Energy: Oil and Gas 2019

Last Updated August 09, 2019

Uganda

Law and Practice

Authors



Kampala Associated Advocates is a full-service law firm that advises clients on a range of legal issues, including litigation, dispute resolution, arbitration, taxation, banking and finance, debt collection and credit management, energy, mining, oil and gas, environment, infrastructure and public private partnerships, employment and labour, corporate advisory, real estate and conveyancing, and intellectual property and technology. The firm's core practice areas are Energy Law and Policy, drafting, negotiating and advising across the entire petroleum value chain. Clients include Total E& P, Tullow Oil Plc, Oranto Petroleum and the Uganda Chamber of Mines and Petroleum. The firm has a total of 12 partners with varied areas of specialisation, as well as a full-time consultant supported by several senior and junior associates and paralegals.

The Constitution of Uganda (Constitution) provides that ownership and control of all Uganda’s petroleum resources is vested in the Government of Uganda (Government) on behalf of Ugandans. This provision is reiterated by the Petroleum (Exploration, Development and Production) Act 2013 (Upstream Law).

The Ministry of Energy and Mineral Development (MEMD) is in charge of policy guidance in the development and exploitation of petroleum resources; granting and revoking licences; approving data management systems; and negotiating and endorsing petroleum agreements (http://energyandminerals.go.ug/).

The institutions below were created under the Upstream Law and have the following regulatory roles:

  • the Directorate of Petroleum in MEMD is responsible for policy making and co-ordinating the development of the sector, and undertakes licensing and national capacity building, among other roles (https://petroleum.go.ug/); and
  • the Petroleum Authority of Uganda (PAU) regulates all players in the petroleum sector, including enforcing compliance and monitoring the operations of oil companies (http://www.pau.go.ug/).

The Uganda National Oil Company (UNOC) was established under the Upstream Law and is governed by the Upstream Law, the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act No.4, 2013 (Midstream Law) and the Petroleum Supply Act, 2003 (Downstream Law).

UNOC’s core mandate is to take care of the Government’s commercial interests in the petroleum sector, and ensure that the resource is exploited in a sustainable manner.

In terms of investments, UNOC’s scope cuts across the entire petroleum value chain, as follows:

  • Upstream Investment – UNOC operates here in two respects:
    1. it manages Uganda’s state participation in petroleum operations; and
    2. it may participate in new ventures and is permitted to make direct applications for petroleum exploration licences (ELs).
  • Midstream Investment – Uganda’s current focus is on the refinery and pipeline business, which is managed by the Uganda Refinery Holding Company Limited (URHC) and the National Pipeline Company Limited (NPC) respectively. These subsidiaries are wholly owned by UNOC.
  • Downstream Investment – in order to ensure security of supply, UNOC is the custodian of Uganda’s national strategic fuel reserves, through its wholly owned subsidiary NPC, and as such is responsible for developing, managing and operating Uganda’s storage terminals.

In order to give effect to the National Oil and Gas Policy for Uganda (NOGP) 2008, the following petroleum laws and regulations were developed.

The Upstream Law:

This gives effect to the Constitution and regulates petroleum exploration, development and production. It repealed the Petroleum (Exploration and Production) Act, Cap 150.

On 24 June 2016, four sets of Upstream Regulations were issued and gazetted to supplement the Upstream Law, namely:

  • the Petroleum (Exploration, Development and Production) Regulations, 2016 (the Upstream EDP Regulations);
  • the Petroleum (Exploration, Development and Production) (National Content) Regulations, 2016;
  • the Petroleum (Exploration, Development and Production) (Metering) Regulations, 2016; and

The Upstream EDP Regulations revoked the Petroleum (Exploration and Production) (Conduct of Exploration Operations) Regulations, 1993 (S.I. 150 1).

The Midstream Law:

This established a legal framework to ensure Uganda’s midstream petroleum operations are carried out in a sustainable manner that guarantees optimum benefits for Ugandans, enables the development of petroleum refining, gas conversion, transmission pipelines and midstream storage facilities, addresses the decommissioning of facilities, and eases investment in midstream operations, among other related issues.

On 2 June 2016, three sets of Regulations were published to supplement the Midstream Law:

  • the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Regulations, 2016; (the Midstream General Regulations);
  • the Petroleum (Refining, Conversion, Transmission and Midstream Storage) (Health, Safety and Environment) Regulations, 2016; and
  • the Petroleum (Refining, Conversion, Transmission and Midstream Storage) (National Content) Regulations, 2016 (the Midstream (National Content) Regulations).

