Energy: Oil & Gas 2020

Last Updated August 10, 2020

Uganda

Law and Practice

Authors



Kampala Associated Advocates is a full-service law firm that advises a number of 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 conveyance, 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 government of Uganda holds ownership and control of all petroleum resources within the country on behalf of the citizens of Uganda, as is stipulated in the 1995 Ugandan Constitution. The Petroleum (Exploration, Development and Production) Act, 2013 (the "Upstream Law") reiterates this position.

The government of Uganda’s goal is to ensure the sustainable utilisation of petroleum resources. As such, policy guidance in the oil and gas sector is controlled by the Ministry of Energy and Mineral Development (MEMD). The Ministry is mandated to oversee the exploitation and development of natural and petroleum resources in Uganda; in particular, the Ministry manages private sector parties through the issuance of licences and the negotiation of petroleum agreements.

Petroleum legislation has established the regulatory institutions listed below, which assist the Ministry (www.energyandminerals.go.ug) in its mandate and ensure effective management of the sector.

  • The Petroleum Authority of Uganda (PAU) – PAU is a governmental organisation mandated to regulate the petroleum industry and the players involved. The Authority is in charge of licensing, monitoring operations of oil companies, supervising exploration, enforcing compliance and disposing of petroleum products (www.pau.go.ug).
  • Directorate of Petroleum – the Directorate was established within the Ministry in an effort to promote the development and sustainable exploitation of energy resources. The Directorate is mandated to, among other things, undertake licensing and national capacity building, regulate exploration drilling and co-ordinate the development of the petroleum sector (www.petroleum.go.ug).

The Upstream Law provides for the establishment of the Uganda National Oil Company (UNOC). UNOC is governed by the Upstream Law; the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act, 2013 (the "Midstream Law"); and the Petroleum Supply Act, 2003 (the "Downstream Law").

UNOC’s core mandate is to oversee the government’s commercial interests in the petroleum sector, and ensure that the resource is exploited in a sustainable manner.

UNOC’s responsibilities span the entire petroleum value chain.

  • Upstream investment – UNOC is mandated to take part in new ventures and make direct applications for petroleum exploration licences (ELs), and it also oversees state participation with joint venture partners.
  • Midstream investment – UNOC wholly owns the subsidiaries that manage the refinery and pipeline business in Uganda: the Uganda Refinery Holding Company Limited (URHC) and the National Pipeline Company Limited (NPC) respectively.
  • Downstream investment – UNOC is the custodian of Uganda’s national strategic fuel reserves, through its wholly owned subsidiary NPC, to ensure the security of the supply of petroleum products. UNOC is therefore in charge of developing, managing and operating Uganda’s storage terminals.

The Petroleum Laws and Regulations in Uganda are as follows.

  • The Upstream Law – the Upstream Law gives effect to the Constitution and regulates petroleum exploration, development and production. It repealed the Petroleum (Exploration and Production) Act, Chapter 150. The following upstream regulations were issued and gazetted in 2016 to supplement the Upstream Law:
    1. the Petroleum (Exploration, Development and Production) Regulations, 2016 (the "Upstream EDP Regulations");
    2. the Petroleum (Exploration, Development and Production) (National Content) Regulations, 2016;
    3. the Petroleum (Exploration, Development and Production) (Metering) Regulations, 2016; and
    4. the Petroleum (Exploration, Development and Production) (Health, Safety and Environment) Regulations, 2016 (the "Upstream (HSE) Regulations").
  • The Upstream EDP Regulations revoked the Petroleum (Exploration and Production) (Conduct of Exploration Operations) Regulations, 1993 (S.I. 150 1). In 2020, MEMD, in continuance of its mandate of policy guidance, issued the Petroleum (Exploration, Development and Production) (Amendment) Regulations, 2020 that amended various provisions of the Upstream EDP Regulations.
  • Midstream Law – the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act was put into effect to operationalise the national oil and gas policy of Uganda by establishing a legal framework to ensure Uganda’s midstream petroleum operations are carried out in a sustainable manner that would guarantee optimum benefits for Ugandans.
  • The Midstream Law also regulates the planning, preparation, licensing, installation and maintenance of facilities for midstream operations, and provides for the security of midstream operations, among other related issues. In 2016, three sets of Regulations were published to supplement the Midstream Law:
    1. the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Regulations, 2016 (the "Principal Regulations");
    2. the Petroleum (Refining, Conversion, Transmission and Midstream Storage) (Health, Safety and Environment) Regulations, 2016; and
    3. the Petroleum (Refining, Conversion, Transmission and Midstream Storage) (National Content) Regulations, 2016 (the "Midstream (National Content) Regulations").
  • On 13 March 2020, the Ministry issued the Petroleum (Refining, Conversion, Transmission and Midstream storage) (Amendment) Regulations, 2020, which amended certain provisions of the Principal Regulations and revoked the Petroleum (Refining, Conversion, Transmission and Midstream Storage) (Amendment) Regulations, 2018.
  • 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 was passed by the Parliament in May 2020 and requires, inter alia, 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.

