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Sabastiano RWENGABO
March 2017
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY
IN THE OIL AND GAS SECTOR
Lessons from Ecuador for Uganda
ACODE Policy Research Series No.81, 2017
Advocates Coalition for Development
and Environment
ACODE Policy Research Series No. 81 2017
Advocates Coalition for Development
and Environment
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY
IN THE OIL AND GAS SECTOR
Sabastiano RWENGABO
March 2017
Lessons from Ecuador for Uganda
ii EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Published by ACODE
P.O Box 29836, Kampala
E-mail: library@acode-u.org;
acode@acode-u.org
Website: http://www.acode-u.org
Citation
Rwengabo, S. (2017). Efficiency, Sustainability, and Exit Strategy in the Oil and Gas
Sector: Lessons from Ecuador for Uganda, ACODE Policy Research Paper Series
No. 81, 2017, Kampala: ACODE.
© ACODE 2017
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of the
publisher. ACODE policy work is supported by generous donations and grants from
bilateral donors and charitable foundations from around the world. The reproduction
or use of this publication for academic or charitable purposes or for purposes of
informing public policy is excluded from this restriction.
ISBN: 978-9970-567-01-0
iii
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Build a baseline. Build a baseline. Build a baseline. Think through what
the scenario will be if nothing is done. Tell companies how to do things
in a different way. Create awareness, help people make decisions, and
cater for future externalities. Interconnect the oil electric system to the
national grid so as to generate a lot of power demand and have more
for export. Convince companies to start thinking beyond barrels, to think
about kilowatts. An integrated system increases the net oil production
through energy efficiency. Through energy efficiency, you can increase
a country’s barrel per capita oil production. The economics of energy
efficient oil and gas production are very important. Reducing the cost
of oil production, through energy efficiency, is vital for increasing the
efficiency of the entire oil and gas sector.
Berend van der Berg, OG&EE Project, Quito, Nov. 2016
iv EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Sustainable management of the oil and gas sector is one of the greatest
yet elusive ideals facing petroleum-rich countries. Flattered by petro-dollars,
many oil-rich economies have plundered their opportunities and wasted
valuable time by relegating other equally important sectors and sometimes
spending oil revenues unproductively. Avoiding this misleading approach
to petroleum-wealth management is critical for sustainable exploitation of
the high-value resource. This is based upon the awareness that petroleum
is exhaustible and should provide the means toward socioeconomic and
infrastructural transformation of the economy. Ecuador learnt this lesson a
little late, but has made commendable strides since 2007. Uganda needs to
learn from such earlier entrants in the sector. This paper draws lessons from
the more experienced oil-and-gas-producing Ecuador, for Uganda’s nascent
oil and gas sector, to argue a case for sustainable petroleum-exploitation. It
relies on extant inquiries on developments in Uganda’s oil and gas sector,
observation of oil-related developments in Ecuador, and interactions and
exchanges with intellectuals from Uganda and Latin America. The findings
reveal that countries which lay emphasis on the following four aspects in the
oil and gas sector are able to maximize returns from the sector for current and
future generations: institutional design and planning for oil-sector efficiency;
balancing oil-sector developments with protection and conservation of natural
environs; national and regional diversification of the economy and energy
sector; and strategic investment of petro-revenues. These considerations are
vital for thinking about, and working toward, efficiency, sustainability, and an
exit strategy in the country’s oil and gas sector.
Abstract
v
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
List of Acronyms vi
Acknowledgement viii
Executive Summary x
1 Introduction 2
1.1 Conceptual Issues 2
1.2 Objectives, Significance and Justification 5
1.3 Methodology 6
1.4 Major Findings 8
2. Background to Uganda’s and Ecuador’s Petroleum Sectors 11
2.1 Brief Background – Uganda 11
2.2 Brief Background – Ecuador 13
3 From Ecuador to Uganda: Efficiency, Sustainability, Exit Strategy 18
3.1 Institutional Processes and Oil-Sector Efficiency 19
3.2 Environmental Protection and Conservation 31
3.2.1 The Futile Yasuni-ITT Initiative (see Annex IV) 32
3.2.2 Beyond Yasuni-ITT – Other Initiatives 37
3.3 Diversification 43
3.4 Exit Strategy: Strategic Investment of petro-Revenues. 47
4 Conclusion & Recommendations 52
4.1 Conclusion 52
4.2 Recommendations 54
List of References A
ANNEXES H
Annex I: Major Post-2006 Developments in Uganda’s Oil and Gas Sector H
Annex II: Extract from the Law: Legal Restrictions on Gas Flaring in Uganda J
Annex III: Recent Institutional Evolution in Uganda’s Petroleum Sector K
Annex IV: About Yasuni National Park, Ecuador L
Annex V: Occidental Exploration & Production Company (OEPC) Vs. Ecuador M
Annex VI: World Bank On AG Flaring N
Annex VII: About the OGE&EE Project O
Table of Contents
LIST OF MAPS
Map 1: Location of Uganda’s Oil Deposits 12
Map 2: Map of Ecuador 15
Map 3: Location of the Yasuni National Park in Ecuador 35
vi EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
ACODE Advocates Coalition for Development and Environment
AFIEGO Africa Institute for Energy Governance
AG Associated Gas
ALC Area Land Committee
BIRUDO Buliisa Integrated Rural Development Organization
BUKITAREPA Bunyoro-Kitara Reparations Agency
CBO Community-based Organization
CCO Certificate of Customary Ownership of Land
CDO Community Development Officer
CELEP EP Corporación Eléctrica del Ecuador (National Electric CompanyEcuadorian
Electric Corporation)
CEN Country Engagement Note [under the World Bank Zero Flaring program)
CNEL (National Electricity Company)
CO2Carbon dioxide
CPF Central Processing Facility
CPF Central Processing Facility
CRED Civic Response on Environment and Development
CSO(s) Civil Society Organization(s)
DEC District Executive Committee
DGF Democratic Governance Facility
DLB District Land Board
EAC East African Community
EARDP Environmental Assessment and Rural Development Programs
EARDS East African Regional Refineries Development Strategy
ELLA Evidence and Lessons from Latin America
ENAMI (National Mining Company)
ENAMI Empresa Nacional Minera del Ecuador (National Mining Company of Ecuador)
ENAP Empresa Nacional del Petróleo (Chile’s National Petroleum Company)
FGD Focus Group Discussion
GDP Gross Domestic Product
GRA Global Rights Alert
KII Key Informant Interview
KRC Kabarole Research and Resource Center
KW Kilowatts
List of Acronyms
vii
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
kWh Kilowatt per hour
LACWADO Lake Albert Children and Women Advocacy and Development Organization
LC Local [Government] Council
LEAP Learning into Practice
LPG Liquefied Petroleum Gas/liquid petroleum gas (aka propane or butane)
MERE Ministry of Electricity and Renewable Energy
MNCs Multinational [Oil] Companies
MoLHUD Ministry of Lands, Housing and Urban Development
MoU Memorandum of Understanding
MW Megawatts
NAVODA Navigators for Development Association
NFA National Forestry Authority
NG Natural Gas
NOGP National Oil and Gas Policy [for Uganda]
OEPC Occidental Exploration & Production Company
OGE&EE Optimización Generación Eléctrica and Eficiencia Energética (Optimal
Electricity Generation and Energy Efficiency)
OPEC Organisation of Petroleum Producing Countries
PAPs Project Affected Persons
PAU Petroleum Authority of Uganda
PFMA Public Finance Management Act
PSAs Production Sharing Agreements
R&D Research and Development
RICE-WN Rural Initiative for Community Empowerment, West Nile
SOTE Trans-Ecuadorian Oil Pipeline
TIU Transparency International Uganda
TTI Think Tank Initiative [of the Canadian International Development Research
Council]
UHRC Uganda Human Rights Commission
UNASOL Union of Latin American countries***
UNDP United Nations Development Program
UNOC Uganda National Oil Company
UPDF Uganda People’s Defence Forces
VPSAG Virtual Pipeline for Stranded Associated Gas
Yasuni-ITT Yasunı – Ishpingo, Tambococha, Tiputini
ZEDES (Special Economic Development Zones)
viii EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
ACODE’s work—policy research and investigation, advocacy, outreach and capacity
development—is supported by generous donations and grants from bilateral donors and
charitable foundations strewn across the globe. Not all of them can be mentioned here.
This publication is a result of the multifarious contributions from several of these support
initiatives. Specifically, this study is a consequence of the South-South collaboration
program on Evidence and Lessons from Latin America (ELLA) in the Oil and Gas Sector.
This Learning Alliance was co-implemented by ACODE (Kampala, Uganda) and Grupo
FARO (Quito, Ecuador), and brought together peers from across the global south—from
government, civil society, the private sector, the academic community and the wider
development community—to learn from each other, by exchanging lessons and practical
experiences, as well as drawing on rigorous, evidence-based research.
Following the author’s excellent participation in the learning alliance on Local Content in
the Oil and Gas Sector, he was invited for a Study Tour to Ecuador. The Tour was intended
to provide both a learning experience as well as create a network of intellectuals learning
about, debating, and advocating appropriate local content and other relevant practices
in the oil and gas sector in the global south. The Tour involved days of presentations,
mainly in Quito, the Ecuadorian capital; discussions; and field visits in the Amazon
region including touring the Yasuni National Park and Ethnic Reserve. After the Tour, the
author won a US$ 5,000.00 Learning into Practice (LEAP) Award, from Practical Action
Consulting, the managers of the ELLA Learning Alliance, to avail Study-Tour lessons
to broader audiences. With this moderate but generous funding, the author draws on
personal experience, exposure, lessons and observations in Latin America, and existing
studies on the Ugandan oil and gas sector to undertake this study.
This paper, therefore, was accomplished with input from several people. To mention
but a few: Mark Lewis (Practical Action Consulting); Marcela Morales and Juan José
Herrera (Grupo FARO) not only managed the nitty-gritty of the ELLA Learning Alliance
and Study Tour but also provided useful information that enriched this study. Berend van
den Berg of the OGE&EE [Optimización Generación Eléctrica and Eficiencia Energética]
Project made invaluable contribution by sharing documents, connecting the researcher
to several other sources (including World Bank), and elaborating other issues through
continuous email correspondences. All resource persons, from government in Ecuador,
officials from the Petroamazonas oil company, researchers and academicians from Latin
American Faculty of Social Sciences (FLACSO), University of the Americas, Catholic
University of Ecuador, and the Yasuni Scientific Station and National Park authorities
were also immensely helpful for this study. Blessings from the Huaorani Chief, whom
the author and other study tour participants met in the Yasuni Ethnic Reserve, where
REPSOL operates a community program, may have also made this study a success.
Fellow Study Tour participants, particularly, Francis Mwesige and Sam Mucunguzi (all
Acknowledgement
ix
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
from Uganda); Beatrice Naa Torshie Torto (Ghana); Charles Onak Judo (South Sudan);
Amir Lebdioui (Algeria, now PhD Candidate, Centre for Development Studies, University
of Cambridge); Leonce Musambya Mutambala (Tanzania); Ali Litho and Ines Feviliye
(Congo-Brazzaville); plus Valerie Commelin and Hisseine Youssouf (Chad) also made the
study tour meaningful, provided a critique of the author’s ideas, and constitute the now-
useful network of researchers on the oil and gas sector in the global south. I hope this
product rewards all of them for their efforts.
Domestically, this study would not have been produced without the support, input and
participation of ACODE researchers and staff, as well as counterpart professionals in
the Ugandan research community. ACODE is fortunate to have the support of the Think
Tank Initiative (TTI), Democratic Governance Facility (DGF) and other donor agencies
which provide funding to ACODE that makes it possible to undertake various research
and policy advocacy activities. Many bilateral and multilateral donor agencies, charitable
foundations, and research institutions across the globe have been helpful to ACODE in
its work. The author was also directly supported by Prof. Elijah Dickens Mushemeza,
Research Associate at ACODE and Africa coordinator of the ELLA program; John
Okiira, Research Officer at ACODE; Onesmus Mygyenyi, Deputy Executive Director and
Program Manager, Environmental Democracy Program (EDP), at ACODE; Assoc. Prof.
Wilson Winstons Muhwezi, Director of Research at ACODE; Bernadette Mercy Ndema,
Communications Officer, ACODE; and more people. While various people contributed to
this work, the views expressed, and sole responsibility for errors and/or omissions, are
the author’s. The author hopes that this study will contribute to the policy discourse on
matters of oil governance by highlighting the efficiency, sustainability, and exit strategy
issues in the lucrative but nascent sector in Uganda, and thereby reward the efforts
and contributions of the several persons—both mentioned and unmentioned—in this
acknowledgement.
xEFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Executive Summary
The Problem
This paper draws from Ecuador’s oil and gas (herein used interchangeably with “petroleum”)
sector to inform Uganda’s evolving petroleum developments. These lessons have wider
implications for the developing-world regions of Africa and Latin America. The paper lays
emphasis on the institutional re-design and development in post-2006 Ecuador and links
with analyses that stress the institutional dimension of governing the oil and gas sector
for the transformation of petroleum economies. Since institutions shape the strategic
choices made by oil-rich states on the management of oil revenues and technologies,
an analysis of institutional experiences is useful for assessing the implications of these
choices for environmental sustainability, strategic investments, diversification of energy
sectors and the economy, and exit strategies.
