Kampala — President
Museveni and his Tanzanian counterpart John Pombe Magufuli have signed
the East African Crude Oil Pipeline Agreement (EACOP), which now paves
way for construction of the proposed crude oil export pipeline from
Hoima, in mid western Uganda to Tanzania's Indian Ocean port of Tanga.
The agreement,
signed on Sunday almost a year after Uganda under the thrust of Total
E&P snubbed Kenya's Lamu port for the Tanga route, also contains
agreed points on the sticking tax issues over which technocrats from
Uganda and Tanzania had been split for months, according to sources
privy to the pact.
The two countries
operate different tax regimes and the major fear was that high
construction and operational costs occasioned by an uncoordinated tax
policy would render the project uneconomic and spark jitters among
international lenders.
Under the signed agreement, Value Added Tax (VAT) should be deemed paid during the three years of the construction phase.
Depreciation should
be 5 percent straight line throughout the lifespan of the pipeline and
the application of Branch Profit Tax by the two states when the pipeline
structure is complete and communicated.
In 2015, Uganda
amended the VAT Act 1996 to remove VAT incurred during the investment
phase, after protest by the international oil companies.
In Tanzania an investor is required to pay VAT and claim a refund later.
However, this poses
risks of foreign exchange rate fluctuation and is subject to
bureaucracy. After months of haggling a harmonised position of VAT
exemption was adopted.
On depreciation,
the two countries opted to use the commonest method of "straight line"
against other approaches such as "sum of years digits or
double-declining balance."
The straight line
method means that the "scrap value" of the pipeline at end of its
lifespan will be subtracted from the value of the original cost to
compute a depreciation rate.
The 1,445km pipeline, according to earlier estimates, will cost $3.5b (about Shs12 trillion).
Discussions are
ongoing to form a Special Purpose Vehicle (referred to as Pipe Co), to
construct, own and operate the pipeline and will also negotiate the
Shareholders Agreement, Project Financing Agreements and Transportation
Agreement between Shippers of oil from Tanga port to the international
market. Pipe Co will pay back the (international) lenders from the
project returns.
Therefore, pending
formation of Pipe Co, the agreement the two presidents have signed holds
that Branch tax (on repatriation of profits) cannot be applied.
Pipe Co
shareholders will fund the pipeline through a mix of equity and project
financing, seeking to achieve between 60 percent and 70 percent of
external debt.
However, the
financing plan is still subject to discussions pending engagement of a
"transactionary adviser" and completion of the Front-End Engineering
Design (Feed) for the pipeline. The process is ongoing.
Early in January a
contract for FEED was awarded to the Houston-based Gulf Interstate
Engineering to study technical requirements that will give a clear
picture of the project and lead to Final Investment Decision (FID)
before end of the year. FID will lead engineering, procurement and
construction, which are expected to start next year.
According to the
Uganda-Tanzania agreement, the two presidents also directed their
respective Attorney Generals to urgently finalise an Inter-Government
Agreement (IGA) to operationalise the terms agreed upon and harmonise
laws of the two countries that will apply to the project.
The heads of state
also directed the IGA to be signed by Energy ministers, Irene Muloni for
Uganda and Prof Sospeter Muhungo of Tanzania, not later than next week.
The IGA will be
followed by the Host Government Agreements (HGA) that defines the rights
and obligations between each State on the project, and will be ratified
by the respective parliaments.
"A date for the two
heads of state to lay a foundation stone either at Hoima or Tanga
should be arranged as soon as possible," the agreement reads in part.
At the signing
ceremony at State House in Dar-es-Salaam, President Museveni was flanked
by Energy minister Irene Muloni and the PS Stephen Isabalija, Deputy
Attorney General Mwesigwa Rukutana, acting director of Petroleum
Directorate Robert Kasande and Dr Josephine Wapakhabulo, executive
director of Uganda National Oil Company (Unoc).
The Tanga route,
according to feasibility studies, was deemed the cheapest for Uganda to
transport its oil from the production point in Hoima to the
international market.
It has convenient
flat terrain, not interrupted by other activities, has lowest
environmental challenges, and provides the shortest schedule for Uganda
to seeing the first oil export - earliest mid 2020.
Besides Tanzania's
convenient land tenure system of no freehold ownership, President
Museveni said at the signing that the choice of the Tanga route was
premised on the country's political stability.
"This oil pipeline
shows the importance of integrated decision-making. The Chinese have
been able to move and become the second biggest economy in the world,"
Mr Museveni noted.
President Magufuli
commended Uganda for choosing the Tanga route for the pipeline, which he
said will not only create employment but also be a source of revenue
for both countries.
Construction
Construction of the
pipeline, expected to commence early 2018, is projected to take 36
months with prospect of between 6, 000 and 10, 000 jobs created.
Uganda's current oil reserves stand at 6.5 billion barrels with 1.7
billion recoverable from the ground.
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