The Ministry of Energy, through the Minister, is empowered by the Upstream Law to enter into petroleum agreements with private investors.

The licensing regime in Uganda works under a two-tier system consisting of:

  • licences issued by the Minister of Energy (the "Minister") for the exploration, development and production phase; and
  • Petroleum Sharing Agreements (PSAs) between persons or an oil company and the government of Uganda.

Under this system, a licensee is permitted to have an exclusive right to execute petroleum operations within a defined contract area under an EL and explore for petroleum. Once a commercial discovery is made, the licensee may then apply for a production licence (PL).

Formerly, investors interested in a contract area expressed interest directly to MEMD and the parties engaged in negotiations of the ELs and PSAs. Presently, ELs are granted through open bidding and making direct applications in “exceptional circumstances”; for example, where three bid invitations have been sent out and no single application has been received, if the application is for a reservoir within a contract area that extends into an unlicensed block, or to intensify state participation with the aim of promoting national interest.

The Minister, with the Cabinet’s approval, makes announcements once areas are open for bidding for a petroleum exploration licence under the Upstream Law. Interested investors may apply to the Minister in writing, expressing an interest to participate in the bidding round, with the prescribed fee enclosed. Alternatively, the investor may make a direct application in accordance with the Upstream Law.

Applicants are required to provide the following:

  • personal details (names and nationality) for individuals;
  • for a company, the name, 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);
  • identification of ten blocks and fewer where exceptional circumstances are in existence;
  • a detailed statement providing particulars of work and proposed minimum expenditure;
  • proof of financial status, technical and industry competence; and
  • proposals on the employment and training of Ugandan citizens and any other relevant information.

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

In Uganda’s Model Production Sharing Agreement, 2018 (the "Model PSA"), the following fiscal terms are included.

Government Take

  • On the grant of an EL, a signature bonus is negotiable, and the bonus on production is applicable on the grant of a PL, once volumes reach 50 million barrels of oil equivalent (BOE) and for each additional 25 million BOE.
  • The licensee shall pay the government USD5 million for reaching 50 million BOE, and USD3 million for each additional 25 million BOE.
  • A performance guarantee amounting to 80% of the minimum exploration expenditure is payable.
  • The application or renewal fees for an exploration licence and production licence are USD20,000 and USD40,000 respectively.
  • There is a royalty based on gross total daily production in barrels ranging from 2.5% to 15%, which shall be paid monthly in kind or cash depending on government preference.
  • There is a maximum state participation of 20%.
  • The annual acreage rental fees for the first exploration period are USD20 per km², USD30 per km² for the second exploration period; USD50 per km² for the third exploration period and USD1,000 per km² for a production licence.
  • The annual training and research fees for the first to third exploration period are USD200,000, USD300,000 for the development period and USD400,000 for the commencement of production.
  • The annual training fees and research fees are USD200,000 for the exploration periods, USD300,000 for the development period and USD400,000 for the production period.
  • The application or renewal fee for a facility licence is USD30,000.
  • Taxes are paid in accordance with the Ugandan tax laws.
  • Profit oil (government take) is based on the "R-Factor", which is computed as follows: R = X (cumulative net revenue) / Y (cumulative capital expenditure).