Despite the numerous undesirable experiences of different petro-states, few attempts
have been made to draw lessons from global south oil producing countries to inform
sectoral developments in nascent oil economies. Specifically, south-south knowledge
exchange, drawing of lessons and experiences remains limited to analogous reflections
on the institutional limitations in these global south polities to utilise their God-given
wealth to transform their economies.1 As a result, comparisons between younger and
older petro-economies that would provide policy-relevant learning-points for nascent oil
economies remain less well articulated.
Objectives & Justification
The goal of the paper is to draw lessons from Ecuador’s post-2006 governance of the
oil and gas sector for Uganda’s nascent sector. This would be achieved by meeting four
objectives:
i. To examine the relationship between institutional processes and the development of
the petroleum sector in Ecuador and Uganda;
ii. To analyse the relationship between strategic investment of petroleum revenues and
post-petroleum development in oil-rich economies;
iii. To draw lessons for Uganda from Ecuador’s environmental protection and conservation
concerns; and
iv. To inform Uganda’s thinking and planning about the exit strategy informed by
Ecuador’s experience.
Pursuing the above-stated objectives is significant for Uganda and Africa need to
1 Mahyash Saed Quresh, 2008, ‘Africa’s Oil Abundance and External Competitiveness: Do Institutions Matter?’, International
Monetary Fund (IMF) Working Paper No. 08/172, Washington DC: IMF .
xi
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
learn vital lessons from other developing-world oil and gas economies, say in South
America, about the relationship between governance of the petroleum sector and
countries’ socioeconomic development future. This learning helps countries to avoid the
decades-old mistakes made by other countries in the sector for a useful grasp of the
link between strategic choices in the oil and gas sector and national development after
the resource has been exhausted is important for sustainability. Given the exhaustibility
of petroleum resources, there is need to develop sectors like industrial manufacturing,
tourism, agriculture, and services using oil and gas revenues, by providing physical and
institutional structures for utilising oil revenues and exploiting oil-driven infrastructure
developments (like roads, railways, ports, and urban enclaves) to develop other sectors
of the economy. Finally, as the oil and gas industry evolves, demands for environmental
protection and conservation mount.2 Uganda faces similar challenges in the Albertine
Graben.3 Ecuador’s experiences, therefore, provide useful learning-points for Uganda.
Argument
Contemporary exploitation of petroleum wealth requires several considerations in the
country’s governance frameworks: (i) policy and legal provisions on management of
transnational workforces and their changing cultures and attitudes in a global oil and
gas industry4; (ii) demands for local content and national participation in the industry; (iii)
energy and economic (productive) diversification given the volatility of the oil industry; (iii)
ensuring that newly-discovered resources, such as in Uganda and Ghana, are produced in
an economically and environmentally sound manner that allows the economy to meet its
development needs while also offsetting natural field decline in a world of environmental
and climate-change concerns. Other concerns include (iv) ensuring constructive
engagements between producing countries, consuming nations, and energy companies
to ensure mutual benefits between oil companies and endowed countries; (v) bridging
distances between production sources and markets; (vi) ensuring reliable technological
changes; and (vii) responding to the fluctuating oil and gas prices.5 Responding to these
issues requires foresight. To determine whether the country has addressed these issues,
one must analyse the country’s strategies and practices on institutional processes,
efficiency, sustainability, and exit strategies. In each aspect the above considerations
can be addressed. And from these aspects Ecuador provides useful lessons for Uganda.
By drawing lessons from the more experienced oil-producing Ecuador for Uganda’s
nascent oil and gas sector, this paper reveals critical precautions Uganda needs to make
to ensure sustainable petro-exploitation.
2 Roldan Muradian, 2014. ‘The demise of a new conservation and development policy? Exploring the tensions of the Yasunı´ ITT
initiative’, The Extractives Industries and Society, 1 (2):284–291
3 Uganda Safari Portal (USP), 2014 (26 June) ‘Oil Vs. Tourism Development in Murchison Falls National Park’, Online: USP [from
https://ugandasafariportal.wordpress.com/2014/06/26/oil-vs-tourism-development-in-murchison-falls-national-park/, 31 Jan. 17)
4 Kathryn Mearns and Steen Yule, 2009. ‘The role of national culture in determining safety performance: Challenges for the global
oil and gas industry’, Safety Science, 47:777–785
5 Harry J. Longwell, 2002. ‘The Future of the Oil and Gas Industry: Past Approaches, New Challenges’, World Energy, 5 (3):100-
104
xii EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Methodology
This paper is based on qualitative methodology. It underlines the importance of efficiency,
sustainability, and an exit strategy for the oil and gas sector. Efficiency is seen in terms
of end-in-mind investment of oil and gas revenues to meet only those ends that satisfy
the country’s development needs, that is, investing in objectively-defined ventures that
bring medium- and long-term returns as opposed to luxurious and wasteful expenditure
of petroleum revenues. Sustainability lays emphasis on cautious management of
“irreplaceable natural resources”, such as oil and gas wealth. Irreplaceability implies
exhaustibility, that is, wherever petroleum deposits are exploited they will be exhausted
in future. Sustainability stresses well-being of future generations: gratification of present
needs, using oil and gas revenues, may compromise future wellbeing, hence the need
for careful and deliberate savings and strategic investment of these revenues to meet
society’s future needs. Exist strategy is related to the foregoing, and implies deliberate
schema for entering and getting out of the oil and gas sector given the exhaustibility of
the resource, volatility of the industry, and its sensitivities which demand that objectives
be clearly formulated and exit done once these objectives have been met.
To provide pointers on how to craft and apply these approaches across space, this
paper draws from Ecuador’s experience to inform Uganda’s oil-governance strategy
by highlighting the trajectory, adaptation methods, and exit strategies the country has
devised to maximise benefits from the sector. The author conducted desk research on
existing studies on Uganda’s and Ecuador’s oil and gas sector, undertook field tours
and observations of oil-sector developments in Uganda and Ecuador; interacted and
exchanged with intellectuals from both Uganda and South America; and held discussions
with experts from Norway, Uganda, and Ecuador. Critical analysis of practitioners’
viewpoints and peer review processes supplemented these methods. Though this
is not a detailed comparative case analysis, it is designed to draw lessons from the
cases analysed despite the differences between Ecuador and Uganda. Attention is
paid to the post-2006 period, a time when Ecuador seems to have made tremendous
progress in managing the petroleum dependent economy, as observed in changes in
infrastructure developments, diversification, priority investments, and balances between
petroleum exploitation and environmental conservation. While Uganda’s sector dates
from 2006 when the country announced commercial reserves, implications for the future
developments are also drawn.
Major Findings
The paper reveals that Ecuador learnt vital lessons a little late but has made commendable
strides since 2006 and has transformed its economy. Uganda can learn from earlier
entrants in the sector, their practices, and experiences in order to exploit a good-starter
advantage.6 Ecuador of late realised the challenge of sustainability in its petroleum
sector, and since 2006, undertook institutional reforms aimed at making the sector more
6 Discussion with Norwegian expert, during the Oil for Development (OfD) Civil Society Dialogue, Hotel Africana, Kampala, 21
March 2017
xiii
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
productive. The sector has been turned into an engine for the broader socioeconomic
transformation of society in order to ensure sustainable returns from petroleum wealth.
This indicates that sustainability demands deliberate emphasis on governance efficacy
in the oil and gas sector, which entails efficient management of industry processes,
cautiously meeting present-day needs while investing for future generations, and devising
an exit strategy from the industry. An exit strategy works best when it is planned and
executed from the start of the industry.
Ecuador is trying to meet this triple challenge using four governance strategies: (i)
institutional design and planning for oil-sector efficiency; (ii) balancing oil-sector
developments with protection and conservation of natural and social environs; (iii)
national and regional diversification of the economy and energy sector; and (iv) strategic
investment of petro-revenues. When these strategies are factored in a country’s governance
frameworks for the petroleum sector—policies, laws, regulations and guidelines, contracts
and agreements, institutional cultures and practices7—and infrastructure developments,
essential predictability of behaviour and accountability of key stakeholders in the sector
are guaranteed.
Conclusions and Key Lessons for Uganda
Ecuador has realised greater benefits from its oil and gas sector since 2006 than during
its past decades of petroleum exploitation. Its emphasis on institutional and structural
reforms, local content and national participation, diversification of the economy and
energy sector, utilisation of oil revenues to build infrastructure and provide political
goods, and identification of strategic areas of investment for future generations are the
key strategic choices which the country made since 2006. While the country may have
received considerable Chinese funding in exchange for oil and gas products to achieve
these development ends8, pre-2006 exploitation had the impact of making the country
dependent on the sector and inefficient in other sectors. Uganda has made attempts
to craft similar institutional forms, possibly displaying earlier learning than Ecuador did,
thanks to the combination of political and bureaucratic goodwill and Norwegian support.
The lesson is clear: governments of oil-and-gas-rich countries, and the societies over
which they rule, ought to not wait for negative impacts of the petroleum sector on the
economy, environment, and socio-political configurations of their country. Instead, acting
proactively, governments can learn important lessons on institutional design, zero-flaring
of AG and related environmental cushions, strategic investment of petroleum revenues,
energy and economic diversification, and promotion of meaningful local content and
national participation in order to ensure efficiency and sustainability. Thus, the key lessons
that can be specified from Ecuador for Uganda are that:
7 Mahyash Saed Quresh, 2008, ‘Africa’s Oil Abundance and External Competitiveness: Do Institutions Matter?’, IMF Working
Paper No. 08/172, Washington DC: IMF
8 This unverified concern was revealed to the author through interactions with ordinary Ecuadorians in Quito, November 2016.
xiv EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
• Unless well planned and developed, through national participation and periodic
review and improvement of provisions in and practical operations related to
governance frameworks, the oil sector may advantage foreign oil companies at the
cost of national citizens.
• Institutionalchangesintheoilsectorcanbecontentious,costly,andcangenerate
sociopolitical problems for the country: they ought to be undertaken diligently,
cautiously, and within the existing legal-constitutional order.
• Politicalwillisakeydriverofinstitutionalreformsforincreasingnationalpresence
and participation and control over the oil and gas sector. All competing political
coalitions within a country ought to arrive at minimum consensus about management
of petroleum-wealth.
• Via solid planning, institutional coordination, and leadership foresight, countries
can promote efficient behavior in the petroleum sector, diversify other sectors,
ensure equitable energy systems, and address other development bottlenecks.
• Overdependence on oil and gas sector can be disastrous to a country due to
oil-price instabilities: as of 2013, between 50-60% of Ecuador’s export earnings
were derived from the oil sector. The sector provided approximately 30-40% of
government revenues. Thus, Ecuador’s dependence on a few export commodities
that are subject to highly volatile price swings left it vulnerable to economic
instability and is forcing the country to change its ways.
• National Oil Companies (NOCs) need legal obligations and political support to
become efficient and adaptive to changes in the industry.
• Institutions evolve. They are affected by the existing politico-ideological order.
Positive, developmental ideological continuity blesses oil-and-gas-rich countries.
• Uganda can craft a petroleum sector that co-exists with conservation-based
tourism. For many years, despite controversial environmental damage, Ecuador
was able to ensure coexistence between oil and gas and tourism sectors and is
working steadily to develop and expand this sector.
• Contraryto theneoliberalorthodoxy’semphasisthatstatecompanies tendtobe
inefficient and corrupt, and that modern competitive advantage lies with private
companies, Ecuador’s experience so far indicates great potential for state-owned
oil companies to perform commendably in the volatile petroleum industry given
techno-scientific, institutional, and political adaptiveness.
xv
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Amb Rene G. Ortiz, former Secretary-General of OPEC (1 Jan 1979 – 30 Jun 1981), giving
remarks to the participants during the ELLA Study Tour, November 2016, Author's Photo.
1EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Lessons for
Uganda from
Ecuador’s
Oil and Gas
Sector.
2
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
1. Introduction
This paper forecasts the sustainability challenge in Uganda’s oil and gas sector by
drawing lessons from the Ecuadorian experience. It reveals that Ecuador in the recent
past realised the challenge of sustainability in its petroleum sector, and since 2006,
undertook governance and institutional reforms aimed at making the sector more
productive as an engine for the broader socioeconomic transformation of society. This
indicates that sustainability demands deliberate emphasis on governance efficacy in
the oil and gas sector. This efficacy entails efficient management of industry processes,
cautiously meeting present-day needs while investing for future generations, and
devising an exit strategy from the industry, which would best work when well planned and
executed from the start of the industry. This triple challenge can be addressed using four
governance strategies: (i) institutional design and planning for oil-sector efficiency; (ii)
balancing oil-sector developments with protection and conservation of natural and social
environs; (iii) national and regional diversification of the economy and energy sector;
and (iv) strategic investment of petro-revenues.9 When these strategies are factored in
a country’s governance frameworks for the petroleum sector—policies, laws, regulations
and guidelines, contracts and agreements, institutional cultures and practices10—and
infrastructure developments, essential predictability of behaviour and accountability of
key stakeholders in the sector are guaranteed.
