Tullow Oil operations under the microscope

Tullow Oil

“We have discovered instances of non-compliance,” the auditors.

A leaked audit report has brought to light glaring inconsistencies in the oil exploration sector and intensified fears that some oil companies are not working according to the signed agreements with the Ugandan government.

The audit report was compiled by Ernest & Young on behalf of the Auditor General and was meant to review the oil exploration activities carried out by Hardman Petroleum Resources Limited, now Tullow Uganda, covering a period of five years from October 8, 2001 to October 30, 2006.In this report, which was submitted to the Ministry of Energy and Mineral Development on April 7, 2009 and has been kept secret from the public, the auditors made findings which are not in line with the Production Sharing Agreement signed between the government and Tullow Uganda in 2001.

This agreement elaborates the responsibilities of both government and the oil company in the oil exploration and extraction processes and how the profits from the sale of oil will be shared. “We have identified instances of non-compliance with the Production Sharing Agreement, Petroleum Exploration and Production Act Chapter 150 and the International Petroleum Industry Practices and Standards,” the auditors noted in their summary of key findings and recommendations.

One of the major findings in the report stated that the oil company failed to pay about shs 300 million in VAT for non-oil-related items imported into Uganda. “Our analysis revealed that some of the imported items did not seem to have a direct connection with the petroleum operations,” wrote the auditors.

The accompanying list revealed that Tullow imported eight pleasure boats seven of which were valued at shs 75 million. The report went on to list items such as golf equipment, tennis balls, footwear and medicaments for “retail sale” for which the company failed to pay VAT.

Other inconsistencies included that the company failed to properly rehabilitate environmentally sensitive areas after extraction, did not appropriately audit their operations and exported sample materials without notifying the appropriate government authorities.

Tullow management was allowed to submit written responses to the auditor’s findings and these were included in the version of the report obtained by the Dispatch.

Glaring inconsistencies

The 74-page audit uncovered a total of 11 instances were found to be wanting in relation to the compliance with the oil exploration and development regulatory framework, six instances were wanting in as far as the compliance with the tax laws of Uganda is concerned while three instances concerning the lack of internal controls were also discovered.

One of the major findings in the report is that Tullow failed to pay up to shs 300 million in VAT during the audited time period.

As part of the signed PSA agreement, Tullow is permitted to waive VAT on all imports of equipment needed for their petroleum operation. However the company allegedly imported numerous items into Uganda unrelated to their oil exploration operations and responded in the audit that they were investigating the matter.

On several occasions, Tullow also allegedly exported samples from exploration operations without the necessary permissions from Ugandan authorities as agreed to.

The report states that it is in the interest of the government to track all export items in order to maintain vital records of its oil resources. The report stated that all exports should be registered with the Ugandan government, a suggestions Tullow called “not practical”.

Conservationists have long been against oil drilling in the Lake Albert region because of its high population of animal species. Limited environmental impact on the plant and animal life in the area from testing and drilling remains a top concern in the debate over oil exploration in Uganda.

Auditors revealed in the report that the company did not always take all appropriate measures to rehabilitate testing areas in terms of their environmental impact within the agreed upon time frame.

On some sites, solid waste and piles of debris were left abandoned after the exploration had ended. “Environmental assessments need ongoing attention as any delayed remedial action may cause extensive damage,” wrote the auditors. In regards to the environmental findings by Ernst & Young, Tullow maintains that such topics are outside of the expertise of the auditors and should not be included in the audit.

Tullow asked that an environmental expert be employed to accurately test the environmental impacts of their operations. “The auditor is not qualified to make any comments on the environmental aspects of the Licensee’s operations,” was management’s response.

To help raise the image of the company in the Lake Albert region, Tullow Oil has been involved in community projects (building classrooms, buying school furniture, etc.). On audit reports, the company has however listed these costs as “recoverable”, meaning that they can use money earned through the eventual sale of Ugandan oil to repay themselves these costs.

Ministry officials stated that such practices are not acceptable and following the exposure of these costs by the auditors, Tullow states that these costs will no longer be listed as recoverable.

The report also found two instances of members of Tullow’s management team profiting through the procurement of supplies for the company’s Uganda operations from companies they held financial stakes in. John Morley, the then in-country manager for Hardman was also a shareholder and director of BMS Minerals, a major supplier to Hardman.

In addition, Elly Karuhanga, the current president of Tullow Uganda, is named in the report as part of the Tullow Uganda Management team and also appears on the list of contractors and sub-contractors.

This is not allowed by the “arm’s length” clause of the PSA in order to control pricing. Tullow denied the charges and maintained that it acted according to the signed agreements. The absence of a frequent internal audit function in Tullow Uganda was also raised by the auditors in the report.

They noted that the operations and volumes of transactions of the company have grown substantially leading to a potential danger for fraud and error going unnoticed as well as inaccurate and incomplete information being produced for decision-making.

The report went on to reveal that Tullow was storing its documents and records regarding its Uganda operations at its headquarters in Perth Australia. This is contrary to the signed agreement that required Tullow to maintain its records at its local office (Uganda) for a period of at least five years.

This was put into place to ensure that records remain available should it be “necessary to explain the information provided”. Tullow maintained that setting up an accounting system in Uganda would be cost prohibitive during the exploration phase. Finally, the auditors also challenged the US Dollars 39,262,492 figure, which was stated by the oil company as the recoverable expenditure covering the period of the audit. “Based on the agreed upon procedures that we performed, we found that expenditure amounting to US Dollars 39,205,909 is eligible as recoverable expenditure,” the auditors noted. This makes a difference of US Dollars 56,583 (over shs 116 million).

Oil curse or blessing?

Another report has criticised the contracts signed between the Ugandan government and oil companies. The report named “Contracts’ Curse-Uganda’s oil agreements place profits before people” was compiled by PLATFORM, an international pressure group specialising in analysing oil agreements between governments and oil companies.

This report notes that the Ugandan government received far less signature bonuses, which are paid by the oil companies upon signing of the PSA with the government. “Oil contracts such as these determine revenue flows in billions of dollars.

In this context, US Dollars 300,000 is largely irrelevant both to the oil company paying it and to government income. The Congo (DRC) government received a US Dollar 3.5 million bonus upon signing a PSA for block 1 in 2008², the report notes.

The report outlines in detail the risks that have been dumped on Uganda and the failure by government to negotiate favourable PSA’s, which in the end may lead to government’s loss of revenue and high profits for the oil companies.

And money that has already been paid to the Ugandan government has not been accounted for in any budget leading to questions of corruption. “While these sums are comparatively small, it generates concern that future bonuses, including the US Dollar five million production bonus stipulated in the Block 4 Dominion Petroleum PSA, will likewise disappear.

On a larger level, if the government has failed to track and account for the destination of these bonus payments, it raises questions over its intention and ability to manage the larger oil revenues to come,” said the report”s authors.

By Edward Ronald Sekyewa