KAMPALA INTERNATIONAL UNIVERSITY. A general overview of the Petroleum Industry in Uganda: the Upstream, Midstream and the Downstream Sector

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1 KAMPALA INTERNATIONAL UNIVERSITY A general overview of the Petroleum Industry in Uganda: the Upstream, Midstream and the Downstream Sector Presentation By PATRICK TURINAWE NGABIRANO 3/20/2014 This Paper is presented to the LLM (Natural Resources) Class 2014 at the Kampala International University as a Coursework requirement for the Oil and Gas Class. The author is a candidate of the class, Graduate of Bachelor of Laws LLB (UCU), and an Advocate of the High Court of Uganda Dip. L.P (LDC). He is a tutorial assistant at the same University.

2 ACRONYMS ELN FARC HFO IRR LPG MEND NOC NPV PAU PEPDA PSA RAP TDJ National Liberation Army Revolutionary Armed Forces of Colombia Heavy Fuel Oils Internal Rate of Return Liquefied Petroleum Gas Movement for the Emancipation of the Niger Delta National Oil Company Net Present Value Petroleum Authority of Uganda Petroleum (Exploration, Production and Development) Act Petroleum Supply Act Resettlement Action Plan Taylor-DeJongh 1

3 A general overview of the Petroleum Industry in Uganda: the Upstream, Midstream and the Downstream Sector. Introduction By Patrick Turinawe Ngabirano Abstract Recent discovery of commercial hydrocarbon deposits in Uganda have placed the Country among oil rich countries in the Africa in particular and the World at large. The industry is subdivided into three stages; upstream, midstream and downstream respectively. This paper intends to give insight on the petroleum activities involved at the different stages. The paper also gives a glimpse at the historical development of the sector in order to understand its background. It will focus on the policy and legal framework that govern the different stages of the petroleum sector. A critique of the legislations, practicalities, challenges and advantages of the edicts will be evident. It concludes with recommendations that will be discussed therein on how the different stages can be developed with the resource to inter play with the social, economic and political development of Uganda. The Upstream covers promotion, licensing, exploration, development and production of petroleum. Midstream includes transportation, refining of oil and conversion of gas. It is recognised that upstream petroleum also includes aspects of transportation, especially with regard to transportation of oil and gas on petroleum fields and in between these fields and processing centres. Downstream petroleum deals with distribution, marketing and sale of petroleum products. Historical Perspective of the Development of the Petroleum Sector in Uganda The petroleum potential of Uganda was first documented by A.J. Wayland 1 in 1925, based on oil seepages he mapped at that time 2 around the Albertain Graben, North West of Uganda 3. The first drilling of wells took place in 1938 though they were not substantial for commercial use. Several wells were further drilled for stratigraphic purposes in the 1940 s and 1950 s 4. Aeromagnetic surveys were made between E. J. Wayland Petroleum in Uganda (Geological Survey of Uganda Memoir, 1) Uganda Government printery, 2nd edition (1926) January 1, Wayland was a British Government Geologist at the time. 2 Environmental Sensitivity Atlas for the Albertain Graben 2010, 2 nd edition page 3 3 The Albertine graben is a Cenozoic rift basin formed and developed on the Precambrian orogenic belts of the African Craton Surface geological mapping undertaken by the Petroleum Exploration and Production Department and the wells drilled by the Licensees so far indicate these sediments to be predominantly sandstones, siltstones, clay stones and shales. The sandstones and siltstones are mostly of high porosity and permeability good enough for oil and gas resoivours 4 However this process was derail by the out-break of World War II until the 1980s, which saw the acquisition of aeromagnetic data across the entire Graben region. 2