1.1 Conceptual Issues
In this paper, “petroleum”, is interchangeable with “oil” and “oil and gas” unless a narrow use
for “oil” is specified. Equally, oil and gas wealth is interchangeable with petroleum-wealth
and oil wealth. Efficiency implies “success in producing as large as possible an output
from a given set of inputs.”11 The concept of efficiency as used here implies end-in-mind
investment of oil and gas revenues in order to meet those ends that satisfy the country’s
development needs. It is about investing resources in ventures that bring medium- and
long-term returns, like economic, industrial, and social services infrastructure; technology
acquisition/transfers and adaptation; inventions, innovations, and technology development
and transformation. Investing in productive ventures specifically defined by relevant
agencies is contrasted with luxurious and wasteful expenditure of petroleum revenues,
investment in non-productive ventures (like housing and automobile purchases). This is
not uncommon in countries flattered by petro-dollars which waste valuable time and oil
revenues by spending unproductively, and expand unreasonably in relative sizes beyond
9 These strategies are not drawn from any authority or piece of research work but reflect the author’s analysis based on the
findings of desk and field research.
10 Mahyash Saed Quresh, 2008, ‘Africa’s Oil Abundance and External Competitiveness: Do Institutions Matter?’, International
Monetary Fund (IMF) Working Paper No. 08/172, Washington DC: IMF
11 MJ Farrell, 1957. ‘The Measurement of Productive Efficiency’, The Journal of the Royal Statistical Society, 120 (3):253-290 (at
p. 254)
3EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
the rate of economic expansion, such that “the more oil a country produces, the larger [is]
its government.”12 The resulting Dutch Disease is characterised by overvalued national
currency13, expansion of government, “low rates of growth of the manufacturing industry,
artificially high real wages, and unemployment”.14 These afflictions stifle responses to
immediate needs and strategic development interests, suffocate manufacturing sectors,
attract inflation, consumerism and extravagance, catalyse the informal economy, lead
to reduced non-oil revenue sources, and engender socio-political problems. This “Oil-
Sector Paradox” or the “paradox of plenty”, underscores the irony that resource-rich
economies are miserable despite their endowments.15
Sustainability here presupposes planning and working for both present and future
needs. Exercising caution, responsibility, and foresight helps a country to cater for
future externalities in the sector and economy. The logic of sustainability is rooted in
the observation that oil-and-gas-rich countries may swim in revenues and forget long
term investments while also degrading their environments. This would negate, even
erase, future opportunities for post-resource continuity, change, and development.
Sustainability is “concerned with the well-being of future generations and in particular
with irreplaceable natural resources—as opposed to the gratification of present needs
which we call well-being.”16 This definition is relevant for this study because: (i) it stresses
“irreplaceable natural resources”, such as oil and gas wealth, which can be exploited
and then cease to exist in future; (ii) underscores well-being of future generations and the
need for strategic planning and foresight in the management of exhaustible resources;
(iii) and shows that using oil and gas revenues gratify present needs may compromise
future wellbeing, hence savings and strategic investment of such revenues furthers the
objective of meeting society’s future needs.
Exit Strategy originates in military thinking but has been applied in the business and
policy world as well. Generally used, exit strategy implies a deliberate schema for
entering and getting out of an environment, an operational space, or engagement that
involves high-end sensitive activity, difficult choices and decisions, and targeted actions.
It is about end-of-business thinking, planning, and working, which actors undertake
when engaged in a purpose-driven process or activity. It follows that an exit strategy is a
means, a deliberate, pre-planned means, of leaving the current situation especially after
the objective has been achieved.17 In this enquiry, therefore, Exit Strategy for a nascent
oil and gas sector cannot be time-oriented for it is difficult to ascertain at the beginning
of the industry how much oil and gas deposits a country has, which technological
12 Ross, The Oil Curse, p. 27-28
13 Michael Bruno and Jeffrey Sachs, 1989, Energy and Resource Allocation: A Dynamic Model of the Dutch Disease. NBER
Working Paper No. 852: Cambridge MA: NBER (from http://www.earthinstitute.columbia.edu/sitefiles/file/about/director/
documents/w0852.pdf, 16 January 2017)
14 Luiz Carlos Bresser-Pereira, 2008. ‘The Dutch disease and its neutralization: a Ricardian approach’, Brazilian Journal of Political
Economy, 28 (1) (109): 47-71
15 Terry Lynn Karl, 1997. The Paradox of Plenty: Oil Booms and Petro-States, Berkeley and Los Angeles: University of California
Press; Matthias Basedau and Wolfram Lacher, 2006. ‘A Paradox of Plenty? Rent Distribution and Political Stability in Oil States’,
Hamburg: German Institute of Global and Area Studies, GIGA-WP-21/2006. Michael Watts, 2001, ‘Petro-Violence: Community,
Extraction, and Political Ecology of a Mythic Commodity.’, in Nancy Lee Peluso & Michael Watts, eds., Violent Environments,
Ithaca and London: Cornell University Press, 2001, pp. 189-212
16 Ibid.
17 Michael D. Gilpin, Col., 1997. Exit Strategy: The New Dimension In Operational Planning, Pennsylvania: U.S. Army War College
4
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
developments may in future affect the exploitability of the resource, and how world
market and political conditions may influence the direction of the industry. What may be
attempted is an “operational-composite” exit strategy, involving time estimations based
on the amounts discovered, goal/mission orientation, and what I call “Context-Oriented”
exit strategy. Context orientation is about adaptive and dynamic management of the oil
and gas sector in order to enhance capabilities for responding to future exigencies as
the industry unfolds. It has three dimensions: (i) the necessity and justification for further
or continued investments in the oil and gas sector given prevailing market conditions
and alternatives to petroleum products, such as alternative energy sources; (ii) costs
and constraints associated with choices between continuity of the oil and gas industry
and alternatives to hydrocarbons in a climate-change-sensitive world; and (iii) awareness
about the exhaustibility of petroleum wealth and thus the need to plan for post-oil
development and wellbeing.
Despite the numerous undesirable experiences of different petro-states, few attempts
have been made to draw lessons from global south oil producing countries to inform
sectoral developments in nascent oil economies. Specifically, south-south knowledge
exchange, drawing of lessons and experiences remains limited to analogous reflections
on the institutional limitations in these global south polities to utilise their God-given
wealth to transform their economies.18 As a result, comparisons between younger
and older petroleum economies that would provide policy-relevant learning-points for
nascent oil and gas economies remain less well articulated. Some references have been
made to the challenge of managing oil and gas wealth in countries like Nigeria, Angola
and Venezuela.19 Few lessons may have been drawn to inform thinking and planning for
countries like Uganda and Ghana. The governance strategies new entrants in the sector
need to adopt are not adequately addressed partly because of difficulties of: forecasting
the impacts of the sector on an economy, comparing old with new entrants in the sector,
and changing global context of the industry. Consequently, analyses of the oil and gas
industry in Africa remain an “unfinished business”20 yet an alternative approach ought
to consider the key strategies that were either practiced (e.g. by Norway)21 or neglected
(e.g. by Nigeria)22 by earlier entrants in the oil and gas sector and use them to inform
policy and practice in nascent sectors. The key question here relates to the adaptability
and transferability of petroleum governance experiences across different global south
countries.23 This paper addresses concerns about approaches that are antithetical to the
ideals and interests of sustainable exploitation of petroleum wealth given the awareness
that these resources are exhaustible and should provide the means toward—not the end
of—socioeconomic and infrastructural transformation of the economy.
18 Quresh
19 See, e.g.: John l. Hammond, 2011, ‘The Resource Curse and Oil Revenues in Angola and Venezuela’, Science & Society, 75
(3):348–378
20 Jacques Lesourne and William C. Ramsay, eds., 2009, Governance of Oil in Africa: Unfinished Business, Paris and Brussels:
IFRI
21 Mark C. Thurber, David R. Hults, and Patrick R.P. Heller, 2011, ‘Exporting the ‘‘Norwegian Model’’: The effect of administrative
design on oil sector performance’, Energy Policy 39: 5366–5378
22 Augustine Ikelegbe, 2001,’ Civil society, oil and conflict in the Niger Delta region of Nigeria: Ramifications of Civil Society for a
Regional Resource Struggle’, The Journal of Modern African Studies, 39 (3):437-469
23 Thurber, et al, ‘Exporting the ‘‘Norwegian Model’’
5EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
1.2 Objectives, Significance and Justification
The goal of this paper is to draw lessons, from Ecuador’s post-2006 governance of the
oil and gas sector, for Uganda’s nascent sector. To realise this goal, four objectives need
to be achieved:
1. To examine the relationship between institutional processes and the development of
the petroleum sector in Ecuador and Uganda;
2. To analyse the relationship between strategic investment of petroleum revenues and
post-petroleum development in oil-rich economies;
3. To draw lessons for Uganda from Ecuador’s environmental protection and conservation
concerns; and
4. To inform Uganda’s thinking and planning about the exit strategy informed by
Ecuador’s experience.
By underlining institutional design and evolution in Ecuador’s post-2006 oil and gas
sector, the paper feeds into analyses that stress the institutional dimension of oil
governance. Institutions shape the strategic choices resource endowed states make and
these choices have implications for sustainability, strategic investments, diversification
of energy sectors and the economy, and using this wealth to increase the economy’s
competitiveness.24 This approach helps in conceptualising the governance of the
dynamic oil and gas sector, further inquiries in petroleum-sector adaptation strategies,
comparative analysis on Africa and Latin America, and the evolving policy practices at
national, regional, and global levels. The oil industry is associated with greenhouse gas
emissions through flaring of associated gas (AG) and other carbon monoxide emissions,
with resulting implications for global warming. New challenges now face the industry—
the demand for alternative green energy; and the demand for zero AG flaring25—and
present techno-scientific and policy problems for both the state and the market.
In terms of comparative analysis, contemporary exploitation of hydrocarbons requires
several considerations relating to governance frameworks: (i) policy and legal provisions
on management of transnational workforces and their changing cultures and attitudes in
a global oil and gas industry26; (ii) demands for local content and national participation
in the industry; energy and economic (productive) diversification given the volatility of
the oil industry; (iii) ensuring that newly-discovered resources, such as in Uganda and
Ghana, are produced in an economically and environmentally sound manner that allows
the economy to meet its development needs while also offsetting natural field decline
in a world of environmental and climate-change concerns. Other concerns include (iv)
ensuring constructive engagements between producing countries, consuming nations,
and energy companies to engender mutual benefits between oil companies and endowed
24 Thurber et al, ‘Exporting the ‘‘Norwegian Model’’; Quresh, ‘Africa’s Oil Abundance and External Competitiveness’.
25 Bjorn Hamso , 2015. Gas flaring: An industry practice faces increasing global attention: World Bank “Zero Routine Flaring by
2030” Initiative, Presentation at the 26th World Gas Conference, 1–5 June 2015, Paris.
26 Kathryn Mearns and Steen Yule, 2009. ‘The role of national culture in determining safety performance: Challenges for the global
oil and gas industry’, Safety Science, 47:777–785
6
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
countries. Bridging distances between production sources and markets; ensuring reliable
technological changes; and managing oil-price fluctuations can also be challenging.27
These issues have ignited deep concerns and reflections on the nature and future of
the industry, and the fate of new entrants in the volatile sector. New entrants, therefore,
are compelled to learn from pioneers in order that the ideas and lessons learned by
earlier entrants may be appropriately replicated, refined, and applied by new entrants.
Benchmarking, in the form of South-South learning and experience sharing in the
petroleum sector, is becoming an important practice in this regard. Uganda particularly,
and Africa generally, need lessons from other developing-world petroleum economies,
say in South America, about the relationship between the design of petroleum institutions,
planning for oil-sector efficiency, and the link between strategic investment of petroleum
revenues and economic development after the resource has been exhausted or become
less dependable as a source of government revenue. These lessons can help countries to
avoid the decades-old mistakes made by other countries in the sector. This is based on
the awareness that petroleum is exhaustible and should catalyse the development sectors
like industrial manufacturing, tourism, agriculture, and services. Instrumentalisation of
petroleum wealth for development can be done by providing physical and institutional
structures using oil revenues and/or exploiting oil-driven infrastructure developments like
roads, railways, ports, and urban enclaves to develop other sectors.
Finally, as the oil and gas industry evolves, it is confronted with demands for environmental
protection and conservation. Ecuador, for instance, now faces debates about the fate of
Yasuni National Park, a highly biodiverse area, and how exploitation of oil in that part
of the Amazon region threatens not only non-human biodiversity but also indigenous
communities.28 Uganda faces similar challenges in the Murchison Falls National Park and
other areas.29 How Ecuador is faring in this regard is a useful learning-point for Uganda
given the combined—but apparently fruitless—civil society, academia and other efforts
to save Yasuni. Therefore, Uganda needs to work toward the co-existence of petroleum
and tourism/environmental conservation sectors.
