Funding Uganda National Oil Company

Highlights

• In December 2021, Parliament passed The Public Finance Management (Amendment) Act, a law that governs how public money and resources are mobilised or collected, stored, dispensed and reported on.
• The PFMA further has a section on how petroleum revenue is going to be managed through the Petroleum Fund. 
• The law now allows Uganda National Oil Company to spend at source — meaning that UNOC will spend the money generated from the sale of oil and gas on its obligations first before depositing the balance, if any, to the Petroleum Fund.
• There are concerns that the law will cripple the powers of Parliament and the public to have an effective oversight of how public resources are managed. Not everyone is worried, however.

Uganda discovered commercially viable oil deposits in the Albertine Graben in 2006. Currently, the country has an estimated 6.5 billion barrels of oil, of which about 1.4 billion will be extracted for export as crude and some will be refined into finished products such as petrol, diesel, jet fuel. In addition, gas resources are currently estimated at 500 billion standard cubic feet. To enable gainful and sustainable use of the petroleum (oil and gas) resource, Parliament has been streamlining the legal regime. It recently passed a law on the crude export pipeline. It also tweaked an old law on petroleum revenue management. The Oil and Gas Revenue Management Policy, 2012, and The Public Finance Management Act 2015 are the two key documents that underpin management of petroleum revenue. The PFMA, as it is better known, was amended by Parliament toward the end of December 2021 with a narrow focus — to allow the Uganda National Oil Company (UNOC), which represents the government’s commercial interests in the petroleum sector, keep some of the money it makes from the sale of crude oil (i.e. spend at source instead of remitting first it to the Petroleum Fund) to meet its financial obligations.

Mr Julius Mukunda, the executive director of Civil Society Budget Advocacy Group (CSBAG), a non-profit that works to influence “government decisions on resource mobilization and utilisation for equitable and sustainable development”, and Mr Peter Muliisa, the chief legal and corporate affairs officer of UNOC, explain what The Public Finance Management (Amendment) Act, 2021, says about Uganda’s petroleum revenue management in this question-and-answer explainer. 

What is the Public Finance Management Act (PFMA) and how is it important in the management of Uganda’s public finances? 

Julius Mukunda: The PFMA is the law that governs how public money and resources are mobilised or collected, stored, dispensed (appropriated) and reported on. It tells you how Uganda collects revenues, who collects revenues and the process of appropriation by Parliament. There is also how the budget is going to be implemented, the annual cash flows and forecasts. The PFMA tells you how the money is going to the accounted for. It further has a section on how petroleum revenue is going to be managed through the Petroleum Fund. 

Peter Muliisa: The PFMA regulates the budget framework. But among other things it also provides for management of petroleum revenue. 

Why is it being amended now? 

Mukunda: The amendment gives the Uganda National oil Company (UNOC) authority to spend revenue from its crude oil sale at source. The law was restricting them. The law was saying: do not spend at source, first bring money to the Petroleum Fund and then it can be appropriated [i.e. allocated through Parliament] to you. But now the crude oil is not part of the definition of petroleum revenue. UNOC can spend money at source. Spending at source means that UNOC will spend the money generated from the sale of oil and gas on their obligations first before depositing the balance, if it is there, to the Petroleum Fund. 

Muliisa: It is the right timing for the amendment because you must give confidence to the other partners that you will meet your costs. But, of course, UNOC’s costs will start to be paid after first oil. But we have entered agreements with the oil companies that commit us to pay those costs at the point when first oil comes out. When you have a contractual obligation like that, you need to be sure that you will meet the costs and give confidence to the other parties before they start investing the $10 billion in exploiting the resource. Yes, we start paying in 2025 but we must be prepared now. In 2025 Uganda will have first oil.

There is already the National Oil and Gas Policy for Uganda, 2008; the Oil and Gas Revenue Management Policy, 2012; The Petroleum Exploration, Development and Production Act 2013; The Income Tax Act; and The Public Finance Management Act, 2015. All these could have covered how the petroleum sector should be managed. Why an amendment of the PFMA with a main emphasis on the sector’s revenue i.e. to allow UNOC access to “proceeds from the sale of Uganda’s interest in the crude oil?”