4 and 1992 consequently identifying five sedimentary basins in the country. 5 Later on, Seismic data was acquired in the area in 1998 and, subsequently, during 2001, 2003 and Policy and Legal Framework Until 2008, Uganda had no Oil and Gas policy. This is well elucidated by the lack of oil and Gas activities or sufficient seismic data to show that there were commercial hydrocarbon deposits worthy of exploration and production. The role of a policy framework cannot be underestimated. It lays down the ideals, intentions and aspirations a government 7. On the other hand, the legislative framework reifies the policy framework to give it a binding 8 effect on the government. The goal of the policy is to use the country s oil and gas resources to contribute to early achievement of poverty eradication and create lasting value to society 9. Comprehending that petroleum is a finite resource, the policy states that it s revenue should merely contribute to the economy mix and more purposely to develop other sectors in order to sustain the economic, social and political progress of Uganda 10. The Upstream sector is governed by the Petroleum (Exploration, Production and Development) Act It replaced the Petroleum (Exploration and Production) Act, Chapter to include best petroleum industry practices; institute a National Oil Company and the Petroleum Authority among other innovations as a measure of implementing the Oil and Gas Policy. The Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act No 4 of 2013 regulates the midstream petroleum sector. The midstream stage is composed of planning, preparation, installation and execution of operations related to refining, conversion, transmission and storage of petroleum products, including cessation of operations and decommissioning of facilities used. 5 These included the Albertine Graben, Lake Kyoga basin, Hoima basin, Lake Wamala basin and the Moroto- Kadam basin. Ground survey s later indicated that the most sedimentary basin to-date is Albertain Graben. 6 Arthur Bainomugisha, Hope Kivengyere and Benson Tusasirwe, Escaping the oil curse and making poverty history; A Review of the Oil and Gas Policy and Legal Framework for Uganda. ACODE Policy Research Series, No. 20, 2006 page 3 7 Acode paper 22 8 Article 72 (2) of the Constitution empowers Parliament to make laws. A policy has no binding effect but the law. 9 National Oil and Gas Policy of Uganda February 2008, Ministry of Energy and Mineral Development, page Countries like Gabon, Equatorial Guinea have suffered from the over dependence on Oil and now that they resource is in depletion, the countries rely mainly on imports in Agriculture, Industrial products which they earlier flourished. 11 The Act was assented to on 13 th June 1985 however it never came into force until 2000 under The petroleum (Exploration and Production) (Commencement) Instrument, 89/2000 made by the Minster of Energy and Mineral Development wherein it provided that the Act shall be deemed to have come into force on 27 th September This sloppiness may be explained by the fact that since the enactment of the Act, there were no serious exploration activities that necessitated its application. 3

5 Downstream activities are composed of the importation, exportation, transportation; processing, supply, storage, distribution and marketing of petroleum products. They are governed by the Petroleum Supply Act No 13 of This legal framework governs the conduct and regulation of the different stages of the petroleum industry in Uganda. The Upstream Stage As noted, the Upstream stage comprises of promotion, licensing, exploration, development and production. This stage has been very active in the recent past following the discovery of commercial oil deposits. For instance, Petroleum Exploration Area 1 was licensed to Heritage Oil and Gas Company (Heritage) and Energy Africa Limited (now Tullow Oil Company) in July Exploration area 2 was licensed to Hardman Resources Limited and Energy Africa Limited in October Exploration Area 3A was re-licensed to Heritage in September In September 2005, Neptune Petroleum Ltd. (now Tower Resources) acquired an exploration license over Exploration Areas Legal framework of the stage Section 5 of the Act prohibits any exploration activities without a licence. The Minister is responsible for Petroleum has powers to grant and revoke licenses 13 Section 9 establishes The Petroleum Authority of Uganda and its functions are provided for in Sections 10 and 11. The National Oil Company is set up under Section 42 and its obligations are outlined in Section 43. The Licencing of exploration activities in Uganda are provided for under Part IV of the Petroleum (Exploration, Development and Production) Act The reconnaissance permit and a survey is carried out before an area can be opened up for petroleum activities. Before any licence can be issued for any oil activities, the Minister must open up areas for petroleum activities 14. This is a declaration of a specific area which has not been licenced for any oil activities to be open for oil activities. Before such a declaration can be made, the Minister has to ensure that an evaluation 15 of preliminary geological, geophysical and geochemical data is conducted 16. The Minister then submits a report to Parliament with details of the areas to be opened 12 Petroleum Potential of the Albertine Graben Uganda, Petroleum and Exploration Department, Ministry of Energy and Mineral Development, September Section 8 (a) 14 Section 47 (1) of the Act 15 The evaluation must include an assessment of the impact of the petroleum activities on trade, industry and the environment, and of possible risks of pollution, as well as the economic and social effects that may result from the petroleum activities. Section 47 (3) of the Act 16 Section 47 (2) of the Act 4

6 and petroleum activities and the said evaluations and impact assessment 17. The Minister then makes a public statement in regards the areas opened up for oil activities. The evaluation reports should also be made available to the public and most especially the affected stake holders. This is with a view to generate ideas and opinions 18 from the public at large and the affected persons/areas in particular. Application for a reconnaissance permit After the Minister has declared an area open for oil activities, interested persons/ companies can apply for a reconnaissance 19 permit from the Minister 20 to carry out a reconnaissance survey. The reconnaissance permit is given in respect to a geographically delineated area 21 and can be issued to different players in respect to the different reconnaissance activities 22. However, where reconnaissance permits are issued to two or more persons in the same area, the activities of one permit holder shall not be detrimental to the activities of another permit holder 23. Section 48 (6) of the Act conditions every reconnaissance permit holder to give the Minister a copy of the data collected free of charge. Within ninety days after the application has been made, the Minister should have considered whether to grant the permit or not 24. The Minister s announcement must be published and communicated in the local language of the area. He/s has to put in place a local office for the public to address their concerns. A reconnaissance permit may apply to a particular type of survey and may permit shallow drilling for data calibration purposes section 50 (1) The Petroleum Exploration Licence; This is one issued by the Minister authorising the licensee to carry out exploration activities. He/s must first declare the areas open for bidding 25 for a petroleum exploration licence with the approval of cabinet 26. Within fifteen days of approval of 17 Section 47 (4) 18 This should be done within 90 days from the date when the Minister makes the Public Statement. Section 47 (6) of the Act. It is expected that the Minister shall consider the views from the general public and affected persons. 19 A reconnaissance means the undertaking of preliminary petroleum activities for the purpose of acquiring geoscientific data and includes geological, geophysical, geochemical surveys and drilling of shallow boreholes for calibration; Section 1 of the Act 20 Section 48 (1) 21 Section 48 (3) 22 Section 48 (4) 23 Section 50 (2) 24 Section 49 (1) 25 The bidding process is done according to this Act and subsequent regulations. Section 52 (6) 26 Section 52 (1) of the Act. This should be followed by a public announcement and gazetting in the Uganda Gazette and media Section 52(3). The announcement should include state the area open for petroleum exploration, stipulate a period of not less than three months for making applications; and contain such information as the Minister may consider necessary section 52 (4) 5