1.3 Methodology
This paper is based on qualitative methodology. It focuses on key parameters on
which lessons are drawn for Uganda from Ecuador: institutional processes, efficiency,
sustainability, and an exit strategy in the oil and gas sector. Efficiency is measured in
terms of preparations and practices for investing oil and gas revenues to meet specifically-
determined needs which satisfy the country’s development interests, and bring medium-
and long-term returns as opposed to luxurious and wasteful expenditure of petroleum
27 Harry J. Longwell, 2002. ‘The Future of the Oil and Gas Industry: Past Approaches, New Challenges’, World Energy, 5 (3):100-
104
28 Roldan Muradian, 2014. ‘The demise of a new conservation and development policy? Exploring the tensions of the Yasunı´ ITT
initiative’, The Extractives Industries and Society, 1 (2):284–291
29 Uganda Safari Portal (USP), 2014 (26 June) ‘Oil Vs. Tourism Development in Murchison Falls National Park’, Online: USP [from
https://ugandasafariportal.wordpress.com/2014/06/26/oil-vs-tourism-development-in-murchison-falls-national-park/, 31 Jan. 17)
7EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
revenues.30 Sustainability is about cautions in governance frameworks and practices that
reflect cautious management of oil and gas wealth, emphasis on the well-being of future
generations while also gratifying present needs, and savings and strategic investment
plans and practices.31 Exist strategy32 is intricately linked to efficiency and sustainability,
and implies entry into the oil and gas sector with a clear plan to get out of the sector
when the fundamental objectives have been achieved, the sector becomes unreliable as
a source of government revenue, and/or oil and gas reserves are exhausted. The paper
draws from Ecuador’s experience on these aspects to inform Uganda’s oil-governance
strategy.
Desk research on existing studies on Uganda’s and Ecuador’s oil and gas sector;
field tours and observations of oil-sector developments in Uganda and Ecuador; and
interactions and exchanges with intellectuals from both Uganda and South America were
used. To these were added discussions with experts from Norway, Uganda, and Ecuador;
critical analysis of practitioners’ viewpoints; and peer review processes. This is neither a
detailed nor standard comparative case analysis. But it is designed to draw lessons from
the cases analysed and use them to inform thinking and practice in respective regions.
Attention is paid to the post-2006 period: this is a time when Ecuador seems to have made
tremendous progress in managing the petroleum dependent economy, as observed in
changes in infrastructure developments, diversification, priority investments, and balances
between petroleum exploitation and environmental conservation. Uganda’s sector dates
from 2006 when the country announced commercial reserves, but implications for the
future developments are also drawn. By comparing a country that joined the oil industry
relatively early and a more recent developing petroleum economy that is entering the
development phase, this inquiry deepens our understanding of variations in petroleum
governance over the years in the global south, and informs practical solutions to the
challenge of developing frameworks and practices for managing the oil and gas industry.
Similarities between Ecuador and Uganda provide the basis for comparative examination
of the trajectories of both countries. Both countries are postcolonial; heterogeneous;
are located in the global south; have socioeconomic, infrastructure, and technological
underdevelopment at the beginning of their respective industries. There was initial
reliance on foreign companies, their technologies, expertise, and capital, to exploit oil
wealth in both countries. The presence of affected local communities in oil-rich areas,
and location of oil resources in high biodiversity conservation and protected areas,
typifies both countries. The dynamics, timing, and experiences of colonialism may vary.
But both countries experienced colonial control, are heterogeneous, face post-colonial
underdevelopment, and experienced tensions between pro-conservation groups and
30 MJ Farrell, 1957. ‘The Measurement of Productive Efficiency’, The Journal of the Royal Statistical Society, 120 (3):253-
290; Amartya Sen, 1973, ‘The Concept of Efficiency’. In Michael Parkin, Avelino Romeo Nobay, eds., Contemporary Issues in
Economics: Proceedings of the [annual] Conference of the Association of University Teachers of Economics, Warwick, 1973,
Manchester: Manchester University Press, pp. 196-210
31 Robert Costanza and Bernard C. Patten, 1995. ‘Defining and predicting sustainability’, Ecological Economics 15: 193-196; Tom
Kuhlman and John Farrington, 2010. ‘What is Sustainability?’, Sustainability 2 (11):3436-3448; UN, 1987. Our Common Future: A
Report of the World Commission on Environment and Development, Oslo and New York: UN (from http://www.un-documents.net/
our-common-future.pdf, 12 January 2017)
32 Gilpin, Exit Strategy; Onur Bayar and Thomas J. Chemmanur, 2011. ‘IPOs versus Acquisitions and the Valuation Premium
Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists’, Journal Of Financial And Quantitative Analysis 46
(6):1755–1793
8
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
pro-exploitation groups. Add this similarity of contentions to a period of postcolonial
political instabilities that affected both countries’ governance and state institutions.
1.4 Major Findings
The paper reveals that Ecuador learnt vital lessons about the institutional design, foresight
and diversification implications of the oil and gas sector a little late. But the country has
made commendable strides since 2006. Uganda can learn from earlier entrants in the
sector, their practices, and experiences in order to exploit a good-starter advantage.33
Ecuador of late realised the challenge of sustainability in its petroleum sector, and since
2006, undertook institutional reforms aimed at making the sector more productive.
Petroleum wealth has been turned into an engine of the broader socioeconomic
transformation of society in order to ensure sustainable returns from petroleum wealth.
This indicates that sustainability demands deliberate emphasis on governance efficacy
in the oil and gas sector, which entails efficient management of industry processes,
cautiously meeting present-day needs while investing for future generations, and devising
an exit strategy from the industry constitute the unbreakable chain of sustainability. An
exit strategy works best when it is planned and executed from the start of the industry.
Few facts may be useful here to demostrate Ecuador's changing fortunes in the context
of dependence on oil and gas revenues: Ecuador’s GDP per capita was US$ 4400.8564 in
2006, increased to $4264.1844 in 2008, then to $ 4943.4471 in 2011, and to $5291.4055
in 2013. By 2016 it stood at US$ 6,248.1, which, when adjusted by Purchasing Power
Parity, is equivalent to about 60% of the world’s average. This is a country whose GDP
was US$ 222.3 in 1960. Compare with Uganda whose GDP was $62.3 in 1960 and
$523.49 in 2005 but now stands at US$675.6, that is, 5% of the world’s average. One
need not calculate percentage changes here to reveal that Ecuador outgrew Uganda
considerably. The best comparison is with Angola and Nigeria, equally petro-states for
about the same period as Ecuador’s, and have experienced similar political instabilities
with perhaps Angolan and Nigerian conflicts being more violent. Angola’s GDP per capita
was US$ 3010.0653 in 2006, and stood at US$4153.7722 in 2015, which is equivalent to
33% of the world’s average. This also indicates commendable development in a decade.
Nigeria’s GDP was US$1967 in 2005 and rose to $2448.2 in 2016, which is 20% of the
world’s average–again indicating impressive development.34 Both countries are below
Ecuador, and performed far below it during the 2006-2016 decade. What happened?
Political goodwill engendered the solid planning and institutional coordination that allowed
Ecuador to promote efficient behavior in the sector, diversify to other sectors and develop
equitable energy systems that transformed the energy sector and the economy during
the past 10 years. Today, Ecuador leads the Latin American region in energy security
and energy sovereignty, and ranks No.5 in global energy security and sovereignty. These
changes resulted from proper utilisation of oil and gas revenues.
33 Discussion with Norwegian expert, during the Oil for Development (OfD) Civil Society Dialogue, Hotel Africana, Kampala, 21
March 2017
34 World Bank, 2016, World Development Indicators, 1960–2016, Washington DC: World Bank (available at: http://data.worldbank.
org/data-catalog/world-development-indicators, 10 March 2016)
9EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Ecuador’s GDP growth averaged 4.3% between 2006 and 2014. This was driven by high
oil prices and substantial external financing that increased government revenues. The
government was enabled to increase social spending and invest in important sectors,
especially energy, transportation sectors, and education. These expenditures led to
decline in poverty from 37.6% to 22.5% during the same period, with corresponding
Gini Index decreasing from 0.54 to 0.47 mainly because economic growth benefitted
the poorest population. Thus, while deceleration and economic slowdown were
experienced in 2014 due, in part, to decline in oil prices and the April 2016 earthquake
on the Ecuadorian coast the reconstruction cost of which was estimated at 3% of GDP,
Ecuador stabilised its current account through restrictions on movement of goods and
capital. It also tried to protect investments and rationalize public spending in order to
address the challenge of maintaining economic stability and improving the investment
climate to attract a more robust private sector that would further diversify the economy,
increase productivity, and create quality jobs for citizens. The World Bank, through
the 2016 Country Engagement Note (CEN) for Ecuador , is working with Ecuador on a
pillar on “Promotion of the Diversification of the Economy.”35 This is intended to reduce
dependency on the petroleum sector.
This study maintains that Ecuador met these challenges using four governance
strategies: (i) institutional design and planning for oil-sector efficiency; (ii) balancing oil-
sector developments with protection and conservation of natural and social environs; (iii)
national and regional diversification of the economy and energy sector; and (iv) strategic
investment of petroleum-revenues. It is clear that when these strategies are factored in a
country’s governance frameworks for the petroleum sector—policies, laws, regulations
and guidelines, contracts and agreements, institutional cultures and practices36—and
infrastructure developments, essential predictability of behaviour and accountability of
key stakeholders in the sector are guaranteed. Note that Ecuador delayed to formulate
an institutional infrastructure for undertaking energy and economic diversification and
efficient investment of oil revenues despite its low levels of environmental degradation
over the years of exploiting petroleum. Consequently, the country became oil-dependent,
suffering decline and underdevelopment in other economic sectors. Since 2006, however,
Ecuador has performed impressively.
Commenting on the rapidity of this transformation, one observer stated: “I have never
seen a country which in such a short time has made a turnaround in just ten years.” This,
he argues, has been a result of local people taking ownership, thinking through things,
planning, and exhibiting determination to develop their economy.37 Ecuador trounced
oil-price fluctuations and the global financial and Eurozone crises, surviving a potentially
35 World Bank, 2016 (03 Oct.), Ecuador: Overview, Washington DC: World Bank (from https://www.worldbank.org/en/countr y/
ecuador/overview#3, 13 March 2017). the Bank has a portfolio of seven financing projects totaling to US$868 million: Education
Reform in Targeted Circuits; Wastewater Management in Guayaquil; Automated Irrigation Systems for Small and Medium-sized
Producers in Ecuador; Improvement of Transport Infrastructure of Ibarra; Improvement of Public Services of Manta; Risk Mitigation
and Disaster Recovery in Ecuador; and Quito Metro Line One. Additionally, the Bank has provided grants and technical assistance
to support different government sectors and agencies.
36 Mahyash Saed Quresh, 2008, ‘Africa’s Oil Abundance and External Competitiveness: Do Institutions Matter?’, IMF Working
Paper No. 08/172, Washington DC: IMF
37 Berend van den Berg, 2016 (7th Nov. ), Presentation on “Reducing Dependence and Diversifying the Energy Matrix in Ecuador/
Creating Sustainability in a non-Renewable Energy Environment: the case of the OGE Project”, Quito
10
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
deep and protracted recession.38 This was possible because the country embarked on
institutional re-design, diversification, social spending, infrastructure development and
priority investments. Concurrent with emphasis on local content and national participation,
new interventions have led to great success in Ecuador’s economy, infrastructure, and
oil and gas sector itself. But there are concerns about the environmental implications
of exploiting petroleum deposits in the Yasuni National Park and Ethnic Reserve. These
concerns raise ecological, biodiversity, indigenous rights, climate-change, and public
health questions.39 While not fully answered, these questions are informing policy and
thinking about the future of the Ecuadorian economy under conditions of fluctuating oil
prices. The country is slowly but progressively addressing these challenges at the behest
of oil interests.
Uganda has, on paper, foregrounded minimum governance strategies for maximizing
returns from the petroleum sector and to undertake investments that cater for the needs
of future generations. Uganda should not wait for negative impacts of oil and gas sector
on the economy, environment, and socio-political configurations of the Pearl of Africa.
Instead, government can draw additional lessons to inform institutional development,
environmental cushions like zero-flaring of AG, strategic investment of petroleum
revenues, energy and economic diversification, and promotion of meaningful local content
and national participation in order to ensure efficiency and sustainability. Uganda’s laws
provide for some of these cautions. Implementation is awaited. Restated at the end of
the paper are recommendations on how to undertake these strategies.
The rest of the paper proceeds in three sections. The second section briefly examines
the backgrounds to the Ugandan and Ecuadorian oil and gas sectors, stressing the
institutional and contextual challenges that have been encountered. The third section
draws upon Ecuador’s experience to provide lessons for Uganda’s oil and gas industry,
placing emphasis on institutional design, environmental protections and safeguards,
diversification, and exit strategy. The concluding section sums up the main issues
and makes recommendations. A caveat here is worthwhile: traditional approaches to
comparative research have not been exhaustively applied here except in as far as they
provide lessons for Uganda from Ecuador—this being based on the understanding of
the limits of comparative case analysis. Next is background to Ecuadorian and Ugandan
petroleum sectors.