The Downstream Law:

This guides all downstream petroleum operations, such as the distribution, marketing and selling of petroleum products. It also puts an effective licensing system in place for the supply of petroleum products.

The Petroleum Supply (General) Regulations 2009 and the Petroleum (Marking and Quality Control) Regulations, 2009 supplement the Downstream Law.

The Public Finance Management Act, 2015:

Part VIII of this Act provides for petroleum revenue management.

The National Local Content Bill, 2019:

This Bill requires any licensee, contractor or subcontractor to give priority to goods and services that are produced and available in Uganda, and that are rendered by Ugandan nationals and companies during procurement.

Draft National Content Policy for the Petroleum Subsector in Uganda:

This Policy is still at the draft stage, with a goal to enhance opportunities, address challenges and constraints, define the necessary institutional framework to co-ordinate the development, implementation and monitoring of National Content, and grant the required monitoring and evaluation framework.

The Upstream Law empowers the Minister of MEMD to enter into Petroleum Agreements with private investors. Uganda’s licensing regime operates under a two-tier system, comprising:

  • Petroleum Sharing Agreements (PSAs) entered into between an oil company or individual/s and the Government; and
  • licences issued by the Minister for the exploration and production phase.

This system permits the licensee an exclusive right to explore for petroleum and execute petroleum operations within a defined contract area under an exploration licence (EL); once a commercial discovery is made, the licensee may apply for a production licence (PL).

In the past, investors expressed interest in a contract area directly to MEMD and negotiated the ELs and PSAs. Currently, ELs are awarded through open bidding and through direct applications in "exceptional circumstances" – for instance, if no applications are received from three separate bid invitations, if the application is for a reservoir within a contract area that extends into an unlicensed block, or to enhance state participation in order to promote national interest.

In response to the Minister’s announcement of areas open for bidding, an investor may apply to the Minister in writing, enclosing a prescribed fee, to express interest to participate in a bidding round, or may make a direct application as per the Upstream Law. Applicants are expected to provide the following:

  • personal details (names and nationality) in the case of individuals;
  • for a company, the name and place of incorporation, directors' names and nationalities, share capital, and the name of any beneficial owner/s with more than 5% share capital;
  • identification of the block/s;
  • a statement with particulars of work and proposed minimum expenditure;
  • evidence of financial status, technical and industry competence; and
  • a proposal on the training and employment of Ugandans and other relevant information.

An applicant is also required to provide security or a performance bond to execute obligations under the EL and insurance policies to cover liabilities while executing operations under the EL.

The following fiscal terms are included in Uganda’s model production sharing agreement (Model PSA), 2018.

Government take

  • A signature bonus on the grant of an EL is negotiable, and the production bonus is applicable on the grant of a PL once volumes reach 50 million barrels of oil equivalent (BOE), at which point the licensee shall pay USD5 million and USD3 million for each additional 25 million BOE.
  • A performance guarantee amounting to 80% of the minimum exploration expenditure.
  • Application or renewal fees for ELs and PLs are USD20,000 and USD40,000 respectively.
  • Royalties based on gross total daily production in barrels range from 2.5% to 15%, and shall be paid monthly in kind or cash, depending on Government preference.
  • The maximum state participation is 20%.
  • Annual acreage rental fees for the first exploration period are USD20 per square kilometre (KM²), USD30 per KM² for the second exploration period, USD50 per KM² for the third exploration period 50 KM², and USD1,000 per KM² for the production licence.
  • Annual training and research fees are USD200,000 for the first to third exploration periods; USD300,000 for the development period; and USD400,00 for the commencement of production.
  • Fees to obtain scientific reports and other relevant documents made by the Minister during impact assessment before opening up new areas for licensing are USD10,000.
  • Application or renewal of reconnaissance permit fees is USD10,000.
  • Application or renewal fees for a facility licence are USD30,000.
  • Taxes are paid in accordance with the Ugandan tax laws.
  • Profit oil (government take) is based on the ‘R-Factor’, which is calculated as R = X (cumulative net revenue) divided by Y (cumulative capital expenditure).

Licensee take

  • Cost recovery limit of 65% for petroleum.
  • Profit oil (contractor take) is based on the ‘R-Factor’, which  is calculated as R = X (cumulative net revenue) divided by Y (cumulative capital expenditure).