7 Parliament, the Minister then informs Parliament of the areas open for bidding for an exploration license 27. Section 53 of the Act provides for exceptional circumstances under which the Minister may directly receive applications. Such exceptions include 28 ; where invitations for bids have been sent out three times and no application has been received; where the application is in respect of a reservoir within a licensed block which extends into an unlicensed block; or enhancement of the participating interest of the State in the promotion of national interest. Where a direct application has been made to the Minister, he/s must cause a notice of the application to be published in the Gazette and in at least one national newspaper of wide circulation in Uganda indicating 29 receipt of the application for a petroleum exploration licence; a detailed description of the nature and location of the proposed undertaking; inform members of the public that the application may, within the limits of commercial confidentiality, be inspected at the offices of the Minister; and invite directly affected parties and local authorities in areas affected by the project who object to the granting of the licence, whether on personal, environmental or other grounds, to lodge with the Minister an objection within a specified time, being not less than thirty days from the date of notice. Any party affected by the petroleum activity has a right to file an objection of granting an exploration licence with the Minister who should make a decision within fourteen days 30. This complaints procedure has been criticized as a fallacy. If the objection is upheld, no exploration licence shall be granted though the objection can also be dismissed by the Minister. An aggrieved party would find remedy by appeal 31 to the High Court within thirty days. The Application The applicant makes an application to the Minister in writing which should include 32 a. The name and nationality of the applicant 33 b. identify the block or blocks in respect of which it is made; c. the identified blocks should not be more than ten 34 d. a statement containing particulars of work and the minimum expenditure proposed for the block or blocks over which the licence is sought; e. give information on the financial status and the technical and industrial competence and experience of the applicant; and 27 Section 52 (2) 28 Section 53 (2) 29 Section 54 (2) 30 Section 55 (2) 31 Section 55 (5) 32 Section 56 (3) 33 And in case it is a Company its name and place of incorporation, the names and nationality of the directors or equivalent officers and, if the body corporate has share capital, the name of any person who is the beneficial owner of more than five percent of the issued share capital Section 56 (3) (a) (ii) 34 However under special circumstances, the Minister may accept an application form more than ten block but not more than twenty Section 53 (4) 6

8 f. A statement containing particulars of the applicant s proposals with respect to the employment and training of citizens of Uganda, and may set out any other matter which the applicant wishes the Minister to consider. Within sixty days, the Minister should confirm to the applicant in writing that the application is complete in all aspects 35 The Minister shall require the applicant to execute a performance bond 36 or any other kind of security for the observance of the conditions in the exploration licence and to also take any necessary insurance liabilities for any risks that may arise in the course of exploration activities. There are no particular time limitations within which to consider the applications but should at least not be beyond 180 days. In consultation with the Authority and approval by cabinet, the Minister may make a decision on the grant of the application with such conditions as may be determined 37. Section 59 (1) outlines the contents of the exploration licence to include; a. the date of grant of the licence; - the exploration area to which the licence relates -the conditions on which the licence is granted. The Exploration licence confers upon the licensee the exclusive right to explore for petroleum, and to carry on such petroleum activities and execute such works as may be necessary for that purpose, in the exploration area 38. The licensee must commit 39 to and carryout a minimum work programme in both the primary exploration term and any subsequent extension; explore the licensed area, using geological, geophysical and any other acceptable methods of exploration for the purpose of identifying prospects; in accordance with the work programme, commence seismic surveying which shall continue until the licence area has been fully surveyed; drill a minimum number of wells; and carry out any other exploration activity stipulated in the minimum work programme. In case the licensee makes a discovery 40 of petroleum in an exploration area, they are inclined to immediately inform the Authority of the discovery and submit to the authority the particulars of the discovery in writing with thirty days. The licensee should also promptly run tests in respect of the discovery and undertake a technical evaluation of the discovery; and submit the technical evaluation report to the Authority as soon as it is complete. 35 Section 53(5) 36 Section 56 (8) (a) and (b) 37 Section 58 (1). A licence cannot be granted in respect of a block which is, comprised in a licence already granted. 38 Section 60. This is subject to the Act and the Conditions set in the licence as long as it is in force. 39 Section Section 66 7