38 Rebecca Ray and Sara Kozameh, 2012, Ecuador’s Economy Since 2007, Washington, D.C.: Center for Economic and Policy
Research
39 Lorenzo Pellegrini, Murat Arsel, Fander Falconı´ and Roldan Muradian, 2014, ‘The demise of a new conservation and
development policy? Exploring the tensions of the Yasunı´ ITT initiative’, The Extractive Industries and Society, http://dx.doi.
org/10.1016/j.exis.2014.05.001
11 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
2 Background to Uganda’s and
Ecuador’s Petroleum Sectors
Uganda and Ecuador have different experiences because of variances in the times each
entered the industry. In this section an attempt is made to briefly historicise the Ugandan
and Ecuadorian oil sectors in order to underline the key efficiency, sustainability, and
exit-strategy challenges faced by these countries. While it is too early to judge the
Ugandan sector, attempts have been made to craft an institutional infrastructure that
would inform progressive developments in the sector, despite the limitations in the
efficiency and sustainability cushions due to expectations, political and bureaucratic
corruption that affects general governance in the country, uncertainties associated with
the sector, and the relative young age of organised institutions charged with managing
the sector. The Ecuadorian sector started during the 1960s but did not help the country
to socioeconomically and techno-scientifically transform itself, much like the rest of Latin
America, hence the paradox of plenty. The post-2006 changes, however, have almost
been revolutionary.
2.1 Brief Background – Uganda
Uganda’s oil and gas sector is short-lived, though interest in the resource is a century-
old phenomenon. The 19th century witnessed attempts to explore for possibilities
of oil and gas wealth in then colonial Uganda, when E.J. Wayland, a geologist of the
colonial government, undertook oil exploration and documented substantial amounts of
hydrocarbons in western Uganda in what is today called the Albertine Graben.40 In 1938,
there was an attempt to drill some wells, wherein some hydrocarbons were encountered.
The discovery, however, was not tested as Britain soon got enmeshed in World War II
that started in 1939. During the 1940’s and 1950’s additional exploration was attempted,
and several shallow wells drilled for stratigraphic purposes. Post-colonial attempts were
also slow, owing, in part, to the many political-governance challenges the country faced
between 1966 and 1986. In 1986 President Yoweri Museveni issued policy direction
on capacity building, data acquisition and promotion, and monitoring of compliance of
licensed companies. There were aeromagnetic surveys during the decade 1983-1992.41
These surveys identified some of the very promising sedimentary basins—the Albertine
Graben, Lake Kyoga basin, Hoima basin, Lake Wamala basin, and the Moroto-Kadam
basin.42 Post-1986 developments, especially explorations, data acquisition, capacity
40 Uganda Oil and Gas Info. Ltd., 2009, ‘History and Development of Oil, 2009, (Online: www.ugandaoilandgas.com, accessed on
31st May 2012 and 21 October 2015); EJ Wayland, 1925, ‘Petroleum in Uganda’, Nature, Vol 15, Issue 2904, pp. 980
41 The first deep well, Waki B-1 well, was drilled in 1938 in Butiaba, present-day Buliisa district. Over 20 Shallow wells drilled
in Kibiro and Kibuku areas for geological correlation. 2 Geological surveys carried out during the 1940’s and 50’s established
the presence of sedimentary sequences of clays and silts. See: Rep. of Uganda, 2014. The Histor y and Progress of Petroleum
Exploration and Development in Uganda, Kampala: Directorate of Petroleum, MEMD (from http://www.petroleum.go.ug/uploads/
History_brief_20142.pdf, 21 Oct. 2015).
42 Fred Kabagambe-Kaliisa, 2010 (15th Sept.). ‘Developments in Uganda’s Oil and Gas Sector and Opportunities for development’.
Kampala: Ministry of Energy and Mineral Development
12
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
building, led to the declaration of commercially-viable oil and gas reserves in the Albertine
Graben in 2006.
Map 1: Location of Uganda’s Oil Deposits
Source: NOGTEC, 201443
Although several companies participated in the exploration, three multinational oil
companies were licensed to develop the sector: Total E&P, Tullow Oil (formerly called
Energy Africa), and China National Overseas Oil Company (CNOOC). These companies
constitute a Joint Venture Partnership (JVP). Post-2006 developments, therefore,
involved mainly establishment of the governance frameworks for the oil and gas sector;
establishment of organised institutions; inter-ministerial coordination and cooperation;
and increasing interest from civil society and other stakeholders. Uganda consumes
petroleum products to the tune of 27,000 barrels/day, while the whole of East Africa
consumes close to 200,000 barrels/day. Consumption is growing at an annual rate of about
43 NOGTEC, 2014 (06 Feb.), ‘Uganda signs MoU with oil firms over production’, Online (from http://www.nogtec.com/uganda-
signs-mou-with-oil-firms-over-production/, 15 March 2017)
13 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
7%. This presents an opportunity to Uganda’s oil and gas reserves with the confirmation
of over 1.4 billion barrels of recoverable oil in the country.44 Following the announcement
of commercial oil reserves in 2006, the country has undertaken several developments:
the National Oil and Gas Policy (NOGP), 200845; legislations46; and instituting relevant
agencies for the sector concurrent with private sector, civil society, and general public
interest and debates about the nature and future of Uganda’s nascent petro-sector ( See
Table in Annex I).
Uganda is entering the development phase of its oil and gas sector after 2016. The country
hopes to start exporting crude oil in 2020. It took the country a decade to reach this
phase because of the need to first develop the minimum institutional infrastructure, local
capacity, and policy, legal, and regulatory framework for managing the sector. This delay
contracts with Ghana. The country announced commercial reserves about the same time
as Uganda but started production within five years. This occurred before the country
developed the requisite institutional structures and capacity to manage key elements
of the sector.47 There may have been other political economy and regional issues which
militated against rapid development of the industry as the land-locked country sought
to negotiate its way toward building an oil refinery and pipeline.48 The development of
institutional infrastructure and other governance frameworks in no way guarantees that
Uganda has provided sufficient cushions against the challenge. It reveals that the time
spent to plan and craft these structures has been useful in managing expectations and
benchmarking other countries.49
2.2 Brief Background – Ecuador
Native Ecuadorians knew and used petroleum for an unrecorded period in history.
Knowledge about, and use of, oil is as old as the Ecuadorian natives have known. Coastal
indigenous peoples especially around the Santa Elena peninsular near Guayaquil turned
the black substance to tar and used it to caulk canoes, water-proof arms and utensils,
and make torches for use in the nocturnal darkness of the Amazon. Later, the Spanish
colonists used oil for tarring their own ships using the very methods used by native
Ecuadorians. Pre-World War II output remained low, until a vigorous search was launched
in the Amazon region in 1921 by Standard Oil of the USA which obtained concession to
explore the area—and made insignificant discoveries. Commercial quantities date to the
post-World War II era, having been found in 1967 by a consortium of Texaco and Gulf.
44 Rep. of Uganda, 2014, UGANDA’S Oil Refinery – An Opportunity For Transformation, Kampala: MEMD (at http://www.
energyandminerals.go.ug/downloads/UGANDAOILREFINERY.pdf)
45 Republic of Uganda, 2008, National Oil and Gas Policy for Uganda, Kampala: Ministry Of Energy And Mineral Development
46 Republic of Uganda, 2013a, Petroleum (Exploration, Development and Production) Act; 2013b, Petroleum (Refining, Conversion,
Transmission and Midstream Storage) Act,2013; 2015, Public Finance Management Act , Entebbe: UPPC
47 Sam Hickey, Abdul-Garafu Abdulai, Angelo Izama and Giles Mohan, 2015a, The politics of governing oil effectively: A
comparative study of two new oil-rich states in Africa, ESID Working Paper No. 54, Manchester: The University of Manchester;
Sam Hickey, Badru Bukenya, Angelo Izama, and William Kizito, 2015b, ‘The political settlement and oil in Uganda’, ESID Working
Paper No. 48. Manchester: ESIDRC
48 Luke Patey, 2015. ‘Oil in Uganda: Hard bargaining and complex politics in East Africa’, OIES Paper: WPM 60, Oxford, UK:
Oxford Institute for Energy Studies
49 Ugandareportedly benchmarked Nigeria’s belated Local Content policy and was applauded for developing its policy before
starting production. See Collins Olayinka, 2016 (15 June 2016). ‘Uganda to adopt Nigeria’s oil sector local content policy’, Abuja:
The Guardian (from http://guardian.ng/energy/ugandatoadoptnigeriasoilsectorlocalcontentpolicy/, 16 January 2017)
14
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Both companies are now part of ChevronTexaco. Ecuador, at the time of discovery of
commercial petroleum deposits, depended on agriculture, particularly production and
export of bananas.50
By 1949, President Galo Plaza Lasso had come to the conclusion that Ecuador would not
join the ranks of oil producing countries. Between 1938 and 1950, there were exploration
activities in the Ecuadorian Oriente, a sparsely inhabited and badly accessible jungle
area east of the Andes mountains. These explorations “resulted in negligible quantities of
heavy oil or produced only water with or without a scum of tarry oil.”51 In 1967, however,
a Texaco Gulf Consortium discovered vast amounts of oil in the north of Sucumbio
province. This led to the construction of a private-company-built and operated trans-
Ecuadorian Oil Pipeline (SOTE), a 312-mile-long pipeline rising 13,000 feet from Nueva
Loja in Sucumbio, over the Andes Mountains, and to the Pacific Ocean port of Balao in
the country’s Esmeraldas province. For 25 years the pipeline was managed privately and
was turned over to the state in 1992. From June 1972 to-date, Ecuador has been flowing
with oil: by 2000, the pipeline which initially carried 250,000 barrels per day carried
360,000 barrels per day as production and demand increased.52 Ecuador suspended its
membership to the Organization of the Petroleum Exporting Countries (OPEC) in 1992,
which it had joined in 1973, but re-joined in October 2007. Post-1972 developments
raised profits for foreign companies and also led to significant damage to the environment
and negatively affected indigenous communities.
Besides endless lawsuits with oil companies over environmental and indigenous rights
implications of oil exploitation, Ecuador also experienced an unpredictable political
period until late 2006 when President Rafael Vicente Correa Delgado came to power
and worked to reorient the economy and politics of the country. Correa inherited several
problems posed by political instabilities, pressures from different social and indigenous
movements, environmentalist lobbies, underdevelopment, poverty and unemployment.
Then the country was plunged in the global economic recession that started with the US
financial crisis in 2008. Correa started by delivering his campaign promise of writing a
new constitution, which, following drafting by an elected Constituent Assembly, acquired
a 64% vote of approval in September 2008, coming into effect in October 2008. This was
Ecuador’s 20th constitution. It increased presidential powers, and allowed the president
to run for two consecutive four-year terms—hence the holding of new elections for
President, Vice President, Members of the National Assembly (a unicameral legislature
like Uganda’s), and provincial and local offices.
50 Judith Kimerling, 2006. ‘Indigenous Peoples and the Oil Frontier in Amazonia: The Case of Ecuador, ChevronTexaco, and
Aguinda v. Texaco’, International Law and Politics, 38:663
51 H. J. Tschopp, 1953. ‘Oil Explorations in the Oriente of Ecuador, 1938-1950’, AAPG Bulletin, 37 (10):2303-2347
52 Allen Gerlach, 2003. Indians, Oil, and Politics: A Recent History of Ecuador, Wilmington: Scholarly Resources Inc., p. 33
15 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Map 2: Map of Ecuador
Winning the first round of presidential elections with 52% of the vote in April 2009, and
his party, Alianza País (AP), securing most (but not absolute majority) seats in Congress,
Correa set out to address several of the social and economic ills suffered by Ecuador in
what he called a “Citizens’ Revolution.”53 During the February 2013 elections, Correa won
with a landslide victory with 57% of the votes, “more than 30 percentage points higher than
his nearest rival, Guillermo Lasso, of the center-right Movimiento Creando Oportunidades
(CREO) party”, and his [Correa’s] “AP movement won a strong congressional majority,
gaining two-thirds of the seats in the 137-seat National Assembly. President Correa has
been the first leader since the late 1970s to enjoy sustained popularity across the regions
and a broad array of class and demographic groups.”54 Correa’s last constitutional term
ends in 2017.55
53 Marc Becker, 2011. ‘Correa, Indigenous Movements, and the Writing of a New Constitution in Ecuador’, Latin American
Perspectives, Issue 176, Vol 38 (1):47-62 (at p. 47)
54 Beittel, p. 3
55 By writing time (Feb. 2017), Ecuador has held presidential elections and a referendum on tax havens on 19 February 2017.
Lenin B. Garces Moreno of the PAIs alliance received 39% of the vote, 10% higher than his opponent, Guillermo A.S. Mendosa
Lasso of Creating Opportunities party. This win fell below the 50%+ required, and a re-run is scheduled for April 2017.
