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November 4, 2013 / Magelahpeter

Petroleum and Mining Contracts in Uganda: What lawyers need to pay attention to

Recently I was asked to talk to a group of lawyer friends who would like to advance their knowledge in the extractive sector. Two of them had been approached by a prospecting company that wants to set up shop in Kampala. From our discussion it was clear that there is general lack of basic knowledge about the industry. Our discussions focused on petroleum and mining contracting and what kind of clauses needed to be included. Many of those in the discussion had little knowledge on Uganda’s mining and petroleum sector generally. From our discussions it was noted that the lack of interest among legal practitioners in the mining and petroleum industry will greatly hinder their role. Presently most petroleum and mining companies use foreign law firms and Ugandan law firms carry out peripheral work in the sector. Our discussions prompted me to blog about a few things for petroleum and mining contracting that often cause confusion. But before I discuss the contracting issues, here is a snap-shot of Uganda’s petroleum and mining sector.

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Uganda has discovered 3.5 Billion Barrels of Oil in the Albertine region, with only 40% of the graben explored so far, more exploration will take place in the next years. The discovery of commercial quantities of oil has resulted in increased interest in the mining sector generally. The government has called for bids for the oil refinery to be constructed in Kabaale, Hoima district, there are also discussions on the construction of a crude oil pipeline to Mombasa while some investors have expressed interest in construction of the Eldoret-Kampala (and later Kigali) pipeline which will transport finished products from the Mombasa refinery. On the other hand in September 2013, Kweri Ltd confirmed the existence of large quantities of aluminous clays in Eastern Uganda whose economic value is greater than the value of petroleum so far discovered. Government has also licenced Tibet Hima Ltd to mine copper in Kilembe Mines that has an estimated 4.5 million tons of copper. There are more prospects for copper discoveries in the Tooro-Buganda belt. Several companies are involved in gold, limestone, phosphate and tin exploration and mining in Karamoja, Kasese, Mubende, Busia, Tororo, Bududa and other parts of the country.

 

From the discoveries and level of activities so far, it is clear that the extractive sector is going to be the main driver of Uganda’s economy in the coming years. Ugandan lawyers need to up their interest in extractives and demonstrate skill and knowledge in the sector if they are to benefit from the much lucrative extractive business.

 

Whereas in general terms a petroleum or mining contract is governed by the same rules of law of contract, some unique aspects in the industry require understanding to be able to know how to treat them in the contract. A lawyer needs to understand the basics of petroleum exploration or mining, the nature of the resource (oil, gas, mineral) and its associated challenges in exploration, extraction and refining as well as understand the market for the product if he/she is to effectively negotiate a petroleum/mining contract.

 

It should be understood that petroleum and mining contracts differ in form and content. The two are governed by different laws which determine the implied and express terms and conditions and these must be understood before negotiations. The lawyer must also be able to understand the value chain of the resource being negotiated. This should be considered together with the country’s policy in relation to the resource. For example Uganda is looking at engaging in all the three value chain stages of petroleum production (exploration, processing and marketing/distribution). The country has adopted a Production Sharing Model (PSA) for petroleum exploration and development. This means the lawyer must be able to advise a client on how well his/her interests will be catered for along the value chain. It is important to note that each of the stages may require different contracts or renegotiation of existing contracts (and licenses) based on the country’s laws.

 

On the other hand, the value chain for minerals may require different considerations depending on the mineral in question. For example many African countries have been unable to develop infrastructure to add value to minerals, hence the upstream stage is dominant while others like Botswana, Tanzania and South Africa have set up small-scale midstream activities mainly for processing Gold, Diamond and Tanzanite. Most of these involve working with citizens to add value to the minerals. The mining contract should be able to spell out the responsibilities of the company and what role it will play in the mineral value chain as well as governments role.

 

Another important difference in Uganda between petroleum and mining is the fact that Petroleum Exploration is governed under a PSAs while mining is ran through concessions or licensing where companies are taxed based on their returns, nature of investment and the mineral involved. The geological factors such as nature of rock and technology needed, the scale of a mining will determine the nature of the mining contract to be entered into. The lawyer must have a good understanding of these factors to effectively negotiate a contract.

 

The lawyer must be able to understand other associated resources and how to deal with them in the contract. Geologically some mineral resources and petroleum exist with other resources for example oil and gas, copper and cobalt, copper and Malachite, platinum and Gold, copper, Nickel, silver and gold e.t.c.

 

When it comes to oil and gas, there is a tendency for many contracts to treat the two as one and the same. Whereas geologically oil and gas are hydrocarbons and the same processes are used to extract them. The two are governed by very different economic factors hence the need to differentiate them in a contract. The processing, marketing and distribution of oil is different from gas. Oil is processed in many products (petrol, diesel, plastics e.t.c.) hence fetching much more in monitory terms than gas. Marketing of oil is determined by international market and political trends since oil is normally sold to international markets. On the other hand, gas due to difficulties in transporting it, is ordinarily sold to the local market. In many African countries gas is flared off or pumped back to the ground. A PSA should therefore separate the two in case they are discovered.

When it comes to associated minerals it is important to establish the present value of the minerals and the ownership of the minerals/resources. Whereas some resources can be of negligible value, it is important to provide for them in case of change in market, technology or political environment. Problems often arise as to the ownership, disposal, storage or use of the associated minerals in cases where the contract was never specific. For example in 1960s to 80s the value of cobalt was low and many contracts did not consider the distribution of cobalt since it made no economic sense. In 2000s the value of cobalt increased and it became part an important resource for mining companies. In Uganda’s case cobalt from Kilembe Copper mines was dumped in Kasese in the 1960s and in the 2000s the same cobalt was licenced to Kasese Cobalt Company that processed it for several years. This is because the cobalt reverted to government when mining activities ceased in 1970s.

Understanding associated resources and minerals require a great deal of understanding the mining sector, marketing and distribution of minerals as well as the mineral value chain. This will enable to lawyer to know which terms are workable for the associated minerals and which ones to push for during contract negotiation. 

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One Comment

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  1. acmeug / Nov 4 2013 3:07 pm

    Reblogged this on Chumba cha Habari.

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