9 The licensee is also expected to draw up and carry out an appraisal programme for the purpose of delineating the reservoir to which that discovery relates in terms of thickness and lateral extent and estimating the quantity of recoverable petroleum in the reservoir within two years 41. From time to time, the Authority may require 42 the licensee to inform the Authority in writing of the chemical composition and physical properties of the petroleum; the stratigraphical position and depth of the discovery; and any other matters relating to the discovery specified by the Authority in the notice However, if the discovery is of no commercial interest and has no potential commercial interest, the licensee shall have no obligation to make the appraisal if it has notified the Minister of the same in writing 43. The Minister may put it in writing that the discovery area in which that discovery is located shall cease to form part of the petroleum exploration area if it is verified that it is of no commercial value subject to the terms and conditions in the agreement 44. The licence expires according to the time stipulated in the licence but shall not take more than two years 45. However, it can be renewed 46 once and for not more than two years 47. Application for the renewal of an Exploration Licence It should be made by the licensee within ninety days before the expiration of the licence 48. The application for renewal of the licence must be supported 49 by particulars of the work carried out in and the amount expended in respect of the exploration area during the term of the licence up to and including a date that is not earlier than fourteen days prior to the date of the application, or where the application is for a second renewal of the licence, during the period of the first renewal of the licence up to and including a date that is not earlier than fourteen days prior to the date of the application; (b) the applicant s proposals for minimum work programmes and expenditure in respect of the licence area specified in the application and, in particular, details of the programme to be carried out in the first year of the renewal period being applied for; and (c) any other information that the applicant wants the Minister to consider. 41 Section 66 (2) though the Minister may extend the appraisal period as he/s may deem fit. In Norway, it is a limit of 3years while in Nigeria, it is 2 years. 42 Ibid 6 43 Ibid (5) 44 Section 67 (2) 45 Section 61 (a) 46 Also in cases of force majeure under Section 188 (3) 47 Section 61 (b) 48 Section 62 of the Act though the Minister has powers to accept an application made before but not after ninety days from the date of expiry of the licence 49 Section 62 (3) 8

10 The Minister may in consultation with the Authority renew 50 the exploration licence of the licensee though the renewed licence shall be one half of the number of blocks in respect of which the licence was first granted or, as the case may be, last renewed 51 Section 68 of the Act confers Any petroleum extracted during the exploration period for purposes of testing the reservoir before the issuance of a production licence shall be dealt with in accordance with the provisions of this Act Petroleum Production Licence A petroleum exploration licensee 52 has an exclusive right to apply for the grant of a petroleum production licence over any block or blocks in that area which, following appraisal, have been shown to contain a petroleum reservoir or part of a petroleum reservoir 53. Where a petroleum exploration licensee makes an application, they are required to make a report 54 on the petroleum reservoir; a field development plan; any relevant information that the Minister may reasonably require, including information relating to alternative proposals for development and production not included in the development plan; and any other information that the applicant may deem necessary. Where a petroleum exploration licensee does not apply for a petroleum production licence, the Minister may announce 55 that the areas are open for bidding for a petroleum production licence and the areas may be stratigraphically divided 56 stipulating that the application should be made in less than three months and any other conditions. The Midstream Stage The composition of the midstream stage is planning, preparation, installation and execution of operations related to refining, conversion, transmission and storage of 50 Where the licensee has violated provisions of the Act or has defaulted on the Conditions on the licence, the licence may not be renewed. 51 Section 64 (4) 52 Any other person can also apply under subsection 4 as long as they can prove that the exploration areas contains a reservoir 53 Section 69 (1), the right is limited to reservoirs included in the application and any other prospect or discovery within the area which the application covers may be required to be stratigraphically delineated or relinguished. 54 Section 71 (1). The report should also include details of the chemical composition, physical properties and quality of the petroleum; the thickness and extent of the production strata; the petrophysical properties of the petroleum reservoir formation; the petroleum reservoir s productivity indices for the wells tested at various rates of flow; the permeability and porosity of the petroleum reservoir formation; an estimate of the production capacity of the petroleum reservoir; an evaluation of the petroleum reservoir and adjoining areas; any additional geological, geophysical and geochemical data and other relevant information relating to the petroleum reservoir; and an assessment of the potential effects of the petroleum activities on the environment, social and other relevant activities. 55 The information should also be gazetted and also published in newspapers of wide circulation. 56 Section 70 9