16
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Correa’s relations with indigenous movements “point to the complications, limitations
and deep tensions inherent in pursuing revolutionary changes within a constitutional
framework”.56 These contradictions are inherent in post-neoliberal economic governance.
But many social movements shared his view that Ecuador needed to develop and
implement socioeconomic strategies that benefit the majority. Disagreements between
some social movements and government on how to pursue these ends did exist, but
in no way contrasted with, or weakened the import of, pursuing a common principle:
using oil wealth to transform the economy. Pressure on government to stop exploitation
and marginalisation of oppressed communities, while it did not strengthen Correa’s
opponents,57 underlined the need to reorient the oil economy in order to benefit the
people in a manner never before experienced. Ecuador was able to tread through the
economic and financial difficulties that afflicted the global north during the 2008-2015
periods and embark on infrastructure development and diversification.
Ecuador was able to survive the 2008 Financial Crisis, the Eurozone crisis, and their
spill-over effects for world consumption from oil-exporting countries. “With increasing
state revenues due to the high prices of oil, and a smart renegotiation with oil companies,
the state has increased social spending.”58 Ecuador is estimated to have lost only 1.3%
of GDP during these recessions, but soon rebounded to pre-recession levels of output
by 2011. This was mainly due to a fiscal stimulus that extended housing assistance
programs to low-income households, the doubling of the amounts of housing finance in
three years, a prudent monetary policy that kept interest rates low while requiring banks
to keep at least 45% of their reserves in Ecuador, and a deliberate doubling of education
funding.59 As a result of these and other similar interventions, poverty and unemployment
fell. School enrolment increased. Political stability unprecedented in 80 years of Ecuador’s
history followed as Correa became the first president to exceed five years in office under
a democratic dispensation since “the last return to democracy, during the [equally short-
lived] governments of Jaime Roldós and Osvaldo Hurtado (1979–84).”60 The resulting
rapid changes are observable throughout the country.
Renegotiation with oil companies allowed Ecuador to secure enhanced state control over
the oil and gas sector, despite concerns that vast oil concessions covered large parts of
the Amazon. The Yasuni-ITT Initiative, Ecuador’s innovative proposal to leave hundreds
of millions of barrels of oil beneath Yasuni National Park and Ethnic Reserve, was one
of Correa’s bargaining swings in the sector. The initiative resulted in current criticism
that Ecuador is sacrificing biodiversity and rights of Amazon-inhabiting indigenous
communities at the altar of petro-exploitation.61 More than 50% of Ecuador’s export
56 Becker, ibid, p. 47
57 Marc Becker, 2013. ‘The Stormy Relations between Rafael Correa and Social Movements in Ecuador’, Latin American
Perspectives, Issue 190, Vol. 40 (3): 43-62
58 Carlos de la Torre and Jhon Antón Sánchez, 2012, ‘The Afro Ecuadorian Social Movement: Between Empowerment and Co-
optation’, in Jean Muteba Rahier, ed., Black Social Movements in Latin America: From Monocultural Mestizaje to Multiculturalism,
New York: Palgrave Macmillan, pp. 135-150 (at p.135)
59 Rebecca Ray and Sara Kozameh, 2012. Ecuador’s Economy Since 2007, Washington, D.C.: Center for Economic and Policy
Research
60 de la Torre and Sánchez, 2012. ‘The Afro Ecuadorian Social Movement’, p. 137
61 Matt Finer, Remi Moncel and Clinton N. Jenkins, 2010. ‘Leaving the Oil Under the Amazon: Ecuador’s Yasun´ı-ITT Initiative’,
BIOTROPICA 42 (1):63–66; Lorenzo Pellegrini, Murat Arsel, Fander Falconı, and Muradian, ‘The demise of a new conservation
and development policy?’.
17 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
earnings are derived from petroleum. The sector provides about 40% of government
revenues – hence dependence on few commodity exports that are highly susceptible to
price volatilities. This leaves the country vulnerable to economic instability. Therefore, an
examination of the Ecuadorian experience should provide important lessons for Uganda’s
oil and gas industry. The following section underlines the importance of efficiency,
sustainability and an exit strategy for oil-dependent economies, drawing lessons from
Ecuador for Uganda.
A visit to Petroamazonas’ Central Processing Facility (CPF) in Block 15, Amazon Region,
Ecuador, November 2016, revealed a miniscule of the Company’s operations
18
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
3 From Ecuador to Uganda: Efficiency,
Sustainability, Exit Strategy
Attentiveness to efficiency, sustainability, and exit strategy in the oil and gas sector is
dependent upon the general governance of the sector, a challenge that straddles decades,
even generations, with complex changes occurring at different periodic junctures in the
general environment. In Ecuador, this attentiveness remained elusive until revolutionary
changes were instituted in the country in mid-2000s. Ecuador, a small oil-producing
country with about 15 million people, is situated along the South American Pacific Coast,
nested between Colombia and Peru, two of the major cocaine producing countries in the
Andean region. But Ecuador is strategically important to the United States–both a major
trans-shipment point for U.S.-bound illegal drugs, resting-point for Colombian armed
groups (before the 2016 peace accords) seeking to rest, resupply, and transport drugs,
and sanctuary for thousands of refugees fleeing Colombia’s internal conflict who enter
the country through the porous northern border. Besides, Ecuador was, by 2012, the 11th
largest supplier of crude oil imports to the United States, an important supplier of crude
oil to the Western United States62, and home to the highly-biodiverse Yasuni National
Park in the Amazon region.
Through solid planning, institutional coordination, and strategic repositioning, Ecuador
stressed the promotion of efficient behavior in the energy sector, diversification of the
energy sector, equitable energy systems, and is now looking forward to regional energy
integration. Political will behind these changes led to the transformation of the energy
sector and the economy in just 10 years: the resulting robust energy sector drives
wealth creation and national development. Today, Ecuador is the region’s No.1, and the
world’s No.5, in energy security and energy sovereignty. The restructuring of oil-sector
institutions, enhanced state control over and regulation of the sector, diversification, and
investment in strategic sectors, now define Ecuador’s economy. These interventions are
intended to cushion the country against overdependence on the volatile sector, a view
nascent oil-producing economies need to learn. One can refer to the idea that efficiency,
sustainability, and an exit strategy in Ecuador’s oil and gas sector, are discernible from
the governance strategies undertaken in the form of institutional redesign, management
of environment and conservation pressures, diversification and strategic investment of oil
revenues. A look at institutional design should provide a starting point for illustrating the
strategy and drawing vital lessons for Uganda.
62 June S. Beittel, 2013. Ecuador: Political and Economic Conditions and U.S. Relations, Washington DC: Congressional Research
Service, p. 1
19 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
3.1 Institutional Processes and Oil-Sector
Efficiency
Institutions are central to governance through several interlinked processes. First, rules
of the game must be established or existing ones refined, revised, reformed. When this
is achieved, a legacy of “how” things are done is created that reduces confusion on the
tasks to be accomplished and responsibility holders. Second, when rules are organised
into agencies, and other structures, they become visible and measurable, leading to
predictability. Third, when enforcement of rules is undertaken and compliance monitored,
it becomes easy to enforce accountability of role holders. This is nowhere more important
than in the capital- and technology-intensive oil and gas sector, which oscillates between
traditional business or private-sector entrepreneurship and politics. Laws alone on paper
are not enough–systems of implementation and monitoring are equally important. This
demands bureaucratic and political commitment to establish and consolidate institutional
structures through which petroleum-sector operations are undertaken.
Petroamazonas was formed and separated from Petroecuador, a major step in the
redefinition of the state’s role in Ecuador’s oil and gas industry.
Business processes in the petroleum sector, like exploration, production, refining,
marketing, transportation, and export, require institutions to be effective in the service of the
oil-endowed economy. The Ecuadorian oil and gas sector was, for many years, dominated
by multinational enterprises—to which the hostility of host nations grew strong over the
years.63 These companies came at a time Ecuadorian institutions were underdeveloped.
63 Mira Wilkins, 1974. ‘Multinational Oil Companies in South America in the 1920s: Argentina, Bolivia Business History Review,
Brazil, Chile, Colombia, Ecuador, and Peru’, 48 (3): 414-446
20
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Much of what became rules of the game were dictated by these multinationals. This
created a cycle of dependence on foreign institutional forms, foreign capital, and foreign
skills and expertise as opportunities for local capacity development became constrained
due to preponderance of foreign interests in maximising returns from the sector. Nascent
oil economies had better take caution from these lessons: the development of domestic
institutional capacity (via benchmarking and other innovative approaches), mobilisation of
domestic capital to secure a stake in the sector, and development of local competencies,
remain central to balancing foreign interests and national interests.
Figure 1: Institutions and Oil-Sector Development in Ecuador
Figure 1 illustrates the relationship between the evolution of the Ecuadorian oil-sector
institutions and the nature of evolving interests by the turn of the 20th century. This
remained the case until the mid-2000s when political re-articulation of new institutional
interests occurred. Few observations clarify this claim: first, commercial quantities of
petroleum reserves in Ecuador were discovered in 1967 by a Texaco-Gulf consortium,
indicating the centrality of multinational oil companies in the country’s oil sector.64 The
rules of the game were set in favour of the consortium as Ecuador had limited capacity
to develop, in a short time, strong governance frameworks for the sector. The oil began
to flow in early 1970s. Second, Ecuador was underdeveloped when petroleum deposits
were discovered. The country did establish a national oil company, Petroecuador, but
the company lacked the technical and technological wherewithal to compete with US
companies. This made the sector dependent upon western technology, skills, expertise,
and capital. Dependence sacrifices domestic/national interests at the altar of foreign
interests – what I call preponderance of foreign interests.
64 Kimerling, ‘Indigenous Peoples and the Oil Frontier in Amazonia’.
21 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Third, although Ecuador joined global OPEC in 1973, its relationship with the organisation
remained less well-entrenched: the country left the organisation in 1992, creating several
decades of disconnect from the global oil bargaining space. Thus, OPEC did not provide
the institutional space for stronger articulation of Ecuador’s own oil interests. Ecuador re-
joined OPEC in 2007. Moreover, within OPEC asymmetrical economic interdependence
among member states made it difficult to use economic resources for political
concessions. OPEC did not cushion its members against intra-organisational competition
and infighting, which implied that Ecuador could not use it as a means of engaging the
powerful western companies then exploiting the country’s oil wealth. Finally, multinational
corporations, western finance institutions, and competing Nation-State interests became
centres of dispute between northern and southern polities65, and might have affected
the country’s political developments. During the 1990s, privatisation and liberalisation
of the economies, in part following the Structural Adjustment Programs (SAPs), led to
increased private-sector investment and an increase in petroleum production spurred by
increasing international oil prices.66 By 2007, therefore, a redesign of Ecuador’s oil-linked
institutional infrastructure was necessary for securing greater returns from the lucrative
industry.
Ecuador’s Institutional Re-Design since 2007
Renegotiation of oil concessions with multinational oil companies
Situation of the country’s stake in the sector through state-owned oil companies
(NOCs); reconstitution of NOCs
Establishment of inter-agency frameworks for efficient management of oil revenues
for diversification and strategic investment
Establishment of measures for managing social and environmental concerns
Although Brazil, Colombia, and Peru strengthened their institutional frameworks
and property rights of private oil producers ahead of their regional peers67, Ecuador’s
institutional design involved: (i) renegotiation of oil concessions with multinational oil
companies; (ii) reconstitution of the country’s stake in the sector through the state-owned
oil company; and (iii) establishment, at state level, of inter-agency frameworks for efficient
management of oil revenues concurrent with management of social and environmental
concerns. Although these renegotiations had been attempted during the 1972-1984
period68, the post-2006 change of political leadership brought more focused actors with
nationalist objectives and with the will to achieve them.
The renegotiation of oil concessions with multinational oil companies was intended to
increase the government’s stake in the lucrative industry. This would reduce national
losses at the expense of the multinationals who had invested in the country for almost
65 Richard Stuart Olson, 1979. ‘Economic Coercion in World Politics with a Focus on North-South Relations’, World Politics 31
(4): 471-494
66 Osmel Manzano and Francisco Monaldi, 2008. ‘The Political Economy of Oil Production in Latin America’, Economia 19 (1):59-
103
67 Manzano and Monaldi, p. 59
68 See John D. Martz, 1987. Politics and Petroleum in Ecuador, New Brunswick NJ: Transaction Books, p. 396
22
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
half a century. It was also intended to redirect the country’s political-ideological milieu
informing the institutions of governance, for there had been oscillations between
neoliberalism and nationalism in the management of the Latin American oil and gas
sector. Ecuador needed clear policies on energy security and sovereignty, wanted to
overturn the neoliberal agenda, and sought to construct a new national agenda in the
sector. The process was also intended to strengthen policy, legal, regulatory and other
institutional and organisational frameworks in order to institute rigorous processes for
measuring different performance aspects of the sector and redefine its relationship with
other sectors.69
The Ecuadorian experience underscores the need to ensure that all measures and
assessments of local content and national participation are rigorous: It was difficult for
many years for Ecuadorian institutions to determine the percentage of the products
imported or produced by local suppliers in order for us to determine the localness of local
content. Thus, calculating local content requires an in-depth inquiry in the productive
capacity of local companies, for there can seem a façade of high-level local content
while this content is itself foreign.70 Petroecuador, later with Petroamazonas, played the
role that national oil companies and regulatory institutions play in promoting national
participation and regulating local content practices: holding the country’s stake in the
sector.
