notes: “This Act takes precedence over all existing laws relating to any matter under this Act, and where there is a conflict between this Act and any other Ugandan law, other than the Constitution, this Act shall prevail.” However, the petroleum upstream and midstream laws and all other relevant environmental laws will be triggered should there be a need. Tanzania will have its separate law but aligned with Uganda’s.
Difference of opinion
The drafting of the Act was not without disagreements. From the beginning, when the government and the oil companies were consulting about the contents of the law, there were areas of contestation. Take the issue of advertisement of some services. The government had initially wanted all goods and services needed to have some advertisement to allow local players room to participate during the bidding process. However, in the end, the oil companies got their way, with the law allowing the EACOP Company to directly procure certain services for everyday business purposes without advertising them or going through the usual tendering processes.
When the law, then still a bill, came to the floor of Parliament, the legislators also had several concerns. For example, on the issue of the environment, the members of Parliament on the Environment and Natural Resources Committee were not comfortable with the wording around Article 10(8), which allowed the project company to make deviations of the pipeline route without seeking regulatory approval if the alteration was not substantial. The MPs raised a concern that the Act does not determine who defines what is substantial or not.
The legislators recommended that the law sets parameters to determine and specify what amounts to substantial modifications of the pipeline route. They also recommended that changes be made to have gross human rights and environmental rights violations among possible reasons for termination or suspension of the project authorisation. These recommendations never made it into the Act.
When it came to the issue of local content, at some point the committee requested that legal services be ring-fenced for Ugandans. The argument there was that law firms in Uganda understood the local laws better than the foreign firms. However, the proposal was dropped because it would loop in other professional service providers who would have demanded the same.
Before this law, Uganda and Tanzania had different laws on issues such as land use and ownership, taxation, national content, just to mention a few. Such differences in law were expected to create uncertainty for the project, disrupt investment plans, and further compound the uneven distribution of resources between the two countries.
The EACOP Act tries to avoid all this by harmonising the laws and introducing a stabilisation clause that offers the pipeline project more certainty. For example, the Act harmonises the local content policies in the two countries by giving Ugandan and Tanzanian service providers priority during the issuance of contracts. The Act also offers tax incentives to the main contractors in the two countries, such as zero value-added tax on the import of goods and services solely for the pipeline project.
Opportunities for Ugandans
Now, much of the public’s attention shifts to the opportunities Ugandans can exploit from the oil project.
According to official government figures, 150,000 jobs have been reserved for Ugandans during the construction and development stages of the oil project, accounting for 57 per cent of the entire labour force. About 28 per cent of the $15 billion expenditure plan will be reserved for Ugandans undertaking different works and services during the construction and development stage.
The law dedicates an entire section to national content and outlines 15 services that have been ring-fenced for Ugandan companies. These are transportation, security, foods and beverages, hotel accommodation and catering, human resource management, office supplies, fuel supply, land surveying, clearing and forwarding, crane hire, locally available construction materials, civil works, environmental studies and impact assessments, communication and information technology services, and waste management.
Ugandan companies or persons that wish to offer such services must be registered on the National Supplier Database, a platform that the Petroleum Authority of Uganda manages.
One of the main issues that the drafters of the law grappled with was who would qualify to be called a Ugandan company to enjoy the ring-fenced services. While ordinarily a Ugandan company is taken as one that is registered locally, such a definition would not serve the purpose that the government was aiming at in the oil industry – to retain as much value in-country as possible.
To clearly define a Ugandan company for oil and gas purposes, the law references national content regulations. And according to Uganda’s oil and gas national content regulations, a Ugandan company is one that is locally incorporated under the provisions of the Companies Act, 2021. To qualify as a Ugandan company for oil and gas purposes, the entity must additionally employ 70 per cent Ugandans, provide value addition to Uganda, use locally available raw materials but also be approved by the Petroleum Authority of Uganda.
Even when companies pass the test of being defined as Ugandan companies, the EACOP Act does not necessarily make it obvious that they will win contracts. The law stretches it further.
The law, among others, emphasises the need for Ugandans to be able to meet quality standards for the project, abide by health and safety policies, and have environmental and technical expertise to be able to undertake the assignment.
Where Ugandan companies lack the competence to undertake a tender, the law encourages the local companies to enter joint ventures with foreign firms. There were worries that some shrewd businesspeople would create local briefcase companies to be part of joint ventures, denying the country the benefits of retaining revenue.
To avoid this scenario, the law orders that “A Ugandan company shall not be considered eligible to participate in a Ugandan joint venture unless the Ugandan party… has a letter of good conduct.”
The Petroleum Authority of Uganda is responsible for issuing the letter of good conduct. And applicants undergo rigorous due diligence processes before acquiring the letter. In this case, the authority will need to understand whether the Ugandan company looking to enter a joint venture will be an active participant in the partnership; if the company has the experience, technical and financial competence to deliver the supplies in a timely manner; and be able to transfer knowledge and technology to other Ugandans. Short of that, the authority will not issue a letter of good conduct.
However, the law introduces aspects where service providers do not have to go through the rigorous approval processes set by the authority. In situations of unforeseen circumstances such as a fire outbreak, or even an environmental threat, a contracting party is allowed to bypass procurement regulations to hire a service provider.
Incentives for the investor
The law is not only generous to Ugandans, but offers some incentives to the EACOP Company. One of the incentives is a 10-year income tax exemption from owning and operating the pipeline.
The law exempts the project company from paying withholding tax on dividends paid to its shareholders.
Also, goods imported into Uganda specifically for the crude oil pipeline project are exempted from withholding tax.
The law also stops tax authorities from slapping customs and import duties on equipment and materials used in the construction of the EACOP (apart from motor vehicles). However, motor vehicles that are imported temporarily for use in the project will also be exempt.
The law introduces a series of other tax incentives for smaller companies involved with the pipeline when it comes to value-added tax and offers a conducive formula for deducting allowable expenses. However, the incentives are not automatic. Any company that wishes to enjoy these incentives needs to get a certificate of approval from the Uganda Revenue Authority. The URA will require the applicant of this certificate to have a copy of the agreement for the work or service, and confirmation from the EACOP Company that the transaction is covered by the provisions of the Act. The applicant will have to get an answer about the application within 15 working days.
Uganda’s government still managed to put clauses in the law that could limit tax revenue erosion by allowing the EACOP Company to be incorporated in England or Wales, but emphasised that the company’s management, control and place of effective management shall be in Uganda. This means the branch in Uganda will be treated as a resident for tax purposes.
Made possible with support of Natural Resource Governance Institute