11 petroleum products, including cessation of operations and decommissioning of facilities used. The Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act governs these operations. It outlines the different roles played by the Minister 57, The Petroleum Authority 58 and the National Oil Company. 59 In essence, this stage focuses on any operations to deal with refining 60, conversion 61, transmission 62 and storage of petroleum products. Uganda is fast tracking construction of an oil refinery that will not only be beneficial to it but the region. There are plans to have piplines from Kigali- Rwanda and Juba- South Sudan. The downstream sector in Uganda has an overwhelming demand for petroleum products with over 90 licensed companies to carry out operations. East Africa has only one refinery facility at Mombasa operating at half capacity of the expected 70,000 BPD. The total regional demand is estimated at over 160,000 BPD with an expected annual growth rate of 6% 63. Together with transportation limitations faced by the sector, all these necessitate an inland refinery that will tap into this demand and actuate unlimited growth of the sector and other businesses in the region. Besides, it will also ensure security of supply of petroleum products especially for the land locked Partner States such as Rwanda and Burundi. The ability of a rational exploitation of the resource to support sustainable development and contribution to the country s growing energy requirements by providing Heavy Fuel Oils (HFO) which can be used for power generation and Liquefied Petroleum Gas 64 (LPG) that will help offset use of trees for domestic cooking. In 2009, the Government of Uganda contracted Foster Wheeler Energy Limited Ltd, an energy consultant company from the United Kingdom on the most viable option to value addition of its crude oil. The company recommended that a refinery was a more commercially viable option with a Net Present Value (NPV) of US$ 3.2 billion at a 10% discount rate and an Internal Rate of Return (IRR) of 33% Section 4 of the Act 58 Section 5 and 6 of the Act 59 Section 7 of the Act; however the role of the NOC is ambiguous and left for the arbitral guidance of the Executive. 60 It is the transformation of crude oil into finished or partly finished petroleum products using different processes of distillation, cracking and reforming or other methods of altering the molecular structure of the crude oil 61 This refers to the changing the natural gas component, without altering the molecular structure of the natural gas entered into the process through the use of pressure or temperature 62 Refers to the transportation of petroleum products but not for distribution to consumers or retailers or transportation of petroleum commodities through pipelines with its inlet or outlet flange at a refinery or gas conversion facility in Uganda 63 Refining Opportunities in Uganda, Ministry of Energy and Mineral Development Report, page 20. Also see, The study done by Foster Wheeler on the feasibility of a refinery in Uganda available at the Ministry of Energy and Mineral Development. 64 Liquefied Petroleum Gas (LPG) include diesel, petrol, kerosene, jet fuel 65 Refining Opportunities in Uganda, page 19 10

12 In any refinery project, investment in desulphurisation units is usually significant. The low sulphur content means that the refinery would benefit from a lower investment thereby increasing profitability of the investment. The sulphur levels in the crude are recognised to be some of the lowest in the world 66 - The study also indicated that the most optimum location for a refinery would be around Hoima due to its closeness to the source of the crude oil which would help to overcome crude pipeline transportation problems arising from its waxy and viscous nature 67. The Government has already acquired land for the refinery located in Kabaale Parish, Buseruka Sub-county in Hoima District 68. The area will not only have Uganda s first oil refinery but also an aerodrome, waste management facilities, associated industries such as petrochemical industries and staff quarters. In March 2013, Taylor-DeJongh (TDJ) an independent American firm, won a bid and was contracted to advise government on the projected $1.6bn oil refinery 69. It is expected to help government in sourcing for a lead investor, sourcing for financing for the refinery and formation of a refining company. On implementing the objective to construct a refinery, the bidding process is already on going with six international petroleum companies 70 confirmed to have registered. The best bidder is expected to be announced in June 2014 and will be mandated to construct the refinery 71. Well as the need to construct a refinery is important and needed soon. It should not be hastened before sufficient infrastructure and capacity is established. A race in the sector can yield to disastrous environmental and technical mayhem. It is reported that government s strategy is to develop the refinery in stages starting with a capacity of 20,000 barrels per day, to be upgraded to 60,000, 120,000 and then later 180,000 barrels per day 72. Governments projections of constructing the refinery are to have capacity of producing 20,000 BPD and later develop it to 60,000 BPD three years and five to six years respectively 73. Compensation and Resettlement 66 Ibid page Ibid 68 See, Isaac Imaka & Frederic Musisi Oil refinery compensations: A mixed bag of hope, despair for residents. The New Vision Tuesday, March The area will cover nine villages of Nyahaira, Kyapoloni, Nyamasoga, Kabaale 2, Kabakete, Kiteegwa, Katooke, Kigaaga and Nyansenene. 69 Edward Ssekika, Government hires transaction advisor for oil refinery, Friday, 01/03/ The firm boosts of thirty years experience in oil and gas advisory business and was named as Oil and Gas Advisor of the Year by the Infrastructure Journal. 70 These include China Petroleum Pipeline Bureau, Petrofac from UAE, RT Global Resources from Russia, Vitol SA from Switzerland, SK Energy from South Korea and Marubeni Corporation from Japan. 71 Edward Ssekika, Oil refinery winning bidder to be announced in June, The Observer, Tuesday, 18/ Edward Ssekika, Government hires transaction advisor for oil refinery, Friday, 01/03/ Ibid 11