The Income Tax Act (ITA) came into effect in 1997, as amended from time to time under Part IXA and governs the taxation of petroleum operations. It provides for the taxation of petroleum production and allows for cost oil and allowable deductible expenditures. The licensee and its contractors are subject to 30% corporate income tax.

The ITA also provides for a method of taxing petroleum companies in the event of a transfer of interest to another party. It also prescribes accounting principles applied in the taxation of contractors and cross-border shared petroleum resources. Timelines for filing returns and the payment of taxes are provided for. It is an offence not to furnish returns or to file inaccurate returns or neglect to make payment by the due date, and the penalty is a hefty fine.

Tax exemptions exist under the ITA for 6% on local supply of goods and services (not specific to but available to petroleum industry players).

Other tax laws include the following:

  • the Value Added Tax Act – supplies to petroleum companies  are ‘deemed paid’, with no VAT payment;
  • the East African Community Customs Management Act 2004 has exemptions for imports for direct use in petroleum under the 5th schedule;
  • the Excise Duty Act 2014;
  • the Tax Appeals Tribunal Act;
  • the Stamp Duty Act 2014; and
  • the Tax Procedure Code Act.

Under the Model PSA, the Government is mandated to notify the licensee of its intention to back-in within 120 days of the licensee’s application for a PL, and it should indicate if it shall participate as the Government or through UNOC. The Government’s participation interest is capped at 20%.

The licensee is required to carry the costs of the Government or UNOC from development to production, and such costs shall be fully recoverable out of the Government’s share of production, including interest at LIBOR. The Government has a right to execute operations in the contract areas that it has nominated to participate as per its percentage interest. Additionally, it may make direct applications for new ventures or ELs. Under the Model PSA, upon the Government’s request the licensee shall provide secondment opportunities for job training to Government personnel. The licensee may also be required to assist the Government or UNOC in the sale of all or part of its production share.

The Upstream Law addresses objective vii) of the NOGP 2008, which is "to ensure optimum national participation in oil and gas activities" by requiring licensees and/or contractors and subcontractors to:

  • give preference to national goods and services; where they are unavailable, it introduces a mandatory requirement that, if an international company is identified to provide such goods and/or services, it should enter into a joint venture (JV) with a Ugandan company and offer it 48% share capital in the JV;
  • employ and train Ugandans in all phases of operations and submit a detailed programme of such training and recruitment of Ugandans annually to PAU after the licence is granted, considering gender, equity, disabled persons and host communities; and
  • transfer technology and train Ugandans by utilising training programmes within or outside Uganda, implementing a knowledge transfer to Ugandans and utilising trained Ugandans in management and technical work; this shall be a shared responsibility with the Government.

The licence holder must satisfy the following requirements in order to proceed to development and production once it has a commercial discovery:

  • Discovery of petroleum: the licensee is to inform PAU as soon as possible, and must submit written particulars of the discovery within 30 days. The licensee must subsequently run tests and undertake technical evaluation, submitting this report to PAU upon completion.
  • Appraisal: this is to be carried out within two years from the date of the submission of the technical evaluation of test results, and the Minister may extend the appraisal period for no more than two years. If the licensee notifies the Minister within the specified time that a discovery is of no potential commercial interest, the licensee may choose not to appraise that discovery.
  • PL: the application is to be accompanied by a petroleum reservoir report, a field development plan (FDP) and any additional information deemed relevant by the Minister and the applicant. The PL will be approved if the licensee has technical competence, capacity, experience and financial capability, and has submitted the FDP and petroleum reservoir report to the Minister within the required timeline. The Minister shall process PL applications within 180 days. Any applicant who is dissatisfied with the Minister’s decision not to grant a PL may request the reasons for refusal. Production forecasts are to be submitted annually to the Government for approval.
  • Following a commercial discovery, the licensee may apply for a PL in respect of a development area within an exploration block.

Exploration Periods

There are three exploration periods, with the first period being the initial EL granted, and the second and third exploration periods being the two EL renewals or extensions. The term of an exploration period shall not exceed two years.       

Production Periods

PLs have an initial term of not more than 20 years, and may be renewed twice only, with a term not exceeding five years.

Extensions

An EL may only be extended twice, with a term not exceeding two years (which brings EL extensions to a total of two years + two years = four years). A PL may only be renewed twice, with a term not exceeding five years (PL extensions are therefore five years + five years = ten years).

