Ugandan oil

Complaining about the contracts here.

The oil contracts are structured so that price risk lies primarily with the state, while the private companies are virtually guaranteed a healthy return even if the market slumps. As the oil price rises, investors will make a higher and unlimited profit, taking close to one quarter of oil revenues, whether each barrel is fetching $70 or $200.

Umm, well, yes, the price risk should be on the State. Imagine doing it the other way around. No price risk upon the state, all of it being carried by the oil company. So, a fixed price paid by the oil company to the state then. Just imagine that that price is $40 a barrel (no, just imagine). When oil sells at $60 a barrel that might be fair enough. But if oil, purely for reasons out of control of the oil company or the state, soars to $200, then would not the campaigners be crying that $40 for the state and $160 for the oil company is gross exploitation?

Quite: the two alternatives are that either the gross revenue is shared in a percentage manner (as now, putting price risk at least partly upon the state) or the oil company is paid a flat fee. Which of course puts the entirety of price risk upon the state. (To the point that if the fee is $20 a barrel and oil drops to $10 a barrel then the state loses $10 for every barrel the oil company happily carries on pumping.)

You could run in that third manner: but then you\’ve got a further problem. The flat fee needs to account for the risk taken with the capital spent to find the field in the first place. If you don\’t do that, then you\’ll not have anyone else willing to come in and look for natural resources. So the flat fee would be large. Much, much larger than said campaigners would think suitable. We can all hear the shouting, can\’t we? \”They\’re getting $30 a barrel just for pumping it\”…..even \”They only invested $100 million and they\’re getting $400 million back!\” (all entirely made up numbers and merely illustrative).

No accounting made for the hundreds of millions that investors in oil prospecting have made elsewhere and got back not a single penny from. And of course successful projects do indeed need to cover the costs of unsuccessful ones to keep the industry on the road at all.

This is also fun:

The 20-year contracts, consistently weak or completely silent on human rights protection, also include a sweeping \”stabilisation clause\” – article 19 requires the Ugandan government to compensate the companies for any future change in the law that affects their profits – designed to militate against improvements in environmental standards.

Nooo, that\’s not why they are designed that way. They\’re designed that way because governments have a tendency to move the goal posts once the investment in extraction has been made. I think Zambia and its copper mines are a recent example. Sure, get the mines running again and we\’ll take a royalty of x. Then once the hundreds of millions of $ have been spent on getting the mines running again the government came back and said, well, you know, actually, hah, hah, hah, we didn\’t really mean it. We\’ll take $x plus a little bit please. Maybe $3x. After all, you\’ve spent all that money now and can\’t back out, can you? (See Russian examples galore.)

Legal disputes between the two sides will not be resolved in Uganda, but in London:

Yup. Sensible really. Have legal issues determined where they will be determined as legal issues, not ones of politics.

Note please that I don\’t claim that the contracts are perfect (indeed, I know very little about the details). Only that the things being complained about here don\’t seem to be the things which should be complained about. They seem eminently sensible.

Me? I would worry much more about how the state income is going to be spent. If that cash is spent internally, most especially if it is spent on (and I agree that Uganda needs spending on such things) health and education, then the exchange rate will appreciate and choke off exports from other sectors. The income needs to be sterilised from the domestic economy otherwise they really are going to fall into the resource curse: Dutch Disease as it is called.