13 Article 26 (2) (b) of the Constitution prohibits government from acquiring property without prompt payment of fair and adequate compensation prior to the acquisition of the property 74. Government is therefore faced with the most enormous project to compensate and resettle habitants in these areas. It has established a Resettlement Action Plan 75 (RAP) and contracted Strategic Friends International (SFI), a company to carry out the resettlement for inhabitants that have chosen to be relocated. Many locals however complain that the resettlement areas are insufficient to cater for their families and agricultural produce (livelihood) 76. On the other hand, government has also started compensating other land owners and dwellers that chose to be monetarily compensated. However, locals severely contest the valuations which government claims were made by professional land valuers and approved by the Chief Government Valuer 77. It is these challenges that government has to systematically and comprehensively deal with before it is too late in order to avoid the communities response with mayhem against the various oil and gas projects in the area. Experiences from other jurisdictions indicate that civil strife is very culpable if the communities around the oil exploration areas are not sufficiently dealt with. In Nigeria, the Movement for the Emancipation of the Niger Delta (MEND) a rebel group are the latest in a long history of rebel attacks on the Nigerian oil network 78. In Colombia, the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN) rebel organizations have engaged in bomb attacks on Colombia s oil pipelines, kidnappings of oil company employees for extortion, and civilian killings as part of their resistance campaigns 79. In neighbouring Kenya, Tullow Oil suspended its drilling after weekend protests by locals 80 Although government has established a comprehensive Resettlement Action Plan (RAP), there is more to be desired to actuate it without civil strife and conflict. The Legal framework The licence granted is valid for the initial five years within which the licensee should execute the code of practice issued by the Minister- section 96 (however this should 74 In Advocates for Natural Resources Governance and Development and 2 others vs Attorney General and another Constitutional Petition No 40 of 2013, the Court ruled that compensation to the property owner must be done before government can take over the property. 75 This includes verification, disclosure of compensation values, livelihood improvement and financial management training, identification of resettlement areas and construction of resettlement houses, among others 76 Isaac Imaka & Frederic Musisi Oil refinery compensations: A mixed bag of hope, despair for residents. The New Vision Tuesday, March Isaac Imaka & Frederic Musisi Oil refinery compensations: A mixed bag of hope, despair for residents. The New Vision Tuesday, March Jacob Kathman & Megan Shannon, Oil Extraction and the Potential for Domestic Instability in Uganda African Studies Quarterly, Vol 12, Issue 3, Summer 2011at page 7 79 Ibid 80 EAC cooperation vital for success of oil sector, The New Vision 01/Nov/

14 be to the satisfaction of the Authority 81 ) if the work is done to the satisfaction of the Authority, a licence is granted to operate the facility for twenty years and may be renewed 82 for a period five years at a time. On completion of the construction of the facility, the Authority may grant the licensee an operation permit that would allow the licensee to commence operations of the facility which should not be for a duration longer than the licence 83. Currently, there are no such permits that have been given since construction of the facilities has not yet begun. A conflict of Ministerial or political power visa-vie the Petroleum Authority can be noticed under section 23 in regards to the renewal of a licence. The Minister has powers to renew the licence for five years. This licence or now operations permit is granted by the Authority. This will create institutional bedlam or incongruity and avoid transparency. Political intrusion is a significant attribute to the oil curse adage which will eventually lead to Institutional paralysis and a failure in petroleum governance. It is recommended that such powers be left to the NOC or PAU. A licensee is required to submit a decommissioning plan before the licence to install and operate a midstream facility expires, or is surrendered or before the use of the facility is terminated permanently 84. It should be submitted at the earliest four years or at least two years before the use of the facility expires or is expected to be terminated or surrendered 85. Note that there is no penalty or counter effect on the failure of submission of the plan. I propose a harsh penalty in terms of confiscation of equipment and a monetary penalty should be heavily paid by the licensee in breach of the provision. This will bestow a significant obligation on the licensee to meet their bargain. Well as this requirement is vital for the decomposition planning and implementation stage, the time period within which the plan should be submitted is abstruse. Perhaps the Authority should have powers to determine when or demand for the decommissioning plan five years before its termination or surrender or expiry. This plan is geared at facilitating a systematic use or closure of the midstream facility at the materialization of the licence. The Minister is expected to establish a decommissioning fund for any of the types of the facilities which should be applied to implement activities approved in the decommissioning plan. The Authority is supposed to charge the licensee a portion of the estimated future cost for decommissioning in every subsequent calendar quarter Note the conflict of powers and roles 82 This is subject to a fee prescribed by the Regulations made by the Minister. This should be done by the Authority which has the technical benchmark to determine the economic implications 83 Section 20 (3) take note of the transfer of powers in granting the licence by the Authority. The operations permit is granted by the Authority rather than the Minister. This implies that the Authority is fully charged to oversee the operations activity of the facility by the licensee. 84 Section 43 (1) 85 Section 43 (7) 86 Section 44 (4) 13