Minimum Work Programmes

The licensee is required to start exploration operations within two months of the grant of an EL. Under the Model PSA, the minimum work programme in the exploration phase is not specifically prescribed for, but it provides that this item shall be negotiated for on a case-by-case basis. Nonetheless, the licensee is expected to execute geological, geochemical, geophysical and other studies, or to consult existing data if any is available  – ie, 2D and 3D seismic data, gravity, magnetic maps, reports and publications on the contract area. The licensee is also required to drill a certain number of exploration wells.

Relinquishment Requirements

Areas to be considered for EL renewal shall not exceed the discovery area and not more than one half of the original contract area. Blocks specified in EL renewal applications are to be strictly confined to no more than three discrete areas, and each block should share a common border with at least one other block. A stratigraphically delineated block shall be considered as such on the grant of an EL.

The Minister shall approve the shape and size of the areas to be relinquished. One month before the relinquishment date, the licensee shall submit a relinquishment notice and report to PAU.

Export Rights

In line with the model PSA, the licensee may use any means of transportation to export all its petroleum entitlement. It is also entitled to construct, operate and maintain an export pipeline through a separate pipeline company, which shall handle the transportation of petroleum from the delivery point to the loading point.

Domestic supply requirements (and terms)

The Government may choose to take a certain amount of the licensee’s crude oil in order to satisfy the domestic consumption requirements for that year. Within 30 days of the end of each month of delivery, the Government shall reimburse the licensee for such crude oil in US dollars, at the price determined by the Upstream Law and the Model PSA, unless otherwise agreed between the parties.

Ugandan refineries have a right of first refusal of petroleum from the contract area, provided they take the petroleum at market price. 

Liability and Risk Regime

The licensee is liable for damages to third parties caused by persons undertaking work for the licensee.

Withdrawal

The licensee may withdraw or surrender from all or any of the blocks by applying to the Minister for a certificate of surrender. The application for a certificate to surrender for an EL should be made 90 days before the date of surrender, or a year before surrender for a PL. The certificate of surrender application shall provide the following details:

  • the effective date of surrender;
  • the blocks to be surrendered;
  • particulars of the petroleum operations executed from the grant or renewal of licence of blocks to be surrendered, whichever is later; and
  • records and reports of petroleum operation as required by the Minister.

The Minister may issue an unconditional certificate of surrender or a conditional one related to safety and best industry practice. A certificate of surrender shall not be issued to a licensee in default, nor to one that is non-compliant, and will not be issued if the Minister is not convinced that the blocks to be surrendered will be left in a safe condition in line with industry practice. A licence shall be amended following the grant of a certificate of surrender for part of the blocks, and shall cancel the licence for surrender of the whole block. The licensee’s surrender of any block shall not affect liability incurred before the date of surrender and any prior legal proceedings. The licensee's obligations – such as decommissioning costs – shall be fulfilled up to the time of surrender.

Termination

This shall occur if the EL or PL has expired or is surrendered by the licensee or lawfully cancelled or terminated by the Government. Termination shall not affect any liability that incurred before termination or legal proceedings that may have commenced or continued against the licensee.

Abandonment Rights and Obligations

Following the termination, revocation or expiry of the licence, the licensee shall take reasonable steps to restore the surface of the contract area as far as possible to its original condition, which may have been damaged in the course of operations. The Minister has a right to specify any facility or installation that the Government may take over upon the termination, revocation or expiry of a licence.

A licensee may sell part or all of its interest in a contract area after it has done the following:

  • received prior written consent from the Government, which shall not be unreasonably withheld unless there is a belief that public interest or safety is likely to be prejudiced on transfer;
  • applied to the Minister in the prescribed form and fulfilled the financial obligations under Ugandan law;
  • checked the joint operating agreement for a joint venture partner (JVP) – if there is a pre-emptive right, the first option would be to offer JVPs first option to buy the licensee's interest and, if they are not interested, to approach third parties; and.
  • paid the relevant taxes and duties in relation to the transfer.

The Upstream Law requires the Minister to approve the production schedule in the FDP and issue an annual production permit to the licensee. Additionally, upon the licensee’s application, the Minister may approve the petroleum quantity that may be produced at all times for a fixed period. Furthermore, the Upstream Law provides for the discretion of the Minister to stipulate that production shall be increased or decreased in relation to the approved plan.

The Midstream Law provides that no person shall construct or operate a facility for refining crude oil, a facility for the conversion of natural gas, a transmission pipeline, a midstream storage facility or any other facility for the purpose of midstream operations without a licence issued by the Minister.

The Midstream General Regulations further provide that no person shall construct a refinery, conversion plant or any other petroleum plant without a licence issued by the Minister.