The reconstitution of the country’s stake in the oil sector entailed redefining the role of the
national oil company, Petroecuador, as a major institutional player in the sector. In 2006,
Petroecuador assumed production assets of Occidental Petroleum after the expiry of the
latter’s contracts. Government pressured the company to adopt market-like operations
and efficiency. In 2009, following a tax dispute, Ecuador also expropriated two blocks
which had been assigned to Perenco. Meanwhile, Chevron was involved in lengthy
legal battles with Ecuadorean plaintiffs. In February 2011, an $18 billion judgment—
later reduced to $9.5 billion—was rendered against Chevron by an Ecuadorian court
for alleged contamination through Texaco’s crude oil production in the region between
1964 and 1990 (Texaco was later acquired by Chevron). In 2014, a US Court ruled that
the $9.5 billion Ecuadorian judgment resulted from fraud and racketeering, finding it
unenforceable.71 Ecuador needed to change its fortunes.
Over the years, the national oil company made progress. It forged partnerships with
foreign companies to build capacity. By the mid-1970s, Petroecuador had become
the majority owner in a consortium with Texpet. Its stake gradually increased until the
company assumed full control in 1990. But Petroecuador was not only inefficient; it was
irresponsive to environmental protections, tallied “more than 1,400 oil spills since 2000
alone.”72 It was claimed that “for over 30 years, Petroecuador has done absolutely nothing
69 Gerlach, Indians, Oil, and Politics
70 Observations by Juan José Herrera during Study Tour to Ecuador, November 2016.
71 United States District Court - Southern District of New York, 2014. Chevron Corporation (Plaintiff) – against - Steven Donziger,
et al (Defendants), Case 1:11-cv-00691-LAK-JCF Document 1874 Filed 03/04/14 Court Ruling (available at http://www.
theamazonpost.com/wp-content/uploads/Chevron-Ecuador-Opinion-3.4.14.pdf, 20 January 2017)
72 Chevron Corporation, No Date. ‘Texaco Petroleum, Ecuador and the Lawsuit against Chevron’, Online [from https://www.
chevron.com/~/media/chevron/ecuador/documents/texacopetroleumecuadorlawsuit, 20 January 2017)
23 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
to remediate those pits under its responsibility.”73 The state oil company itself needed
regulatory pressure to enforce compliance with oil-sector and environmental rules of the
game. The rules of the game themselves needed to be strengthened.
The establishment of inter-agency frameworks for efficient management of oil sector
followed the realisation that Ecuador depended on oil revenues yet the industry is
unpredictable. Coordination between state ministries and agencies was important here.
Instead of sectoral–institutional separatism, Ecuador realized the need to coordinate the
efforts of various players in the sector toward a common goal. Ecuador demonstrates the
importance of creating an ecosystem whereby the networks, constituted through national
committees for quality control, for instance, can help in monitoring and measuring local
content practices and outcomes.74 These measures answered the question of how
countries can manage and maximize benefits from their own oil and gas resources. By
strengthening the institutional capacity and mandate of regulatory institutions to make
follow-up on commitments and promises of oil companies, the state, and the rest of the
society, these measures constituted a process of continuous learning and adaptation.
This allowed Ecuador to ensure consistency in oil-sector governance by matching
through processes from baseline scenarios to target endpoints.75
Much of Ecuador’s post-2006 reforms fell under the 2008 constitution which stresses
principles of good life, enforcement of rights, precautionary principles, right to nature,
and other principles. These principles were intended to ensure sustainable coexistence
between people and nature: “Nature or Pachamama, where life is reproduced and exists,
has the right to exist, persist, maintain and regenerate its vital cycles, structure, functions
and its processes in evolution…”76. The Constitution defined Ecuador as a socio-
democratic and secular state. It specified people’s, and the state’s, sovereign claim over
natural resources thus: “Sovereignty lies with the people, whose will is the basis of all
authority, and it is exercised through public bodies using direct participatory forms of
government as provided for by the Constitution. Non-renewable natural resources of the
State’s territory belong to its inalienable and absolute assets, which are not subject to
a statute of limitations.”77 The state is responsible for “planning national development,
eliminating poverty, and promoting sustainable development and the equitable
redistribution of resources and wealth to enable access to the good way of living.”78 It is
liable for managing the country’s oil wealth in a manner that ensures [at least minimum]
regulation and control over the resource for the benefit of the people.
73 Bret Stephens, 2007 (30 Oct.), ‘Amazonian Swindle’, The Wall Street Journal [Online: https://www.chevron.com/documents/pdf/
texacoamazonianswindle.pdf, 20 January 2017)
74 Observations in Ecuador, November 2016
75 Berend van den Berg, ‘How to Develop a Baseline Scenario’, Training on Zero Routine Gas Associated Gas Flaring, Quito,
Ecuador, October, 2016.
76 República del Ecuador, 2008. Constitution of the Republic of Ecuador (Quito: Official Register October 20, 2008), Art. 71
77 Ibid, Art. 1
78 Ibid, Art. 1(5)
24
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Solid planning and institutional coordination has led to the transformation of Ecuador’s
energy sector in just 10 years, with a robust energy system that drives wealth creation
and national development. Ecuador is Latin America’s No.1 energy secure and energy
sovereign country, and the world’s No. 5 in energy security and sovereignty. One
wonders what had happened to the country prior to 2006. What is Uganda/East Africa
doing to achieve the same or use the oil industry to build the infrastructure that will
help East Africa develop after oil and gas exhaustion?
The starting point for understanding the institutional and governance redefinitions of
the Ecuadorian oil sector is a brief synthesis of political will. Political will informed the
Ecuadorian state’s desire to meet specific political objectives: (i) using the country’s
resources, especially oil revenues, to finance expanding social expenditures; (ii) speeding
up the paying off of debts owed to northern financial institutions, which would reduce
dependency on Washington-based institutions, their structural policy conditions, and their
interventions which are believed to be motivated by US interests; and (iii) constituting a
post-neoliberal politico-economic balance between public and private gains and control
following the nationalist realisation that “neoliberal policies had been overgenerous to
foreign investors.”79 Buoyed by high global petroleum prices, Ecuador increased its public
sector investment from around 2006, about the time Uganda and Ghana announced
commercially-viable oil reserves.
When Rafael Correa Delgado became president, he instituted serious reforms. First, he
worked on a new Constitution which materialised in 2008. Second, Correa introduced
austerity measures that, at the beginning, were unpopular with some Ecuadorans: as the
2008-2009 financial crisis wreaked havoc on American economies, some military and
police personnel protested against cuts to benefits for public servants on 30 September
2010 in what was considered a coup attempt. But Correa, despite being injured by teargas
as he addressed some of the protesting police, survived the storm thanks to the continued
support from mainly some elements in the military leadership. Austerity measures are
not without their own costs and political risks.80 Finally, government, between 2007 and
2010, undertook a deliberate effort to increase oil revenues. This measure was hardly
inconsistent with the country’s social-democratic constitution.
The country set up new rules by redefining and developing new contracts requiring several
extraction companies to invest in Ecuador on better terms for Ecuador. This arrangement
as President Correa is quoted to have stated, was intended to ensure that “The biggest
part of petroleum revenues must go toward the owners of the resource, the Ecuadorean
people.”81 This was supposed to mark the beginning of a shift from production sharing
agreements (PSAs) to new production contracts which were supposed to be controlled
79 Barbara Hogenboom, 2012, ‘Depoliticized and Repoliticized Minerals in Latin America’, Journal of Developing Societies 28
(2):133-158 (at p. 148-9)
80 BBC, 2010 (1 Oct.), ‘Ecuador declares state of emergency amid “coup attempt”’, London: BBC (from http://www.bbc.com/news/
world-latin-america-11447519, 8 February 2017)
81 Reuters, 2014 (24 Nov.), ‘Ecuador to start takeover of Petrobras assets’, Quito: Thomson Reuters (from http://af.reuters.com/
article/energyOilNews/idAFN2420447420101124, accessed 7 February 2017)
25 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
by the state-owned Petroecuador. Companies like Repsol (Spain), Eni (Italy) Andes
Petroleum and PetroOriental (China), and Chile’s state-owned energy company, ENAP,
agreed to these rules. When Petrobrass (from Brazil) refused these new rules, its assets
were acquired by the state.82
In October 2007, President Correa issued an oil decree. The decree increased the state’s
share of oil revenues from 50% to 99% for companies which were unwilling to switch
from PSAs to new service contracts. The new contracts would be controlled by the
state-owned Petroecuador. Five multinational oil companies entered into negotiations
with the government. Before they agreed to switch to service contracts within two years,
Correa shortened the proposed transition period to just six months, the causes of which
shift remain unclear. Although oil companies had experienced problems investing in the
Ecuadorian oil industry, due to the country’s chronic instability and tendency for conflicts
between the state or communities and with private producers, Correa was not moved
by companies’ fear of Ecuador’s socio-political conditions. This standpoint bordered on
potentially unsafe policymaking for an unstable economy. But Correa’s insistence and
companies’ intransigence did not cripple the industry as some observers expected.
President Correa further supported his predecessor government’s 2006 decision to
terminate Ecuador’s contract with the U.S. oil company, Occidental Petroleum (Oxy),
over an alleged breach of contract. This controversial move underwent several legalistic
battles and dispute settlement, as demonstrated in the coming paragraph. In November
2007, Ecuador initiated new legal proceedings against another U.S.-owned oil company,
Occidental and City Oriente, for allegedly failing to pay their windfall oil taxes. These
disputes demonstrated the country’s desire to reclaim its control over its oil wealth,
its readiness to change the rules of the game, and its willingness to stand by the new
order created by herself.83 Correa sought to address the many obstacles in the unstable,
unreliable, unpredictable oil industry. He prioritised infrastructure development, energy
security and sovereignty. He demanded operational efficiency upon assuming production
assets of Occidental Petroleum after the expiry of the latter’s contracts, pushing for
market-like operations and efficiency of Petroecuador. Withstanding legal battles with
Chevron (later Chevron Texaco), Ecuador realised the need to change its fortunes without
breaking its backbone. This would be achieved through strengthening its institutions.
Through solid planning and institutional coordination, Ecuador stressed the promotion
of efficient behavior in the energy sector, diversification of the energy sector, equitable
energy systems, and is now looking forward to regional energy integration. Political
will led to the transformation of the energy sector and the economy in just 10 years:
a robust energy is the driver of wealth creation and national development. Today,
Ecuador is the region’s No.1 energy secure and sovereign country, and the world’s
No.5 in energy security and sovereignty. But challenges remain.
82 Reuters, ibid.
83 Clare Ribando Seelke, 2008 (21 May), Ecuador: Political and Economic Situation and U.S. Relations, Washington: CRS Repor t
for Congress
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EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Interactions with Boris Davalos, an official from the Ecuadorian ministry of strategic
sectors, revealed that when government recovered control over the energy sector,
a process evolved that would lead to tremendous change in the country’s fortunes.
Ecuador generated high revenues for investment in other sectors, which allowed for
the diversification of the energy sector. By 2006, Ecuador spent hundreds of millions
of dollars to import energy from Colombia. By 2016, the country exports more than 3
times it imported in 2006. There were, on average, 170 unscheduled stops to the refinery
operations due to black-outs! Today the refinery operates at full capacity, producing
110,000 barrels per day with a 30-year supply life. More refineries are being planned
thanks to stable electricity supply and technologies for turning AG into electricity that
is used to power the refineries. Today, a “marshal plan” on energy and electricity, 2016-
2040, is in place. The plan is intended to sustain the country’s development goals through
energy self-sufficiency.84
It appears as though 21st century socialism has returned in Latin America following
the failure of SAPs. People’s demands, state demand for autonomous control over
natural resource endowments as stated in the Ecuadorian constitution, and the
challenge of provision of political goods, have all driven this redefinition of the rules
of the petro-extraction game. Trade regimes had to change. Morals of extraction and
exploitation for national development were instituted. Ecuador had to address social
tensions: there were reactions from affected indigenous communities, who believed
that underground resources beneath their homelands, are up for exploitation not on
their behalf but on behalf of capitalist interests. The resulting contention between
Ecuador and oil companies can thus be understood
(Ivan Narvaez, Panel Presentation: Extractive Nationalism in Latin America,,
Quito: FLACSO, presentation during Study Tour, 8 Nov. 2016)
The redefinition of relations between the state and oil companies went concurrently with
new plans for the oil sector. In addition to the establishment of coordination responsibilities
in state structures, government operations in the oil sector were also redefined. Public-
private partnerships remain important, as the region/country oscillates between
nationalisation and privatisation and a combination of both. In Ecuador the state’s role
was divided between two companies in order to increase government’s own efficiency:
Petroecuador and Petroamazonas. During the 1972-1990 period, the government’s stake
in the industry was dominated by Petroecuador. The company suffered bureaucratic
inefficiencies, as many parastatals do, and hardly operated as a profit-oriented entity.