15 This is a very significant requirement in order to deal with the environmental, community and social challenges the State will face in acclimatising the area occupied by the facilities. Where the decommissioning fund is inadequate to cater for the decommissioning plan, the licensee bears the additional costs and expenses 87 however where the fund is in excess, such excesses are deemed profits 88 generated under the terms and conditions of the license. Under section 46 and 47 of the Act, the Minister has powers to make directions 89 as to the disposal of decommissioned facilities and removal of properties by the licensee. This can be based on technical, safety, environmental and economic grounds as well as other users. However this falls short of a complaints procedure if the licensee finds that the directions are arbitrary or unfair or unjustifiable. On the other hand, these powers should be transferred to the Authority that has technical capacity to deal with such issues. Section 51 of the Act confers powers to the Government to take over the facilities where the licence expires or it is surrendered or cancelled or when the use of the facility has been terminated permanently. 90 It is intriguing that the facility and its accessories must be in good condition and adequate maintenance to ensure functional capability that the operation may require and in case they are not, compensation shall be paid to Government by appraisement 91. This requirement is abhorrent and would be exploitative to the investor. I recommend it is annulled. Some of the noteworthy benefits is the social obligations of the licensee to Ugandans are directly provided for in various ways; the licensee should give priority to citizens of Uganda 92 to provide goods and services that can add value to petroleum operations and they are approved by the Authority; training and employment of Ugandans 93. Because of the technical nature of the sector, government has to depend on expatriates and multinational companies. Nevertheless, the policy and the laws provide for the requirement of these companies to train and employ Ugandans in the sector. Many oil companies especially Tullow Oil have been very prominent in providing scholarships and supporting educational programs in the sector. The Downstream Stage The downstream stage can be summarised to be comprised of two attributes; the construction of storage facilities and the supply chain management of petroleum. All 87 Section 46 (9) 88 Section 46 (10) 89 The directions should be in line with international best petroleum practices 90 It takes over the facility six months after the termination or expiry of the licence 91 Section 51 (4) 92 Or joint venture provision of services where such services and goods are not provided for by any of the Uganda Company or persons. The licensee is expected to submit a report of its achievements to meet these demands within sixty days of each calendar year. 93 Section 54 and 55 14

16 aspects of importation, exportation, transportation, processing, supply, storage, distribution and marketing of petroleum products characterise the downstream stage. It is governed by The Petroleum Supply Act No 13 of Legal framework Unlike other stages where the Minister in some limited cases shares powers with the NOC or the PAU, here all the powers are embedded in the Minster 94 and his or her technical petroleum committee 95. A Department of Petroleum Supply 96 under the Ministry responsible for Petroleum activities, headed by a Commissioner 97 is established to guide and implement the sectors activities. It is pivotal to note that the NOC and the PAU, which are the most influential institutional frame works established under the PEDPA do not play any role according to this law. Perhaps, it can be explained by the fact that the Petroleum Supply Act came into force much earlier in than the other legislations enacted in Conversely, this disintegrates administration and management of the petroleum sector giving way for beaurcracies and corruption routes. There is need to amend the law to refer the administration of the sector under one of the entities for the efficient, transparent and consistent running of the entire sector as a whole. Although the Petroleum Supply Act has been in place since 2003, it took until 2009 when the Petroleum General Regulations came on board for it to guide the downstream sector in streamlining licensing of petroleum marketers. While the delay in issuance of the guidelines caused a paralysis of the sector, their issuance has restored sanity and certainty in the management of the sector. Permits and Licences For any person to construct, install or modify a facility of the petroleum supply chain, they must obtain a permit 99 from the Commissioner 100. If granted, the construction must begin within ninety days from the issuance of the permit 101 and at completion a certificate of completion in respect of the project after the final inspection 102. The permit is valid for five year or until the completion of the works, whichever is sooner. However it can be extended for five years upon payment of a prescribed fee Section 6 of the Act 95 Section 8 (1) of the Act, the Committee is comprised of eight members and a Chairperson all from various sectors per Section 9 (2) of the Act. All members serve a tenure of three years renewable once. 96 Section 6 (3) of the Act 97 Section 6 (4) of the Act, the role of the Commissioner is to oversee the effectual enforcement of the Act 98 It commenced on 25 th November 2003; Petroleum Supply Act (Commencement) Instrument, Section 17 (1) of the Act 100 Section 18 (1) and Regulation 3 (1) of the Petroleum Supply Regulations 101 Regulation 5 (1) 102 Regulation 5 (3) 103 Section 21 (1) of the Act 15

