How much worth is our Oil cash ( Published in the Newvision 29th october 2013)

How much worth is our Oil cash

Uganda’s petroleum fiscal regime is a production sharing agreement type with signature bonuses, rentals, royalty, income tax and ring-fence among others.  The fiscal terms applicable to upstream operations are governed by Part IXA of the Income Tax Act, (Cap 340) (ITA), the 2012 Upstream Act) and the terms of any petroleum agreement and. The Ugandan government has, to date, used a production sharing form of petroleum agreement. The principal fiscal terms are as follows:

ü  The government is entitled to a royalty computed as a percentage of gross daily production, such royalty to be in kind or cash at the government’s election. The percentage can be on an escalating scale as production increases. Royalty rates are biddable and will be set out in the licence or petroleum agreement- current information suggests Based on Gross Total daily Production. Where production (P) does not exceed 2,500 5%, 2,500<P<5,000 7.5%, 5,000<P<7,500 10%, and P>7,500 12.5%. Royalty is paid on a monthly basis.

 

ü  Under a production sharing arrangement, the contractor is entitled to cost recovery from a specified percentage of gross oil or gas production after deduction of any applicable royalty. Cost recovery may be ring-fenced with costs only recoverable from production from the contract area to which they relate. After deduction of Royalty, 60% cost recovery limit is allowed. For Purposes of the estimation below, 40% of the Gross revenue (prior to deducting royalties) is assumed.  Unrecovered costs can typically be carried forward;

 

ü  After deduction of royalty and cost recovery, remaining production is split between the government and contractor on a sliding scale as set out in a petroleum agreement, with the government’s percentage increasing as daily production increases. Available information suggests a 67.5% for government and the remaining share for companies;

 

ü  The contractor is required to pay income tax at the standard corporation rate tax of 30 per cent on the proceeds of the sale of their share of profit oil under the petroleum agreement. Contract areas are ring fenced for tax purposes with each contract area taxed as if it is a separate tax payer- this protects loss transfer by companies from one project to another to minimize tax payment;

 

ü  Under the 2012 Upstream Act signature bonuses are payable on the award of exploration and production licences and are not cost recoverable. Signature bonuses have, according to media reports, been paid in respect of petroleum agreements entered into under the repealed Petroleum (Exploration and Production) Act (PEPA) regime. It was reported, for example, that the PSAs that were signed on 3 February 2012 by Tullow with CNOOC and Total included a signature bonus of US$500,000 and development bonuses of US$2m;

ü  A licensee must pay an annual charge calculated on the grant of a licence and thereafter annually on the anniversary of the grant until the termination of the licence;

ü  A participation dividend paid by a resident contractor to a non-resident company is liable to a withholding tax at a rate of 15 per cent. A lower rate of withholding tax may apply if the dividend is paid to a resident of a country with whom Uganda has a favourable Double Taxation Agreement. This is indeed a welcome move to mitigate transfer pricing.

ü  Any capital transfer /appreciation/ gains is considered as an income and subjected to 30%.

ü  Thin capitalisation rules- Debt/equity ratio 2:1. Interest is allowed to the extent of the rule.

ü  Excise duty and VAT- Applicable on all procurements subject to the duties.

Despite the aforementioned, Uganda’s fiscal regime provides generous allowable deductions including initial allowances of 75%, decommissioning costs, loss carry forward, tax exemption of machinery and equipment and depreciation allowances.

 

It has been estimated that Uganda has 3.5 billion barrels of oil reserves. Assuming a recovery rate of 50%[1] implies that one billion, seven hundred and fifty thousand barrels of oil will be recovered. At envisaged peak production of 200,000 bpd expected in 2020, then the current deposits would be exhaustible in 24 years earning Uganda 3.6 billion dollars annually[2] based on the calculations in table below.

