Uganda's oil deal fuels concerns

Secret agreement with British company does not offer adequate safeguards

The gas flares that have blighted the Niger Delta are set to arrive in Uganda in the next year under the terms of a secret deal between the East African government and a British oil company.

Uganda is believed to be sitting on the largest onshore oil reserves in sub-Saharan Africa but there are mounting concerns that the influx of petrodollars could encourage corruption and degrade the environment.

Leaked documents released yesterday by the oil watchdog Platform have done little to dampen those concerns as the production-sharing agreements between London-based Tullow Oil and the government in Kampala contain few environmental safeguards while guaranteeing the company what the NGO calls "excessive profits".

"The confidential documents we have published make clear that the corporations and the government cannot be trusted to protect the Ugandan people from the negative impacts of oil extraction," said Platform's Kampala researcher Taimour Lay.

The production-sharing agreements (PSAs), which the Ugandan government had refused to publish, pave the way for the controversial practice of gas flaring, which has repeatedly been outlawed but continues around the clock in Nigeria. This is the process in which unwanted natural gas tapped during production is burned.

Article 19.3 of the PSA, leaked by Platform, reads: "Associated gas which is not used in petroleum operations, and the processing of which, in the reasonable opinion of the licensee, is not economical, shall be returned to the subsurface structure or may be flared."

In the last three years, oil finds thought to total 1.7 billion barrels have been made in western Uganda's Lake Albert region, with production due to begin within the next 12 months. Oil exploration specialists Tullow and their partner Heritage Oil, who between them control the majority of Ugandan finds, are thought to be close to a deal to sell on their holdings to one of the oil majors such as the US giant Exxon.

The impact of large-scale oil production in sub-Saharan Africa has come to be known as the "resource curse" as massive, centralised earnings from export have proved easy to siphon off for corrupt officials. A list of major oil producers from Nigeria to Sudan, Equatorial Guinea and Angola reads like an index of corruption and human rights abusers.

Uganda's long-serving president Yoweri Museveni has rejected the example of Nigeria, whose oil wealth has helped to spread poverty, destabilise the country and destroy the natural habitat in the Niger Delta, instead promising to follow in the footsteps of Norway.

However, a confidential audit of foreign oil operations carried out last year by Ernst and Young warns of companies inflating their costs and avoiding responsibility for oil clear-ups. Typically oil companies could expect a return on their investment of between 12 and 20 per cent but the Ugandan deal promises profits of up to 35 per cent.

"It is unfortunate that the Ugandan government chooses to emphasise the risks of the operations to justify the contracts it has signed, rather than renegotiate a fairer deal," Platform says.

"Uganda is heading towards oil production in 2010/11 with no oil legislation yet in place, no revenue management system, and is locked into contracts that undermine the country's sovereign control over its own natural resource."

Tullow has refused to discuss the specifics of its agreements with Uganda but continues to insist that it upholds international and industry accepted standards in its dealings.

Tullow said that in principle there would be no continuous gas flaring at their Uganda facilities except in emergency situations. "Any flaring would be conducted to industry best practice standards and visual pollution would be minimised," said a spokesman.

The oil exploration firm also denied they were in line for "excessive" profits "when weighed against the $600m investment already made in Uganda by Tullow, the exploration risk the Company took on and the further substantial investments which will be required to develop the discoveries."