It is a long acknowledged fact that in the developing world where most of the world’s natural resources are found, the governments of the day cannot afford the monetary and technical resources to develop the different extractive industries including that of oil. As a result, these governments must often partner with foreign companies in order to successfully develop the natural resources the countries are endowed with. In Uganda, in order to develop our oil industry, our government partnered with a number of international oil companies that ‘struck gold’ in the form of 2.5 billion barrels of oil. Today, after a number of successful transactions, Tullow Oil Plc Ltd, a British firm remains the sole holder of majority interests in the oil fields of the so far, 40% explored Albertine Region.
As 2011 came to a close, events worth noting, took place in Uganda’s oil industry. Firstly, an unprecedented oil debate happened in Parliament between October 10th and 11th during which allegations were made of bribes exchanging hands between oil company officials and government ministers of key ministries. Secondly, Uganda’s Head of State reportedly put on hold plans by Tullow Oil Plc to fully farm down their interests in the oil fields to TOTAL France and CNOOC China until Tullow Oil agreed to removal of a stabilization clause in the contract between it and the government. To date, the industry’s operations are in hiatus.
The 1962 UN General Assembly Resolution recognizes the principle of permanent sovereignty of states over natural resources providing that, “the right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development...” Thus, all activities regarding the exploration, extraction and sale of the natural resources must be done according to the national laws of the sovereign state.
In natural resource rich countries, particularly those in the developing world, the concept of sovereignty over natural resources carries with it patriotic sentiments that the state (ideally the representative of the citizens) as owner of the resource, must at all times get better out of the natural resource development deal. Thus, whenever host states find themselves in a higher bargaining position, they begin to seek changes to the existing investment agreements in order to obtain a higher stake. For example in 2009, the Ghana government sought to raise the minimum mining royalty to 6 percent, in spite of binding stabilization clauses in contracts with mining companies operating in the country that had the royalty ceiling at 3 percent.
Stabilization clauses are those provisions in contracts between investors and host states that address changes in law in the host state during the life the project. For investors, stabilization clauses are a risk-mitigation tool to protect foreign investments from such sovereign risks as nationalization, expropriation, or the obsolescence bargain, by which the host state can use changes in circumstances to impose new requirements like increase in taxes or royalties on investors. Host states view stabilization clauses as a way to foster a favourable investment climate which attracts more willing investors.
Uganda’s government is, now, grappling with the infamous ‘to be or not to be’ question. Stabilization clauses, despite their potential to undermine the sovereignty of a State, are part and parcel of international business contracts in the natural resource development world. The wisest course to take, therefore, it seems, is to not merely prohibit existence of such a clause in the contracts she signs with the oil companies but to have her negotiators coin a clause that reflects commitment on the part of both the company and the government to work together to achieve an economic equilibrium that would be ‘win-win’ for all concerned.
Lynn Turyatemba is the Extractives Governance Programme Officer at Africa Institute for Energy Governance (AFIEGO) lturyatemba@afiego.org
When I read through the New Vision article I got the impression that something was amiss. This unabridged version puts things in perspective. Nice article.
ReplyDeleteI should endeavour to get published soon.