Mukunda: The amendment was not necessary.  We did not need it because we already had a legal regime for managing oil and gas. I think we are being misled to enact a law which is going to cripple the powers of Parliament and the public to have an effective oversight of how our public resources are managed. For prudent public finance management, money must first be collected into one pool then an authority allowed by the Constitution of Uganda allocates that money depending on need. That is one principle of public finance management. This proposal is contrary to that principle. It is the wrong approach to help UNOC meet its obligations to other stakeholders. There were other options. One, we could have a memorandum of understanding with Bank of Uganda to guarantee UNOC obligations. Two, establish an account for UNOC so that whenever it needs money, there is an account to pick money from and meet its obligations. This account would be audited by the auditor general, and Parliament would have the oversight function on that. There was absolutely no reason as to why we had to have this amendment.  

Muliisa: The framers of the old PFMA termed all revenues from oil and gas as petroleum revenue. They then provided that the revenue should go to the Petroleum Fund and the Petroleum Fund should only have limited withdrawals for just two functions: one, to support the Consolidated Fund in infrastructural development; and two, for purposes of investment for future generations. Those were the only two modes of accessing money from the Petroleum Fund and all must go through an appropriation of Parliament. It did not make provisions for how UNOC would pay for its costs to realise those revenues. If you run a business, you know that you must pay costs for you to generate revenue. This is the idea [that led to the amendment]. 

When you look at what constitutes petroleum revenue — leaving out elements like taxes, signature bonuses —the key ones are three. One, royalty; two, profit oil, which is what the government shares with the oil companies after the costs are removed; three, is where UNOC participates in the joint venture as a commercial entity to sell and get money that UNOC can get from each barrel that it shares with the other partners, in this case TotalEnergies and CNOOC. Whereas royalty and profit oil go to the government, the government or UNOC does not have to do anything to get money from those two revenue streams. Government is entitled without paying a penny because the resource belongs to the people of Uganda and government receives the profit oil and royalty. But for UNOC to realise the 15 percent participating interest, UNOC must be able to pay the costs of the joint venture partnership, the cost of operations, the costs that basically get the oil produced together with TotalEnergies and CNOOC. But this other component that UNOC holds is commercial. You must meet the cost of extracting that crude oil for you to be entitled to it. Remember, the framers of the PFMA in 2015 did not consider that. For them they had said even the petroleum revenue from the 15 percent participating interest should go into the Petroleum Fund. 

UNOC is required to deposit revenue in the Petroleum Fund after using part of it for its expenditure. What percentage of the revenue collected or accrued is UNOC supposed to use and is there a minimum of what it can deposit in the Petroleum Fund? 

Mukunda: UNOC will first spend on its own obligations before it puts the balance, if any, in the Petroleum Fund. In fact, it can even spend and get into debt and then come back and ask for more.

Muliisa: The amendment was to make provision for UNOC to meet its costs to realise revenue from the 15 percent participating interest. If we do not meet the costs, the oil companies will not stop producing because UNOC has not met its obligations. What will happen is that the other companies will pay and they must recover the costs by taking the crude entitlement of UNOC. In essence, the revenue that we would have expected would be lost. The amendment was to let UNOC have available money to pay the costs so that it can obtain that revenue and put that in the Petroleum Fund. We retain money just for meeting the costs of extracting the resource out of the ground. It does not cover our operational costs like rent and salaries as a company. Those ones must go through normal budgeting processes. What it covers is components of the costs in making those oil fields run. 

Who oversees and authorises the usage of the revenue deposited in the Petroleum Fund and why?

Mukunda: Parliament, but it no longer has the powers to oversee how oil money is collected and used — those powers have been shifted to UNOC board of directors. One can say, because UNOC is a government agency, Parliament will also oversee that. But if you look at state-owned enterprises, none of them brings its budget to Parliament for appropriation. They only provide information [reports] about the way they are doing their work. They only come to Parliament to answer audit queries when things have gone wrong. 