A midstream licence may be subject to conditions to be fulfilled by the licensee, regarding the following, among other matters:

  • the main configurations and rated capacities;
  • the regularity and availability of capacities;
  • access to a midstream facility used by third parties;
  • the acquisition of petroleum commodities;
  • the sale of petroleum products; and
  • the payment of annual fees, levies and charges.

The Downstream Law mandates that a person carrying out the construction of or major modification to an installation or facility of the supply chain must obtain a petroleum construction permit. In addition, a person carrying out petroleum supply operations is required to obtain a petroleum operating licence. Such licences are obtained by way of written application to the Commissioner for the Department of Petroleum Supply within MEMD.

Midstream and downstream operations do not have historic forms of contract in place. However, larger projects will usually have government participation in the form of a Public Private Partnership (PPP) or, in the case of transit pipelines through other states, agreements such as intergovernmental agreements (IGAs), host government agreements (HGAs) and other arrangements as negotiated by the parties.

Downstream operations in Uganda are not run by a national monopoly. However, the Midstream Law provides that licences issued by the Minister for the construction of pipelines and midstream storage facilities will contain terms regulating "access by third parties on commercially reasonable terms to uncommitted capacity in a facility".

The Downstream Law and Petroleum Supply (General) Regulations, 2009 regulate the issuance of downstream licences in Uganda. The Downstream Law provides for the issuance of petroleum construction permits and petroleum operating licences.

A petroleum construction permit application shall be submitted to the Commissioner of the Department of Petroleum Supply (Commissioner).

Both licences can be granted to a corporate entity. The company does not need to be incorporated in Uganda, but must register a branch in Uganda if it is a foreign company. For both licences, the technical ability, financial capacity, type of technology to be used and a certificate of approval of an environmental impact assessment must be provided.

A private investor requires certification from the National Environment Management Authority, the Uganda Investment Authority (UIA) and Uganda Revenue Authority before they can conduct petroleum operations. However, it should be noted that the Commissioner is mandated to assist the applicant to obtain additional authorisations from other competent authorities if and when required by the applicable laws.

Currently, there are no typical fiscal terms and commercial arrangements for midstream or downstream operations in Uganda, mostly because Uganda has solely imported petroleum products. Nevertheless, negotiations between Uganda and Tanzania are currently taking place to construct the East African Crude Oil Pipeline (EACOP) from Hoima (Uganda) to Tanga (Tanzania), with a length of approximately 1445 km, as well as a refinery at Kabaale (Uganda) with a capacity of 60,000 barrels of oil per day. The Midstream Law shall govern the construction of such facilities. It provides that, in the issuance of a licence, the Minister of MEMD may stipulate conditions relating to the access to a facility used for midstream operations by third parties other than licensees, including terms and conditions in contractual arrangements that regulate access, pricing and tariffs. With regard to the Government take, the law provides for annual licence fees. The larger projects will have the Government participate as a commercial partner, and issues to do with the fiscal structure will be negotiated.

Uganda’s midstream and downstream operations are regulated by the Income Tax Act, Cap 340 (as amended) and the Value Added Tax (VAT) Act, Cap 349 (as amended).

However, there is a very specific tax regime for the EACOP. The fiscal regime is laid out in the Intergovernmental Agreement (IGA) between Uganda and Tanzania, which provides that the project will be exempt from income and corporate tax for ten years. The project costs will be allocated between the states to avoid double taxation.

Depreciation allowances for the capital cost of equipment will be 5% per year on a straight line basis. Losses in the project may be carried forward indefinitely for tax purposes. The IGA states that VAT shall not be an economic cost to the project. The project inputs will therefore be exempt from VAT.

The income or profits tax regime governing other midstream and downstream operations in Uganda is as follows:

  • companies are subject to 30% corporate income tax;
  • there is a petroleum excise duty of UGX760 (USD0.20) on each litre; and
  • there is no VAT or withholding tax on petroleum products. 

UNOC has no express special rights regarding downstream licences. However, it is mandated to develop, manage and operate storage terminals so as to hold national strategic fuel reserves to ensure security of supply.

UNOC currently manages and operates a 30 million litre storage terminal in eastern Uganda, and has commenced a phased development of a 240 million litre capacity in North-West Kampala. It shall develop these projects on a Public Private Partnership basis.

There are no specific local content requirements for downstream operations in Uganda, but midstream operations are governed by the Midstream (National Content) Regulations.