Licensee Take

  • There is a cost recovery limit of 65% for petroleum
  • Profit oil (contractor take) is based on the R-Factor.

Petroleum operations are taxable under the Income Tax Act (the "Act") that was passed in 1997 and is amended as and when the need arises under Part IXA. The Income Tax Act provides for the taxation of petroleum operations. In the taxation of petroleum operations, the Act allows for deduction of cost oil and allowable deductible expenditures. The contractors and licensee are then subject to payment of 30% as corporate income tax.

The Act is elaborate on the taxation of petroleum companies in the case of a transfer of interest to another party. It provides for accounting principles that apply in the taxation of contractors and transnational shared petroleum resources. It further provides for schedules within which to file returns and failure to do so within the given schedule or the filing of inaccurate returns is an offence punishable by the payment of a substantial fine.

The Act generally accords exemptions of 6% on local supply of goods and services.

Other tax laws that govern petroleum operations include the following:

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

Under the model PSA, the government has an obligation to notify the licensee of its intention to participate in a well within 120 days of the licensee’s application for a production licence. The government is also obligated to inform the licensee of its intention to participate either as the government or through UNOC. The government’s participation, however, is limited to only 20%.

The government or UNOC does not meet costs during development to production and the licensee only recovers those costs from the government’s portion of production, including interest at LIBOR.

The government reserves the right to perform operations in the contract areas that it has identified to participate in with regard to the interest it holds. The government is also at liberty to apply for new ventures or exploration licences. Under the default PSA, the licensee is obligated to provide secondment opportunities for job training to government employees, in the event that the government requests it. The licensee also has the duty to assist the government or UNOC in selling all or part of its production share if the government so wishes.

The National Oil and Gas Policy 2008's objective (vii) “is to ensure optimum national participation in oil and gas activities”. In line with the policy, the Upstream Law addresses the objectives by setting out several requirements, namely:

  • to give preference to national goods and services and, in the event that they are unavailable, it introduces the mandatory requirement that if an international company is identified to provide such goods and services, it should enter into a joint venture with a Ugandan company and offer it a share capital in the joint venture;
  • a foreign company is mandated to upskill Ugandans in all phases of operations and submit a detailed schedule of such training and recruitment of Ugandans annually to PAU after the licence is granted, offering equal opportunity to disabled persons, both genders and host communities; and
  • to share technology and upskill Ugandans by taking advantage of training programmes locally or outside Uganda, implementing knowledge sharing to Ugandans and employing trained Ugandans in management and technical work. This obligation shall be a shared responsibility with the government.

In order to proceed to development and production once it has commercial discovery, the licence-holder must satisfy the following requirements.

Petroleum Discovery

Once this occurs, the licensee must inform PAU as soon as applicable, and must submit written particulars of the discovery within 30 days. The licensee must then run tests and undertake a technical evaluation, submitting this report to the Authority upon completion.

Appraisal

An appraisal must be carried out within two years from the date that the technical evaluation of test results was submitted and can only be extended for a period not longer than two years by the Minister.

However, the licensee may choose not to appraise that discovery if he or she notifies the Minister within the specified time that the discovery is of no potential commercial interest.

PL

A petroleum reservoir report, a field development plan (FDP) and any other relevant information must go along with the application. The PL will receive approval if the licensee has technical competence, experience, capacity and financial capability, and has submitted the FDP and petroleum reservoir report to the Minister within the required timeline.

Then, the Minister shall process PL applications within 180 days. Any dissatisfied applicant may request the reasons for the refusal. Production forecasts are to be submitted annually for government approval.

Following a commercial discovery, the licensee may apply for a PL in respect of the development area within an exploration block.

In 2017, the government of Uganda issued three licences: one for exploration over the Kanywataba Contract Area with Armour Energy Limited, from Australia, and two over the Ngassa Contract Area with Oranto Petroleum Limited, from Nigeria.

