The Ugandan government has trumpeted that the new oil deal with Tullow oil will net them 80% of the total revenue. A new analysis done by a group who managed to get a leaked copy of the closely guarded draft Production Sharing Agreement (PSA) shows that not only is 80% slightly better than the very best case scenario, the best case scenario is 79.5% provided the government options the 15% stake it has a right to, does not build the pipeline it is intending to and that oil remains at over $122/barrel throughout production. At the moment, it is about $75/barrel. The best-case scenario is utterly unrealistic.
The report (pdf) published by Platform also explains how the deal is markedly worse for Uganda than for the Iraqi Kurdistan deal with Heritage Oil, which is far riskier and therefore should have profits leaning more towards the private company than in Uganda, where things are more stable and less risky for Tullow.
In the Uganda PSA, the state actually shoulders the heft of the risk if things don’t go as planned, and Tullow stand to gain the most should things go well. In one scenario, Tullow loses $700 million, and Uganda $2.1 billion.
By comparing a low cost scenario of $1,735 million invested with a high cost scenario of $4,545 million, we discover that as the costs increase, the government will loses a greater sum of money. The stateʼs discounted revenues (net present value) fall by $500 million, while Tullowʼs fall by only $300 million. If non-discounted, Tullowʼs total cashflow fall by $700 million, but the state loses $2.1 billion.
If things go well,
… it is Tullow, not Uganda, which captures the ʻupsideʼ – the chance of ever-higher profits. At $70 Tullow makes a rate of return of 26.5%, at $120 it is 36.3% and at $180 the company makes 44.4% The companyʼs profits rise at a steady gradient with increased prices. Meanwhile, Uganda – which carried the risk of downside – fails to increase its proportion of total revenues. Instead, as prices rise, the stateʼs take plateaus at just over 75%. In other words, Tullow can continue to take one quarter of oil revenues, whether the oil price is $100 or $250 – raking in enormous profits.
In short, whoever negotiated this deal for the Ugandan government should be sacked, or should at least have to explain himself. Whoever negotiated for Tullow, well, they are good at what they do, obviously. Ripping off developing countries to walk away with a profit of up to 35% in the business world is something to be commended I guess. I never was much of a business person.
The deal is being partially financied by 75% taxpayer owned, Royal Bank of Scotland. Environmental group PLATFORM, who published the leaked PSAs and had them analysed, are taking legal action to force the RBS, which traditionally invests heavily in oil interests, to evaluate environmental and human rights impacts of investments.
Taimour Lay writes in The Guardian:
Our appeal for judicial review, filed on 9 December, argues that the Treasury, majority shareholder in RBS through UK Financial Investments (UKFI), has unlawfully failed to assess the environmental and human rights impact of RBS investments, including its role as Tullow Oil’s lead backer in Uganda.