These regulations state that a private investor must submit a detailed national content programme to PAU stating the following proposals, among others, within 12 months of the grant of a licence:

  • the employment and training of Ugandans;
  • the transfer of technology, knowledge and skills to Ugandan companies, citizens and registered entities;
  • the procurement of goods and services obtainable in Uganda;
  • local supplier development;
  • partnerships with Ugandan companies, citizens and registered entities; and
  • the succession of expatriates by Ugandans.

Once the national content programme is approved by PAU, a private investor cannot amend or deviate from the programme without the approval of PAU.

The regulations further provide a list of goods and services to be provided by Ugandan companies, citizens and registered entities, including:

  • transportation;
  • security;
  • food and beverages;
  • hotel accommodation and catering;
  • human resource management;
  • office supplies;
  • fuel supply;
  • land surveying, clearing and forwarding; and
  • environment studies and impact assessments.

The downstream licence issued in Uganda is a standard model that states the following:

  • the person/entity to which the licence is issued;
  • the purpose of the licence;
  • the period for which it will be valid; and
  • an express declaration that failure to observe any of the conditions stipulated may lead to the revocation, suspension or cancellation of the licence. 

The Downstream Law mandates every licensee to maintain an address in Uganda where communications may be sent, and to maintain records, which shall be furnished to the Commissioner. It further prohibits licensees from engaging in restrictive trade practices that are contrary to the principles of fair competition or are intended to impede the functioning of the free market for petroleum products in Uganda.

The Constitution provides that no one shall be deprived of his/her property without fair, prior and adequate compensation.

A private investor is required to obtain property on a willing buyer-willing seller basis. However, "compulsory acquisition" may be adopted in respect of specific projects done in the "public interest". Even in such a case, compensation must be paid before the compulsory acquisition. Payments are usually made after an investor has completed a Resettlement Action Plan, and where the valuation and methodology have been approved by the Chief Government Valuer.

The Downstream Law establishes conditions for third-party access to infrastructure such as depots, pipelines and other facilities.

It states that a licensee that owns or operates a facility with unused capacity must negotiate in good faith with any third party interested in using that capacity in order to establish the tariff and other reasonable terms and conditions for using the facility.

The third party/interested person must hold or have applied for the necessary licence for the operation, and must provide proof of his or her capacity to pay the tariff and fulfil other reasonable financial and technical conditions, as agreed upon with the owner or operator of the facility.

Uganda has no restrictions on product sales into the local market.

The Midstream General Regulations prohibit a licensee from exporting samples or specimens of crude oil, catalysts, petroleum products or any other materials out of Uganda without the written permission of PAU and subject to conditions specified by PAU.

In accordance with the Downstream Law, no permit or licence can be transferred without the prior approval of the Commissioner and payment of the prescribed fees.

A permit or licence holder who wishes to transfer their interest must file a written application with the Commissioner.

The procedure and processing of an application for the transfer of an interest in downstream licences is similar to that of an application for a licence. Upon approval of the transfer, the transferee holds the remaining period of validity of the original licence and is liable for all pending obligations or liabilities of the transferor.

The Investment Code Act, 2019 governs investments in Uganda. There are no specific foreign investment rules and protections that apply to investments in the petroleum sector, but there are tax exemptions, particularly with regard to VAT and corporate income tax for the EACOP project. 

Stabilisation clauses are permitted insofar as they do not limit the power of the legislature to make law; clauses that attempt to freeze the law are therefore unconstitutional. However, clauses that deal with the economics of the project and seek to protect the economic value of the contract are permissible. The Government may renegotiate a contract in order for the investor not to lose the fiscal benefits of the contract on account of a change in law.

The Constitution prohibits the expropriation of property and provides that a person cannot be compulsorily deprived of his/her property without fair, adequate and prompt compensation. The law therefore provides constitutional protection to an investment. There must be adequate compensation in the event of an expropriation, and the compensation shall not be subject to any exchange control restrictions. The compensation shall also be freely transferable outside Uganda.

Foreign investors in Uganda are registered with UIA and obtain an Investment Certificate. The holder of an Investment Certificate is entitled to commence arbitration under the International Centre for the Settlement of Investment Disputes (ICSID), any agreement with the Government, or any bilateral or multilateral investment treaty. The right to arbitrate is therefore statutory for the holder of an Investment Certificate.

Additionally, parties are entitled to make their own choice of law in a contract, and the choice shall be respected by Ugandan Courts.