Production Periods

The three exploration licences for four years were split into two periods of two years each. PLs have an initial term of not more than 20 years and may be renewed only twice, with a term not exceeding five years.

Extensions

For an EL, the licence may only be extended twice, with a term not exceeding two years, whereas a PL may only be renewed twice, with a term not exceeding five years.

Relinquishment Requirements

For an area to be considered for EL renewal, it must not exceed the area of discovery and not be more than half of the contract area. Blocks indicated in the EL renewal applications must be confined strictly to no more than three discrete areas, and each block ought to share a common border with at least one other block. On the grant of an EL, a stratigraphically delineated block shall be considered as such.

Minimum Work Programmes

Within two months of a grant of an EL, a licensee is required to start exploration operations. The minimum work programme in the exploration phase is not specifically provided for under the Model PSA, but it provides that it shall be negotiated for on a case-by-case basis.

Nevertheless, the licensee is expected to execute geological, geophysical, geochemical and other studies, or to consult existing data if available; ie, 2D and 3D seismic data, magnetic maps, gravity, reports and publications on the contract area. There is also a requirement by the licensee to drill a certain number of exploration wells.

Export Rights

In accordance with the Model PSA, a licensee, with the intention of exporting all its petroleum entitlement, may use any means of transport. The licensee is also entitled to construct, operate and maintain an export pipeline through a separate pipeline company, which shall be charged with the duty to transport petroleum from the delivery point to its loading.

Domestic Supply Requirements (and Terms)

In order to satisfy the domestic consumption requirements for a year, the government of Uganda may choose to take a certain portion of the licensee’s crude oil. The government shall, within 30 days of the end of each month of delivery, reimburse the licensee for the 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 the right of first refusal of petroleum from the contract area. This is provided that they take the petroleum at market price.

Withdrawal

If a licensee desires to withdraw or surrender from all or any of the blocks, he may apply to the Minister for a certificate of surrender. This application must be made 90 days before the date of surrender, or a year before surrender of a PL. The following details must be provided:

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

The Minister may issue an unconditional certificate of surrender or a conditional one relating to safety and best industry practice. A licensee in default or one that is non-compliant shall not be issued with a certificate of surrender. The same applies to blocks that are not in a safe condition in line with industry practice.

Following the grant of a certificate of surrender of part of the blocks, a licence shall be amended, and the licence for surrender of the whole block shall be cancelled. This shall not affect the liability incurred before the date of surrender and any prior legal proceedings.

The licensee’s duties shall be fulfilled up to the time of surrender.

Termination

This shall occur upon the expiry or surrender of the EL or PL by the licensee or if it has been terminated by the government. However, this termination shall have no effect on any liability insured prior to this, or any legal proceedings that may have commenced or continued against the licensee.

Abandonment Rights and Obligations

A licensee, following termination, shall take all reasonable steps to restore the surface of the contract area to its original position, which may have been damaged in the course of operations.

The Minister has a right to state any facility or installation that the government may take over upon the termination of a licence.

A licensee is permitted to sell part or all of its interest in a contract after the following has been done:

  • prior written consent from the government has been obtained, which shall only be withheld if there is a belief that public interest and safety is likely to be prejudiced on transfer;
  • an application to the Minister in the prescribed form has been sent and fulfilled the financial duties under the laws of Uganda;
  • tax has been paid; and
  • the joint operating agreement for a joint venture partner (JVP) has been examined – if there is a pre-emptive right, the first option being to offer the JVP the first option to buy the licensee’s interest and approach the third parties if uninterested.

According to the Upstream Law, the Minister is required to approve the production schedule in the FDP and issue an annual production permit to the licensee.

In addition, after the application, the Minister may approve the quantity of petroleum that may be produced at all times for a fixed period. Furthermore, the Upstream Law provides for the Minister’s discretion 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 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.

