Oil production Uganda - In my previous articles on the subject of the taxation of petroleum operations in Uganda, I explained that Uganda uses the contractual fiscal regime which is in the form of Production Sharing Agreements, as opposed to the concessionary regime used elsewhere in the world.

Under the contractual fiscal regime, the ownership of the petroleum resource remains with the government and the international oil and gas companies are simply contracted as well as licensed by the government to extract and develop the resource on the government's behalf. In return for their efforts, the oil company takes a share of the oil produced. This is why the contract between the oil company and the government relating to this arrangement is referred to as a Production Sharing Agreement (PSA).

Profit Oil

After the oil company has recovered part of its cost from the value of the gross oil produced, in the form of 'cost oil', what is left is referred to as 'profit oil'. This profit oil is then shared between the oil company and the government, in accordance with the pre determined production sharing arrangement contained in the PSA. Uganda's model PSA uses a sliding scale for the split of the profit oil between the government and the oil company, based on production volumes.

Government gains more

This model ensures that as oil production increases, so does the government's share of the profit oil. The cost recovery limit and the ring fencing concept that applies with respect to cost oil ensures that the government will always get its share of the profit oil whenever there is oil produced in a contract area. This will always be the case regardless of how much the oil company will have incurred to produce the oil. The oil company is required to pay corporation tax at the rate of 30% on its share of the profit oil.

Government's take

The total share of the oil produced that the government takes in form of royalties, share of production in form of profit oil, surface rentals, corporation tax paid on the oil company's share of profits, and so on, is what is collectively referred to as the government's take. The government's take can also be looked at as the 'price' that oil companies are willing to offer to gain access to acreage in the Albert Graben to carry out oil exploration, development and production activities. The factors that determine the price oil companies are willing to pay depends on the availability of and demand for oil, the accessibility of the area to be explored, the quality of the oil in that area and the cost of production.

As we compete with the rest of the other oil producing countries in the world to attract capital and technology to invest in our petroleum sector, our policy makers and legislators must be mindful of these factors. As a result they will need to put in place a fiscal regime that will send the right signals to the potential investors. In doing so, they will need to put into consideration the country's special circumstances.

Oil reserve location

Our petroleum reserves are located onshore, inland, in a very ecologically sensitive area. In addition to this, the chemical properties of the oil itself are such that transporting it whether by trucks or pipeline will require a lot of investment because of its high wax content and viscosity. These factors limit how aggressive we can be as a country with respect to our fiscal regime compared to say Malaysia.

According to published information on petroleum fiscal systems in the world, Malaysia has one of the toughest fiscal systems in South East Asia. This is because of its very good geological potential, and ease with which the country's petroleum reserves can be explored and developed, with regards to their accessibility. Our policy makers and legislators therefore face a formidable challenge of putting in place a fiscal regime that is clear and not continuously changed retrospectively, one that will induce maximum effort from the oil companies while ensuring that the government and its citizens who own the petroleum resource are adequately compensated.

The writer is the PricewaterhouseCoopers Uganda Country Senior Partner.

Francis Kamulegeya

The Monitor/17/01/2012