The National Environment Act 2019 (NEA) regulates the use of the environment and governs its protection and conservation. It provides for emerging environmental challenges such as ‘climate change, management of hazardous chemicals and biodiversity offsets’. The NEA provides for environmental assessments and tackles concerns from petroleum operations. It has put offices in place such as the environmental protection force and the environmental tribunal, to monitor compliance.

The Petroleum (Waste Management) Regulations 2019 govern the transportation, storage, packaging and labelling of waste, and the operation of waste treatment plants and disposal sites. It introduced robust petroleum waste management measures and safeguards against pollution. The Regulations shall apply to persons involved in the production, importation, exportation, transportation, storage, treatment or disposal of petroleum waste, or the construction or operation of waste management facilities.

The National Environment Management Agency (NEMA) is Uganda’s primary agency given the mandate to "co-ordinate, monitor, regulate and supervise" the environment. It is in charge of the development of policies, laws, regulations, standards and guidelines related to the environment, and can direct the Government on sound environmental management. Additionally, it spearheads the conservation of biodiversity and extinct species, ozone layer protection, and the management of dangerous materials, processes and hazardous waste (https://www.nema.go.ug/).

Other regulators include the National Forest Authority (NFA), which manages central forest reserves on a sustainable basis and promotes innovative participation by local communities in the management of forest reserves (https://www.nfa.org.ug/).

The Uganda Wildlife Authority ensures the sustainable management of wildlife, and oversees wildlife activities within and outside protected areas (https://www.ugandawildlife.org/en/).

According to the NEA, before embarking on a petroleum project the developer (operator) shall ensure that a person executing the environmental and social assessments complies with the NEA, relevant laws and administrative decisions. The operator shall be responsible for the quality of such assessments, and is also required to carry out an environmental social impact assessment (ESIA) in the form of a project brief, and furnish ten copies of the project brief to the executive director (ED) of NEMA.

If NEMA is content that the project brief includes adequate mitigation mechanisms to address the likely impacts, it shall approve the project. However, if NEMA discovers that the project brief does not provide enough mitigation measures to address the likely impacts, it may reject the project or request the operator to execute an environment impact study (EIS). If an EIS is required, the ED shall notify the operator within 21 days of the submission of the project brief.

20 copies of the EIS shall be submitted to the ED, who shall forward them to the lead agency for comments. The lead agency shall provide comments and forward the copies back to the ED within 30 working days of receiving the EIS.

Within ten days of receiving the lead agency comments, the ED shall invite the public to make written comments within 28 days on the EIS. Subsequently, the ED shall invite persons likely to be affected by the proposed project to make comments on the EIS within 21 days. A public hearing is to be held within 45 days of the comments being received.

The ED is to make a decision within less than 180 days from the date the EIS was submitted. The ED may approve all or part of the project, or may require a redesign of the project, or may refer part or all of the project back to the operator if there is not enough information, or may request additional information or reject the project.

The ED’s decisions are to be furnished to the operator within 14 days.

Upon the approval of a project, the ED shall issue a certificate of approval.

The operator shall also be required to undertake an environmental risk assessment (ERA) as part of its ESIA, which will include hazardous identification, vulnerability analysis, risk analysis and risk response action. The operator shall be required to adopt the mitigation hierarchy principles in its ESIA and ERA.

Before executing a project, the operator must engage local communities and explain the purpose of executing the project, the benefits thereof, any negative impacts, and mitigation measures it has put in place in order to obtain a social licence to operate from the community. Additionally, if the operator requires access to land for the project from the community, it shall comply with the relevant land laws and the Land Access and Resettlement Framework, which was designed for petroleum operational areas, as well as international standards. 

The Upstream EDP Regulations state that a licensee must consider the environment during the design of offshore operations and the installation of facilities.

There are no specific provisions on risk-based assessments for offshore developments and in that respect the onshore regulations would apply. The Upstream (HSE) Regulations provide that licensees shall ensure that risk assessment on health, process safety and working environment is planned, carried out and used. The risk assessment carried out should identify the likely incidents, envisaged hazards or accidents during petroleum operations or while operating a facility, and the impact to human life, the environment and the facility.

The Upstream Law requires the licensee to submit a decommissioning plan to PAU before a PL or facility licence expires, or between two and four years before the use of a facility is terminated permanently. The plan shall be updated in the event of substantial changes to facilities, if so requested by PAU.