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

The Midstream Regulations were in 2020 amended to include early pipeline project activities. The amendment allows for a person intending to apply for a licence to construct and operate a pipeline to undertake early pipeline project activities as part of the planning and preparation for the construction and operation of the pipeline.

The early pipeline project activities include feasibility studies, surveys and studies, site preparations, environmental, health, social risk analysis and assessment studies, and land access and acquisition activities.

A midstream licence may be subject to the following conditions being fulfilled by the licensee:

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

The Downstream Law, on the other hand, mandates a person carrying out the construction or major modification of an installation or facility of the supply chain to 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.

Neither midstream nor downstream operations in Uganda have historic forms of contracts in place. However, larger projects 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 any other arrangement as negotiated by the parties.

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

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

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

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

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

There are currently no typical fiscal terms and commercial arrangements for midstream or downstream operations in Uganda, owing to the fact that Uganda imports petroleum products. However, negotiations between Uganda and Tanzania are ongoing 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 Kabale (Uganda) with a capacity of 60,000 barrels of oil per day. The Midstream Law shall govern the construction of these facilities. It provides that in the issuance of a licence, the Minister of MEMD may stipulate conditions relating to access to a facility used for midstream operations by third parties other than licensees, including terms and conditions in contractual arrangements that shall regulate access, pricing and tariffs.

As regards the government take, the law provides for annual licence fees. Larger projects shall have the government participate as a commercial partner and issues regarding fiscal structure shall be negotiated by the parties.

Midstream and downstream operations in Uganda are regulated by the Income Tax Act, Chapter 340 (as amended) and the Value Added Tax (VAT) Act, Chapter 349 (as amended).

However, a specific tax regime for EACOP between Uganda and Tanzania shall be enacted. The fiscal regime is laid out in the IGA between Uganda and Tanzania, which provides that the project will be exempt from income and corporate tax for ten years. The project costs shall 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 subjected to a 30% corporate income tax;
  • petroleum excise duty of UGX760 on each litre; and
  • no VAT or withholding tax on petroleum products.

UNOC is given no express special rights as regards downstream licences. It is, however, 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. These projects shall be developed on a PPP basis.

Downstream operations in Uganda do not have specific local content requirements. However, midstream operations are governed by the Midstream (National Content) Regulations.

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

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

Once the national content programme is approved by PAU, amendment or deviation from the programme cannot be done without the approval of PAU.

The regulations further provide a list of goods and services that shall be provided by Ugandan companies, citizens and registered entities and they include the following:

  • 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.

It should be noted that the amendment to the Midstream Regulations provides that any person undertaking early pipeline project activities is required to comply with the Midstream (National Content) Regulations and is further mandated to prepare and submit to PAU an implementation schedule and information on national content in relation to the early pipeline project activities, 30 days prior to undertaking the activities.

A standard model is adopted for downstream licences issued in Uganda. They state 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 revocation/suspension/cancellation of the licence.

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

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

A private investor is mandated to obtain property on a willing buyer, willing seller basis. However, for certain projects undertaken "in the public interest", compulsory acquisition may be adopted. Even with such projects, 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 has been approved by the Chief Government Valuer.

Conditions for third-party access to infrastructure such as depots, pipelines and other facilities are established by the Downstream Law.

The Law mandates a licensee that owns or operates a facility with unused capacity to 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 requisite licence for the operation and must prove his or her capacity to pay the tariff and fulfil other reasonable financial and technical conditions, as agreed upon with the operator or owner of the facility.

There are no restrictions on product sales into the local market in Uganda.

A licensee is prohibited by the Midstream General Regulations 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 any conditions as may be specified by PAU.

The transfer of a downstream permit or licence can only be done with 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. Once the approval of the transfer is obtained, the transferee holds the remaining period of validity of the original licence and is liable for all pending obligations or liabilities of the transferor.

Investments in Uganda are governed by the Investment Code Act, 2019. There are no particular foreign investment rules and protections that apply to investments in the petroleum sector. However, there are tax exemptions, in particular with regard to VAT and corporate income tax for the EACOP project.

