Uganda demands end to oil clause that freezes weak regulation

29 Sep 2011 admin

The Ugandan government is insisting that British oil company Tullow Oil, France’s Total and Chinese group CNOOC drop the stabilisation clause from their oil contract of Lake Albert before approving the $10 billion oil project. The original contracts were leaked by PLATFORM in 2010. Meanwhile Ugandan opposition MPs are unhappy that Museveni’s government allowed disputes to be transferred to arbitration in London, including Heritage oil’s attempt to avoid paying $404 million in capital gains tax.

The Ugandan PSAs are highly problematic, as highlighted in PLATFORM’s analysis in “Contracts Curse: Uganda’s oil agreements place profit before people”. That the government is finally demanding that the stabilisation clauses are removed is a victory for democracy and environmental campaigners, because they

reduce Uganda’s legislative sovereignty. If Uganda changes its environmental regulations, laws governing workers’ rights or any other standards that reduce the economic benefit to the oil companies, these must be compensated. This stands even if the companies have been profiting from overly low levels of regulation or high pollution levels.

There is increasing recognition that stabilisation clauses are detrimental to protection of democracy, environment, human rights and workers rights, and are an obstacle to development. Amnesty International has argued that stabilisation clauses like that covering the Baku-Ceyhan pipeline are likely to create a “chilling effect” on government’s ability and intention to legislate to protect human rights and the environment.

Stabilisation clauses effectively immunize an investor from future changes in both fiscal terms and even legislation. To an investor such changes constitute political risks – to a state they constitute exercise of its sovereignty.

According to oil analyst Greg Muttitt: “The use of the term ‘political risks’ in infrastructure and extractive projects can commonly be characterized as a somewhat patronizing ‘We don’t trust the government not to change the rules’. By definition, this risk is carried by the foreign investor, rather than the state party. However, far from remaining open to potential renegotiations, companies aim to reduce political risk by contractually tying the hands of the government as firmly as they can. This is investment colonialism at its most extreme.”

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