17 For a Company 104 to participate or perform in petroleum supply operations 105, they must have a valid petroleum operating licence 106 issued by the Commissioner 107. The licence is valid for not more than twenty five years subject to the nature of the activity and the regulations made thereunder 108. It is also renewable subject to the regulations through which it is granted. It is important to note that a permit holder or licensee has no powers to transfer or assign to another party without the approval in writing by the Commissioner 109. Economic Freedom One of the explicit rights granted by the Act is the economic right and freedom 110 for anybody to participate in the supply chain of petroleum. Section 29 of the Act provides that any person can participate in all or any of the petroleum supply chain activities subject to the law. This is a very significant provision in boosting the sector and enhancing investment and in the sector. Besides, the prices of petroleum products throughout the supply chain are governed by the rules of supply and demand in a free and competitive market 111. This enhances economic freedom. However the law also prohibits anybody from creating artificial shortages or control of prices of products and services or any other activities contrary to principles of fair competition or if they intend to impede a free market for petroleum products in Uganda 112. By this, the law is able to provide shocks that would not destabilise the market and prices of petroleum products. In fact, the Minister has powers to intervene out of public interest if there is sufficient reason to fault anybody involved in restrictive trade 113. Important to note is the requirement for government to maintain National Strategic Stocks 114. This is meant to ensure that there is a steady and sufficient supply of petroleum in Uganda considering that all the Country s petroleum consumption products are imported. Uganda is also a land locked country that bears consequences from its neighbouring countries. In Rwanda, the Country s new Down-stream Petroleum Policy focuses on petroleum bulky imports in order to reduce the import bill. 115 The Country plans on investing in 104 The applicant for a petroleum operating licence must be a body corporate; Regulation 6 (2) 105 These are activities involving import, landing, loading or unloading, processing, storage, distribution of petroleum products 106 Section 17 (2) and Regulation 6 of the Regulations 107 Section 18 (1) 108 Section 21 (2) 109 Section 22 of the Act 110 Article 40 (2) of the Constitution provides for the right of every person in Uganda (citizen or not) to carry on any lawful trade or business. 111 Section 30 (3) 112 Section 30 (1) 113 Section 30 (8) 114 Section This will help the Country negotiate for large quantities of Petroleum products and pay less. 16

18 enormous storage facilities able to sustain sixty million litres compared to their current storage capacity of thirty million litres 116. Uganda may need to adopt this ambitious and promising approach. Conclusion It goes without say that political leadership and oil governance are in tandem. It should be transparent, promote accountability and above all, should have good-will for zero tolerance to corruption in order to efficiently managing the petroleum resource without degenerating into an oil curse. In the case of Uganda, the explicit patronage of the resource through arbitrary powers of the Executive against statutorily established institutions is not a mere threat but a disaster in petroleum management. There is urgent need to align the powers, obligations, in the different institutions; NOC and the PAU set up to manage the oil resource. 116 Berna Namata, Kigali adopts bulk oil buying to cut import bill; The Observer Saturday, April

19 BIBLIOGRAPHY Legislation and Policy Publications The Constitution of Uganda 1995 The Petroleum (Exploration, Production and Development) Act No The Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act No 4 of 2013 The Petroleum Supply Act No 13 of 2003 Petroleum Supply Act (Commencement) Instrument, 2003 The Petroleum Supply Regulations National Oil and Gas Policy of Uganda February 2008, Ministry of Energy and Mineral Development Refining Opportunities in Uganda; Ministry of Energy and Mineral Development Environmental Sensitivity Atlas for the Albertain Graben 2010, 2nd edition The study done by Foster Wheeler on the feasibility of a refinery in Uganda available at the Ministry of Energy and Mineral Development. Cases Advocates for Natural Resources Governance and Development and 2 others vs Attorney General and another Constitutional Petition No 40 of 2013, Published Articles Arthur Bainomugisha, Hope Kivengyere and Benson Tusasirwe, Escaping the oil curse and making poverty history; A Review of the Oil and Gas Policy and Legal Framework for Uganda. ACODE Policy Research Series, No. 20, 2006 page 3 E. J. Wayland Petroleum in Uganda (Geological Survey of Uganda Memoir, 1) Uganda Government printery, 2nd edition (1926) January 1,

20 Jacob Kathman & Megan Shannon, Oil Extraction and the Potential for Domestic Instability in Uganda African Studies Quarterly, Vol 12, Issue 3, Summer 2011 Petroleum Potential of the Albertine Graben Uganda, Petroleum and Exploration Department, Ministry of Energy and Mineral Development, September Newspaper Articles Berna Namata, Kigali adopts bulk oil buying to cut import bill; The Observer Saturday, April EAC cooperation vital for success of oil sector, The New Vision 01/Nov/ 2013 Edward Ssekika, Government hires transaction advisor for oil refinery, Friday, 01/03/ 2013 Edward Ssekika, Oil refinery winning bidder to be announced in June, The Observer, Tuesday, 18/ Isaac Imaka & Frederic Musisi Oil refinery compensations: A mixed bag of hope, despair for residents. The New Vision Tuesday, March