Stabilisation clauses are permitted provided they do not limit the power of the legislature to make law. Therefore, clauses that attempt to freeze the law are unconstitutional. However, clauses that deal with the economics of the project and seek to protect the economic value of the contract are permitted. The government has the power to 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 of Uganda prohibits expropriation of property and provides that a person cannot compulsorily be deprived of his or her property without fair, adequate and prompt compensation. The law therefore provides constitutional protection to an investment. There must be adequate compensation that is not subject to any exchange control restrictions, in the event of an expropriation. The compensation shall also be freely transferable outside Uganda.

Foreign investors in Uganda are mandated to register with UIA, which issues them with an investment certificate. The holder of an investment certificate is entitled to commence arbitration either under the International Centre for Settlement of Investment Disputes (ICSID), or under any agreement with the government, or under any multilateral or bilateral investment treaty. Therefore, the right to arbitrate is statutory for the holder of an investment licence.

In addition to the above, parties are entitled to make their own choice of law in a contract and the choice shall be respected by Ugandan courts of law.

The law governing environmental management in Uganda is embedded in the National Environment Act, 2019 (NEA). This Act provides for the management of the environment for sustainable development and caters for emerging issues regarding the environment. Among these are climate change, the management of hazardous chemicals and biodiversity offsets. It also provides for the management of plastics and plastic products.

NEMA is a semi-autonomous institution responsible for harmonising, regulating, governing and supervising the management of the environment in Uganda. It is at the forefront of developing environmental policies, laws, regulations, guidelines and standards. It is authorised to give government guidance on sound environment management for sustainable development (nema.go.ug/aboutus/nema-uganda).

The Petroleum (Waste Management) Regulations, 2019 apply to persons involved in producing, importing and exporting of waste treatment plants and disposal of sites in Uganda.

Other regulators include the National Forest Authority (NFA), which is under the mandate to manage central forest reserves that cover 10% of Uganda’s land cover. It is under the obligation to provide high-quality forest-related products to the country (www.nfa.org.ug).

The Uganda Wildlife Authority (UWA) conserves and manages wildlife and protected areas of Uganda for the country's benefit. (www.ugandawildlife.org/about-us/vision-mission-core-values).

Before embarking on a petroleum project, the developer shall endeavour to make sure that an individual executing the environmental and social assessment complies with the NEA, the laws applicable and administrative decisions. They shall also be responsible for the quality of such assessments. Furthermore, they shall be required to carry out an environmental social impact assessment (ESIA) in a project brief form, and furnish ten copies to the executive director (ED) of NEMA.

In the event that NEMA is content that the project includes adequate mitigation mechanisms to address the likely impacts, it shall agree to the project. However, if it finds out that the brief does not provide enough mitigation measures to address the likely impacts, it may reject the project or make a request for the operator to execute an environment impact study (EIS). If an EIS is needed, the ED shall send a notification to the developer within 21 days of the submission of the project brief.

Twenty copies of the EIS shall be submitted to the ED, who shall then forward to the lead agency for comments. After this, the comments shall be forwarded to the ED within 30 working days after receiving the EIS.

On receiving the comments with ten working days, the ED shall invite the public to make written commentary within 28 days of the EIS. Following this, the ED shall invite persons likely to be affected by the proposed project to make comments on the EIS within 45 days of the comments being received.

In less than 180 days from the date of submission, the ED may approve all or part of the project, or may require the project to be redesigned, or may refer part of the project back to the operator if there is not enough information, request additional information, or reject the project.

The ED’s decisions are to be furnished to the operator within 14 days. If the ED approves the project, he shall issue a certificate of approval.

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

Before executing the 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.

In addition, if the operator requires access to the 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.

According to the Upstream EDP Regulations, a licensee must consider the environment during the design of offshore operations and installation of facilities.

There are no specific provisions on risk-based assessment for offshore developments and, as such, the onshore regulations would apply. The Upstream (HSE) Regulations provide that licensees shall guarantee that risk assessment on health, process safety and the working environment is planned, carried out and used. This risk assessment should identify the likely incidents, accidents during petroleum operations and the impact to human life and the environment.