Annual Profits In USD- peak procuction 200,000 barrels per day
	A	B=12.5% of A	C=40% of A	D=A-B-C	E=67.5% of D	F=32.5% of D	G=30% of F	H=B+E+G	J=H*365
Quantity	(A)Total revenues of 200,000 barrels per day @100USD	(B) Royalties 12.5% of Total Rev	(C) Recovery costs 40% ofgross revenue	Profit Oil	Government share of tax 67,5%	company share 32,5%	company share taxed 30% corporate  tax	Government profit per day	Annual Profit
10000	1 000 000	125 000	400 000	475 000	320 625	154 375	46 313	491 938	179 557 188
20000	2 000 000	250 000	800 000	950 000	641 250	308 750	92 625	983 875	359 114 375
30000	3 000 000	375 000	1 200 000	1 425 000	961 875	463 125	138 938	1 475 813	538 671 563
40000	4 000 000	500 000	1 600 000	1 900 000	1 282 500	617 500	185 250	1 967 750	718 228 750
50000	5 000 000	625 000	2 000 000	2 375 000	1 603 125	771 875	231 563	2 459 688	897 785 938
60000	6 000 000	750 000	2 400 000	2 850 000	1 923 750	926 250	277 875	2 951 625	1 077 343 125
70000	7 000 000	875 000	2 800 000	3 325 000	2 244 375	1 080 625	324 188	3 443 563	1 256 900 313
80000	8 000 000	1 000 000	3 200 000	3 800 000	2 565 000	1 235 000	370 500	3 935 500	1 436 457 500
90000	9 000 000	1 125 000	3 600 000	4 275 000	2 885 625	1 389 375	416 813	4 427 438	1 616 014 688
100000	10 000 000	1 250 000	4 000 000	4 750 000	3 206 250	1 543 750	463 125	4 919 375	1 795 571 875
150000	15 000 000	1 875 000	6 000 000	7 125 000	4 809 375	2 315 625	694 688	7 379 063	2 693 357 813
200000	20 000 000	2 500 000	8 000 000	9 500 000	6 412 500	3 087 500	926 250	9 838 750	3 591 143 750
According to available information, Government will charge Royalties of 5% if production capacity is less than 2500 bpd, 7.5% if production is between 2500 bpd and 5000 bpd, 10% if production is between 7500 bpd and 10,000 bpd, and 12.5% for all quantities above 10,000 bpd. After deducting royalties, the oil companies are supposed to deduct their recoverable costs(40% of gross revenue) to obtain profit oil.  The profit oil is then shared between the government (67.5%) and the oil companies (32.5%) respectively.
Calculation by Enock Twinoburyo

 

 

Oil revenues over the 24 years at peak production of 200,000 bpd, would earn Uganda about 84bn dollars revenue. With a population of 35 million, the latter means $2,400 per capita, or more than 4.5 times GDP per capita at market prices. Thus, the value of the discovered oil is large but far from being large enough to itself lead to a revolutionary change in the living conditions of the average Ugandan. The oil will not make the average Ugandan a rich oil sheik but if the oil re- source is wisely spent, it certainly may make a difference.

 

An assumption can however be made and calculations made for different types of fiscal rules ( suggested saving thresholds for givernment) i.e. Bird in hand or Permanent income hypothesis rule.  To the done at later stage

It is also important- to take stock of how much Uganda has earned so far. Oil in Uganda (www.oilinuganda) estimates that Uganda has got close to 1 billion USD (UGX 2.6 Trillon- which is about 20% of the current Budget of UGX 13.6 trillion). Tullow Transferred two thirds of its rights worth USD 2.9billion ( a third each) to Total and CNOOC. Government levied a capital gains tax of 472.7m in capital gains and Tullow only paid a third of it (USD 141 Million). Tullow is expcted to pay full amount after a London arbitration hearing found that heritage should have paid full amount of capital gains.  According to Bank of Uganda- Uganda has so far received USD 620 Million and should expect another USD 286 Million the balance on capital gains of Tullow’s farm down to CNOOC and Total.  According to Tullow published reports about USD 32 million has been paid in other fees and taxes last year, assuming the same payments by Total and CNOOC would mean Uganda has so far received USD 720 milloon and expects USD 286 Million. It is a fair assumption that Uganda is USD 1 Bn Rich todate or more bearing in mind Uganda presumably has earned some cash from the eight years of oil exploration before 2012.

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[1] With improved and enhance recovery methods, Norway managed to increase recovery rate from 25% to 45% offshore. Recovery rate can even increase to 60% with the use of modern and efficient technologies.

[2] Without clear fiscal rules on how the government will share revenue between the budget and investment, Fiscal sustainability analysis has not been calculated due to missing information. An assumption can however be made and calculations made for different types of fiscal rules i.e. Bird in hand or Permanent income hypothesis rule. To the done at later stage