The Upstream Law provides for the establishment of a decommissioning fund for each development area or other facilities to implement the decommissioning plan. Payments into the fund shall start from the calendar quarter in which the petroleum production reaches 50% of the aggregate recoverable reserves, or five years before the licence expires, or on notice of surrender. If the fund is insufficient for implementation of the plan, the licensee and, where relevant, the facility owner shall take care of the costs and expenses. Any excess amount in the fund shall accrue to the Government.

The NEA requires NEMA to formulate and implement climate change policies with the guidance from the policy committee on environment.

In the management of climate change impact on ecosystems, NEA mandates lead agencies in consultation with NEMA to put guidelines in place and to prescribe measures to address the impacts of climate change on ecosystems, including by improving the resilience of ecosystems, promoting low carbon development, reducing emissions from deforestation and forest degradation, sustainable management of forests, and conservation of forest carbon stock.

Lead agencies are also mandated to advise institutions, firms, sectors or individuals on strategies to address the impacts of climate change, including those related to the use of natural resources.

Under the NEA, the Minister may, by agreement with a foreign state, issue rules relating to liability for pollution damage caused by petroleum activities.

Petroleum operations are highly likely to have an impact on community livelihoods, so their implementation calls for local government consultations, community engagements, and corporate social responsibility projects or social investments to be aligned with district development. If all the above factors are implemented, the operator shall gain a social licence to operate within its contract area.

The Upstream Law further requires licensees to consider members from host communities whilst training and employing Ugandans in their operations. Additionally, local governments within areas affected by a petroleum project may – within 30 days of the notice of an application for an EL – object to the granting of the EL on environmental or other grounds.

There is no special scheme for unconventional upstream interests. The current regulatory scheme for conventional oil and gas extraction governs the upstream development of unconventional upstream interests, including shale, heavy oil and coal-bed methane, as well as limitations to hydraulic fracturing.

Although Uganda has embarked on the promotion of LNG to replace wood energy, there are currently no special laws or regulations relating to the development of LNG projects. However, there is a plan to develop regulations to harmonise the distribution, transportation, storage and marketing of LNG gas.

Uganda’s petroleum resources are mainly located in the Albertine Graben, which has been identified as a region of significant importance for biodiversity conservation, and was nominated as a ‘Biodiversity Hotspot, Eco-region and Endemic Bird Area’. Together with Civil Society Organisations and other international institutions, the Government has devised various recommendations through the implementation of legal, regulatory and policy frameworks in order to permit co-existence between petroleum operations and biodiversity conservation. The existing legal and regulatory frameworks for petroleum development and biodiversity conservation have been strengthened by revising the former petroleum laws and regulations that were achieved between 2013 and 2016, as well as the 2019 amendment of the NEA and introduction of the Petroleum (Waste Management) Regulations.

Furthermore, Uganda is a land-locked country with no territorial access to the sea, infrastructural remoteness and isolation from world markets. This is also not helped by the fact that Uganda’s crude oil is waxy and therefore requires heated pipelines or trucks to transport the crude to the market, which means escalated logistical costs. Currently, Uganda is in talks with Tanzania to develop the East African Crude Oil Pipeline from Hoima (Uganda) to Tanga (Tanzania).

The National Environment Act, 2019, whose purpose is to repeal, replace and reform Uganda’s environment law, and to synchronise it with the current Government policies, addresses recent environmental issues such as climate change and the management of hazardous chemicals and biodiversity offsets, provides for strategic environmental assessments, and tackles environmental concerns arising out of petroleum activities, among others.

The Petroleum (Waste Management) Regulations, 2019 apply to any person involved in the production, importation, exportation, transportation, storage, treatment or disposal of petroleum waste, or the construction or operation of waste management facilities.

Kampala Associated Advocates

KAA HOUSE,
Plot 41 Nakasero Road,
P.O. Box 9566, Kampala

+256 312 244 100

+256 414 349 954

info@kaa.co.ug www.kaa.co.uk
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Law and Practice

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Kampala Associated Advocates is a full-service law firm that advises clients on a range of legal issues, including litigation, dispute resolution, arbitration, taxation, banking and finance, debt collection and credit management, energy, mining, oil and gas, environment, infrastructure and public private partnerships, employment and labour, corporate advisory, real estate and conveyancing, and intellectual property and technology. The firm's core practice areas are Energy Law and Policy, drafting, negotiating and advising across the entire petroleum value chain. Clients include Total E& P, Tullow Oil Plc, Oranto Petroleum and the Uganda Chamber of Mines and Petroleum. The firm has a total of 12 partners with varied areas of specialisation, as well as a full-time consultant supported by several senior and junior associates and paralegals.

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