Under the Upstream Law, a licensee is required to submit a decommission plan to PAU before the expiry of a PL or facility licence, or before the permanent termination of the facility.

However, in the event that there are substantial changes to these facilities, the plan shall be updated if PAU requests so.

The law also provides for the formation of each development area or other facilities to execute the decommissioning plan. Payments into the fund shall commence from the calendar quarter in which the petroleum production reaches 50% of the aggregate recoverable reserves, or five years before the expiry of the licensor notice of surrender. In the event that the fund is insufficient for implementation of the plan, the facility owner shall take care of paying costs and expenses. Any excess fund shall accrue to the government.

NEMA must seek guidance from the environmental committee to implement and formulate climate change policies in Uganda.

The NEA directs all lead government agencies, in consultation with NEMA, to implement guidelines and measures to address the effect of climate change on eco-systems by promoting low carbon development, and reducing emissions as a result of deforestation and forest degradation.

The lead agencies are also mandated to give advice to institutions, individuals and firms on strategies to address the impact of climate change.

For petroleum activities such as the construction of a pipeline and drilling, the Minister of Energy may, by agreement with a foreign state, issue rules relating to the liability of its pollution damage.

Petroleum operations have an effect on the community where the assets are found and produced. An operator shall be granted a social licence to operate within its project's contract area if the operator aligns itself with the district’s development. The operator does this by engaging in local government consultations, community engagements, corporate social responsibility and social investments.

According to the Upstream Law, the authority granting any licence should consider members of host communities whilst training and employing Ugandans in their operations. Local governments within areas affected by a petroleum project may object to the granting of an EL on environmental or other grounds within 30 days of the notice of an application.

Uganda does not have a special scheme for unconventional upstream interests. The existing regulatory scheme for conventional oil and gas extraction places limitations on hydraulic fracturing and regulates the development of unconventional upstream interests, including shale, heavy oil and coal-bed methane.

There are currently no special laws or regulations relating to the development of LNG projects. However, the provisions of the Petroleum Supply Act that relate to petroleum products also apply to natural gas, whether imported or produced in Uganda, including liquefied natural gas.

Uganda is a land-locked country with no territorial access to the sea. Its petroleum resources are centred around the Albertine Graben region, which has been identified as a region of significant importance for biodiversity conservation, and has received a nomination as a Biodiversity Hotspot, Eco-region and Endemic Bird Area.

The government of Uganda, in association with civil society organisations and various international institutions, has come up with several 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 enacted between 2013 and 2016, as well as the 2019 amendment of the NEA, the introduction of the Petroleum (Waste Management) Regulations and the 2020 amendments of the Upstream and Midstream Regulations.

In order to combat the escalated logistical costs that arise from Uganda being land-locked and therefore isolated from world markets, Uganda is in talks with Tanzania to develop the East African Crude Oil Pipeline from Hoima to Tanga, which would transport its crude oil to the market.

The Petroleum (Exploration, Development and Production) (Amendment) Regulations, 2020 amended certain provisions of the Upstream Regulations of 2016. They broadened the scope of what constitutes an emergency procurement, provided for additional instances in which single source procurement may be applied for procurements whose value exceeds USD100,000 and amended the timeframe within which a supplier shall remain on the National Supplier Database from one to three years.

The Petroleum (Refining, Conversion, Transmission and Midstream storage) (Amendment) Regulations, 2020 amended certain provisions in the 2016 Midstream Regulations and revoked Statutory Instrument No 19 of 2018, for midstream storage. The Amendment introduced provisions regulating early pipeline project activities and allows for a person intending to apply for a licence to construct and operate a pipeline to undertake early pipeline project activities as part of the planning and preparation for the construction and operation of the pipeline.

Kampala Associated Advocates

KAA House
Plot 41 Nakasero Road
P.O Box 9566
Kampala

+256 312 244 100

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

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Kampala Associated Advocates is a full-service law firm that advises a number of 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 conveyance, 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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