The Natural Resource Governance Institute (NRGI) has warned that Uganda could lose a substantial share of its petroleum resources' value due to cost overruns and weaknesses in its oil revenue-sharing arrangements. Dr. Paul Bagabo, NRGI's Uganda Country Director, stated that the government bears a disproportionate share of financial risks associated with oil production, including project cost increases. The current fiscal regime does not guarantee that government revenue rises in line with oil companies' profitability.
NRGI's research estimates that at a long-term oil price of $70 per barrel, government revenue from the Tilenga and Kingfisher projects would average approximately $1.8 billion annually between 2027 and 2050. However, if the long-term price falls to $50 per barrel, average annual government revenue would decline to approximately $1.08 billion. Bagabo emphasized the need for Uganda to plan its oil-dependent expenditure cautiously, rather than assuming projected petroleum earnings will remain stable throughout the production period.
The study argues that Uganda's petroleum fiscal terms can deliver a relatively high government take, but the system does not consistently increase the government's share when oil companies become more profitable. This is partly because royalties and profit-oil sharing are linked to production volumes rather than directly to project profitability. The research also raises concerns about the windfall tax design, which creates a sharp financial difference around the $75-per-barrel threshold.
A one-cent increase in the oil price from $74.99 to $75 would transfer approximately $870 million of Tilenga's project value from the investor to the government. The modelling indicates that this arrangement could leave the investor worse off at $75 per barrel than at $70, potentially creating an undesirable incentive around the tax threshold. Bagabo recommended reviewing the arrangement to ensure the government benefits from high oil prices without creating abrupt changes in project value distribution.
The study recommends applying the tax to additional profit above the trigger price or phasing it in across a price range instead of maintaining a sharp threshold. It also suggests considering more profit-based fiscal instruments in future petroleum licensing arrangements so that the government's share increases more consistently with oil project profitability. Project cost overruns are another major threat to government revenue, as oil companies can recover eligible project costs from petroleum revenue before profits are shared.
The study estimates that the government would absorb approximately three-quarters of the value lost when Tilenga's project costs increase by 23-33%. It identifies $4.7 billion in pre-production capital expenditure that will enter the cost recovery system, making effective monitoring and auditing crucial. Bagabo warned that the government must treat cost control as part of its revenue protection strategy, rather than simply an operational matter for oil companies.
The findings come as Uganda prepares to begin commercial oil production, with petroleum revenue expected to support infrastructure development and the government's tenfold economic growth strategy. However, the study cautions against using peak-period oil earnings as a basis for permanent government expenditure, as government revenue could peak at approximately $4 billion in the 2033/34 financial year.
Key points
- The government bears a disproportionate share of financial risks associated with oil production, including project cost increases.
- The current fiscal regime does not guarantee that government revenue rises in line with oil companies' profitability.
- Uganda needs to strengthen its petroleum revenue management framework and review the design of its windfall tax to protect public revenue.
