Angela Nalweyiso

Angela Nalweyiso

Cost Engineer

Directorate of Petroleum, Uganda

Angela Nalweyiso Semakula has about four years of experience in Petroleum Cost Engineering and Economics. She holds an MSc in Petroleum Economics and Management from IFP School in France, an MSc in Technology Innovation and industrial development from Makerere University in Uganda, a post graduate diploma in Financial Management offered by ACCA, United Kingdom and a BSc in Industrial Engineering and Management from Kyambogo University in Uganda. Published works include ‘’Energy Management Practices in Ugandan SME Foundries’’ and ‘’Estimating Energy Conservation Potential of Local Metal Casting Units in Uganda Using Data Envelopment Analysis’’


SESSION 12:  Cost Recovery in Oil and Gas Production Sharing Contracts: The Risk for Host Countries.

With the increasing uncertainties in crude oil prices, both IOCs and host governments are under unprecedented pressure to achieve their objectives which differ in one way or another but all geared towards optimizing returns from petroleum operations. Reduction in expenditure is one of the ways through which this can be achieved. However, the question is, how best can this be achieved in countries where Production Sharing Contracts are in operation?

One of the main attributes of a production sharing agreement that draws the investors’ attention is the entitlement to recovery of the costs incurred during exploration and development phases when production of oil and gas commences. The contractor achieves this by taking a portion, not exceeding a certain percentage of production in the contract area as set out in the agreement. This proportion is known as the cost oil. The cost oil is taken after removing the royalty (if any) but before taxes for PSCs with taxes. What remains after removing the cost oil and taxes is the profit oil which is shared between the contractor and the Host Country as per the negotiated formula.

Disputes around costs that constitute cost oil tend to spring up due to differing interpretation of the contract terms, differing intents and lack of trust between the two parties. The host government and the contractor are not always on the same page regarding relevant expenditures especially when it comes to overheads. Furthermore, the two parties may have differing opinions about certain technical concepts like development plans which determine the relevant investment. This paper examines the risks with regards to cost recovery that host countries may face and suggests mitigation measures.  Cost oil being an important element of PSCs calls for attention both during the design and execution of these contracts. Cost recovery risks are created either due to poor design of the different PSC clauses or its execution.

With a properly designed PSC, cost recovery risks are deemed to be low during execution. However, some risks may arise from budget inflation, expenditure without approval, cost manipulation, costs identification and evaluation, low incentives to save, abuse of transfer pricing and corrupt government officials.

A well-structured framework for monitoring costs of petroleum operations is a must have for government in order to deal with cost recovery risks during execution. It should have components for procurement procedures regulation, work programs and budgets evaluation and approval, physical monitoring, periodical and activity cost reports submission and evaluation, costs data maintenance and auditing.  All these are in one way or another related to human capital. In this regard, successful implementation requires a dedicated team with different professions including but not limited to engineers, geologists, geophysicists, economists and finance that is in position to constantly monitor the contractor’s expenditure. The team has to be trained constantly since the industry is dynamic. Finally, the government may need a clause in the petroleum laws that treats cheating and corruption of any sort as a criminal case.