Muliisa: Actually, our reports are not your ordinary reports. It is not like an annual report of a company. For us at UNOC have to say: we received 10 barrels of crude oil, we sold them at $50 per barrel, and we have deposited the proceeds in the Petroleum Fund. The numbers must add up. If the Petroleum Fund is managed by Bank of Uganda, it must confirm the exact amount we have put there. Uganda Revenue Authority must confirm, the auditor general and accountant general must confirm. That is a huge number of institutions and all of them with clear mandates. That is how far transparency can go because you also have the Parliament, the executive arm of the government is involved. You cannot go any further than that.  

The law says that part of the petroleum revenue may be appropriated by Parliament to fund approved investments of UNOC. Is UNOC guided on what to invest in?

Mukunda: UNOC has got a strategic plan approved by its board — not Parliament. Indirectly, what we believe is that whatever Civil Aviation Authority is doing benefits Ugandans but when it goes into a loss, it is us the taxpayers to bail it out. That is what we are fighting. We are saying: since we Ugandans are the guarantors when you go into debt, we should know exactly how you are spending the money in these investments. But that is not provided for in the current legal arrangement. 

Muliisa: If we do not pay the costs of getting the oil out of the ground, they will take our oil. The law has always been that we receive the barrels of oil, market the oil, and put the money in the Petroleum Fund. It has not changed. What has changed is the 15 percent that UNOC retains as the cost of running the oil fields. If you fail the run the fields, how are you going to generate revenue?

The meaning of petroleum revenue has been revised. The new meaning excludes petroleum revenue being “proceeds from the sale of petroleum arising out of the state participating interest in the applicable petroleum agreement.” What does this mean in terms of revenue sharing?

Mukunda: The petroleum revenue definition was very clear that it is all revenue related to oil and gas. The sale of crude oil, signature bonuses, employment related to oil contracts, all that was defined as petroleum revenue. The changing of the definition was to mean that everything else is petroleum revenue except crude oil. They are saying that if you redefine by law that crude oil is not petroleum revenue, then it means that it will not be deposited in the Petroleum Fund but with UNOC. We are a country with poor accountability mechanisms and, as such, we are not very sure that funds at UNOC will be spent appropriately. 

Muliisa: If it was not changed, UNOC would have to go through the Petroleum Fund where you can only get money for two purposes: to support the Consolidated Fund in infrastructural development; and for purposes of investment for future generations. Payment of our costs in Tilenga (oil field) is not covered by those two costs. What we did ideally was to protect potential revenue by making sure that we meet the costs that will enable us obtain that revenue. To put it into context, the 15 percent participating interest of UNOC will only contribute 7 percent to the total government revenues from the petroleum sector. It is a small portion of what the Petroleum Fund will receive. After meeting our costs, the Petroleum Fund will receive the revenues from UNOC’S 15 percent.  

Who are the key players in tracking the petroleum revenue?

Mukunda: UNOC has the absolute power and authority to collect the oil money and spend it the way it wants. It is at that point of reporting that they will say this is how we spent money. We do not have a format on how the report is going to be presented. They can give us block figures. However, the law also says they will submit their reports to the auditor general, Uganda Revenue Authority, secretary to the treasury and accountant general. But these are reports for you to comment on what has already been done. 

Muliisa: UNOC retains the money but it cannot spend it until Parliament has approved. What it gives us is quickness of retaining the money and limits the bureaucracy that may cause delays and UNOC fails to pay. But, either way, there is parliamentary oversight. UNOC cannot spend a penny without parliamentary approval. We shall send the budget and Parliament will say: we are convinced, you spend; or we not convinced, do not spend. 

Listen to related podcast here. 

* The first three explainers are on the crude oil export pipeline, Extractive Industries Transparency Initiative, and mining

This ACME explainer is made possible with support of the Natural Resource Governance Institute

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