The company birthed Petroamazonas which was also given operational autonomy. The
new company adopted the processes, structures, skills and experience of Occidental,
and utilized them as a real private-sector company. This allowed Petroamazonas to grow
and become efficient. It is now considered to be more efficient than Petroecuador, its
parent company, and an emblematic symbol of local content, national participation, and
ownership of the country’s oil sector. Conflicts did arise between the two state companies.
84 Discussions to the Grupo Faro Study Tour Team, Nov. 2016
27 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
A meeting between President Correa and top leaders of both companies led to the
constitution of these companies into a single value-chain. The meeting resolved that
each company be assigned specific areas and levels of engagement: Petroamazonas
is involved in upstream processes (exploration, development, production) in the
Amazon region; while Petroecuador handles downstream processes (marketing,
commercialisation, exportation), which has allowed it to also acquire a private-sector
mentality.85 The two companies constitute a considerable stake of the government in the
industry. By 2010, the fully constituted Petroamazonas became a 100% state-owned
company. So is Petroecuador. Both companies were established by different laws, at
different times in the history of Ecuador’s petroleum sector. Both are state-funded, though
funding has been lowering and Petroamazonas now lacks enough money to engage in
exploration work. About 12% of its profits are supposed to be re-invested in the Amazon
forest region, where most blocs are located.86
Despite some weaknesses in these institutional innovations, such as limited access
to information, weak transparency mechanisms, and weak civil society, investment in
human capital, research and education has been important since 2007. Scholarships
are offered to Ecuadorians to study abroad on condition that they return to the home
country. Ecuador’s new governance frameworks—including a new oil contracts system
(stressing service contracts, unlike PSAs), legal insistence that oil and gas wealth
belongs to Ecuador, participation of well-defined state institutions, and subnational
distributional mechanisms (such as royalties to affected communities)—have changed
the productive matrix (after realizing the need to reduce dependence on oil revenues
through knowledge production, investment in other sectors). This necessitated new
plans for the diversification of the energy sector to alter the country’s dependence on
petroleum.87 These measures indicate Ecuador’s evolving petro-governance. Although
government seems to have spent oil revenues in a manner that meets the short term
needs of the people, Ecuador’ social spending and artificial economic growth buoyed
by the oil and commodity boom depended on these institutional foundations.88 It is
desirable that oil prices remain stable or high, long enough to support the development
and maturity of other sectors and hence reverse the country's dependence on petroleum
revenues. If Ecuador acquired near sectoral parity between oil and gas and other sectors
(say agriculture, industrial manufacturing, ICT, tourism, and services), it would become
one of the world's most resilient economies.
85 Juan Jose Herrera, 2016, ‘Introduction to the Latin American and Ecuadorian Extractive Sector’, 7 Nov. 2016. Herrera heads the
Extractives Industry Program at Grupo FARO.
86 Herrera.
87 Herrera, ‘Introduction to the Latin American and Ecuadorian Extractive Sector’. Also see: June S. Beittel, 2013 (June), Ecuador:
Political and Economic Conditions and U.S. Relations - CRS Report for CongressWashington DC: Congressional Research
Service, pp. 4-5
88 Roger F. Noriega, 2015, Ecuador: Is there a future beyond Correa?, Washington DC: American Enterprise Institute (see https://
www.aei.org/wp-content/uploads/2015/10/Ecuador-Is-there-a-future-beyond-Correa.pdf, 8 February 2017)
28
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
The pristine Amazon rain forests, viewed from the Andes Mountains
29 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Lessons for Uganda
Uganda can draw important lessons from Ecuador in terms of institutional coordination,
oversight, and monitoring and enforcement of compliance. So far, Uganda has made
three achievements in institutional evolution.
First, Uganda recognised the potential for oil and gas deposits and institutionally
assigned the mandate to the ministry of energy and mineral development (MEMD).
The ministry then undertook the development of minimum capacity for oil-sector
operations that informed subsequent institution building. This allowed the country
to constitute a relatively strong team of knowledgeable bureaucrats, who, kept
afloat by political will, were able to mount serious negotiations with oil companies.
Although critiques may argue that oil-related decision-making and action has been
concentrated with the presidency and a small group of bureaucratic elites connected
to the president, their cohesion has been useful in ensuring institutional coordination,
cohesion, and provided the starting point for the wider local-content-related capacity
building.89
Second, Uganda was quick to evolve its Petroleum Unit in the ministry of energy
and mineral development to a department and now directorate (as of 2016). Later,
the Uganda National Oil Company (UNOC) and the Petroleum Authority of Uganda
(PAU) were established. The PAU is mandated to regulate Uganda’s petroleum sector.
Independent and self-accounting, the authority is responsible for licensing, regulation,
supervision of exploration, harvesting, refining, marketing, and disposal of petroleum
products in the country.90 The UNOC, a limited liability company, represents national
participation through legislated institutional structures. Capacity building, financing,
and operational efficiency are the greatest challenges facing the two institutional
establishments.
Third, the foregoing formations were specified in governance frameworks. The
NOGP’s stated goal is to “use the country’s oil and gas resources to contribute to
early achievement of poverty eradication and create lasting value to society”, through
efficient resource management, transparency and accountability, competitiveness
and productivity, protection of the environment and biodiversity, spirit of cooperation
[with regional and international actors], investment promotion, and capacity and
institution building.91 Legislations based on this policy led to the establishment of
relevant institutional structures. The directorate of petroleum comprises of the
upstream, midstream, and downstream departments. It is staffed with relatively
qualified officials, thanks to Norwegian support.92 Similar capacity considerations
informed appointments to PAU and UNOC, for the directorate was the nucleus for
these institutional structures (Annex III).
89 Sam Hickey, Abdul-Garafu Abdulai, Angelo Izama and Giles Mohan, 2015a, The politics of governing oil effectively: A
comparative study of two new oil-rich states in Africa, ESID Working Paper No. 54, Manchester: School of Environment and
Development, The University of Manchester
90 Republic of Uganda, 2013, The Petroleum (Exploration, Development and Production) Act, 2013, Entebbe: Uganda Printing
and Publishing Corporation
91 Republic of Uganda, 2008, National Oil and Gas Policy for Uganda, Kampala: Ministry of Energy and Mineral Development
(MEMD)
92 Republic of Uganda, 2010, Strengthening the Management of the Oil and Gas Sector in Uganda: A Development Programme
in Co-operation with Norway, Kampala: MEMD, p. 13
30
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Government realised, early enough, that “if the legal and regulatory framework were
not in place, management of the oil industry in the country to date would have been
difficult”93, and that the 1993 regulations needed to cope up with changes in the sector.
The NOGP was enacted to address these regulatory gaps. The policy was followed with
Acts of Parliament, particularly on exploration, development, and production; on refining,
conversion, transmission, and storage; and public finances (oil revenues) management.
These laws birthed the PAU and UNOC, make provisions for the establishment of:
Petroleum Fund, Sovereign Wealth Fund, Petroleum Investment Reserve Fund, and the
Petroleum Resources Investment Committee. As of February 2017, the Local Content and
Resettlement Policies are being developed, indicating evolution of relevant governance
frameworks. Thus, while analysts warn against centralisation of key decisions in the sector
with the presidency94, potential for oil-driven conflicts,95 politicisation of the sector96, and
possibilities of political and bureaucratic corruption and collusions that sidestep the law
to extract monetary and other benefits for a select few97, existing governance frameworks
provide starting-points for evolving an efficient and sustainable sector. These warnings
are not without basis. Ecuador may have lost opportunities between 1967 and 2007 due
to similar afflictions. Hence, important lessons can be fleshed out for Uganda:
• While executive oversight and direction may be important in the initial stages of
the sector, institutional planning and capacity development should be a continuous
process, that outlives, and is autonomous from, specific political executives holding
offices at any particular time. Merit, skills, and expertise, not political expedience,
should guide institutional evolution and efficiency.
• Allowingotherstate institutions that provide oversight over oil-sectoroperationsto
operate with limited executive overlordship promotes checks and balances. When
Correa is no longer Ecuador’s president (from 2017) the country retains its oil-
governance challenge and post-Correa institutional coordination and oversight holds
the key to sustainability, efficiency, and exit strategy.
• Coordinationofinstitutionaleffortsiskeytoinstitutionalefciency,productivity,and
checks and balances. Isolation of institutions tends to create institutional group-think
and stagnation of innovation.
• Like Ecuador did, the review and overhaul of NOCs and other institutions, and
redefinition of mandates of these establishments, is very important during the lifetime
of the sector. Governance frameworks and the institutional structures embodying
these frameworks must be adaptive, dynamic, and subject to periodic assessment
and evaluation.
93 Republic of Uganda, Strengthening the Management of the Oil and Gas Sector in Uganda, p. 13
94 Sam Hickey, Badru Bukenya, Angelo Izama, and William Kizito, 2015b, ‘The political settlement and oil in Uganda’, ESID
Working Paper No. 48. Manchester: Effective States and Inclusive Development Research Centre
95 Jacob Kathman and Megan Shannon, 2011, ‘Oil Extraction and the Potential for Domestic Instability in Uganda’, African Studies
Quarterly, 12 (3):23-45
96 Sam Hickey, Badru Bukenya, Angelo Izama, and William Kizito, 2015b, ‘The political settlement and oil in Uganda’, ESID
Working Paper No. 48. Manchester: Effective States and Inclusive Development Research Centre; Maja de Vibe 2013, Political
Economy Analysis of the Oil Sector in Uganda. A Scoping Study for the International Law and Policy Institute. Oslo: ILPI; Richard
Vokes, 2012, ‘The Politics of Oil in Uganda’, African Affairs, 111 (443):330-314
97 Civil Society Coalition on Oil and Gas (CSCO), 2016, “CSCO submission to the Parliamentary Committee on Commissions,
Statutory Authorities and State Enterprises regarding an investigation into award of UGX 6 billion shillings to public officials for
their participation in a case between Government of Uganda and M/S Heritage Oil and Gas”, Kampala: CSCO
31 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
• Strengthening supervision and third-party oversight over other state institutions
which are responsible for the investment, management, and overseeing the utilisation
of revenues generated from petroleum operations, such as those provided for in
Uganda’s laws, ensures sustainable management and investment of oil revenues.
• Ecuador’sexperienceofback-doordealsduringitscourtcasewithChevronreveals
the futility of excessive secrecy. While a lot of clauses were included in the PSAs
to address shortcomings in the then existing legislations, many of the provisions in
the PSAs may have been embedded in the acts and regulations to render the PSAs
simpler, easy to negotiate and manage.98 However, these PSAs remain secrets, which
weaken independent, third-party, oversight.
• Therewasa controversial handshake to 42 ofcialswhowereinvolved in the case
between Government of Uganda and Heritage Oil. From the preliminary findings of
ongoing investigations, a key lesson is clear: specification of rewards and awards
for exceptional performance of public servants is important for transparency,
accountability, motivation, and prevention of collusion and wasteful expenditure. It
is ironical that officials from Uganda’s revenue agency, including Dr. Simon Kagugbe
who chairs the agency’s Board of Directors, are reported to have been ignorant that
money which has not been budgeted for was spent irregularly: “We did not authorize
any payments because we did not know about anything, we learnt about all these from
the media; in fact it is only on Friday, January 20th, 2017 that the related documents
were brought to the Board meeting. We find it irregular that money that was not in the
budget was spent”99 While rewarding excellent performance is desirable, care needs
to be taken not to dilute the motivation of public officials in non-petroleum sectors
who may be equally performing commendably, exhibiting professional dexterity and
patriotic astuteness in those public spaces of employ.
3.2 Environmental Protection and Conservation
A major debate has been unfolding about the relationship between petroleum exploitation
and environmental damage with implications for climate change. Ecuador’s oil and gas
sector struggles with these concerns. Multinational companies (MNCs) are increasingly
facing pressure to coordinate their responses to global environmental issues.100 Some
companies have had to adjust their management styles to environmental concerns, public
health outcries101, and ethical dilemmas associated with wealth accumulation through the
exploitation of hydrocarbons as against the socially detrimental emission of greenhouse
gases and other costs to global, regional or local environmental futures.102 As a result,
questions of sustainable development of the industry remain.
98 Uganda, Strengthening the Management of the Oil and Gas Sector in Uganda, p. 19
99 Rep. of Uganda, 2017, ‘We learnt of Ushs.6bn ‘handshake’ from media - URA Board’, Kampala: Parliament of the Rep. of Uganda
(from http://www.parliament.go.ug/index.php/about-parliament/parliamentary-news/1118-we-learnt-of-ushs-6bn-handshake-
from-media-ura-board, 16 March 2017)
100 David L. Levy and Ans Kolk, 2002, ‘‘Strategic Responses to Global Climate Change: Conflicting Pressures on Multinationals in
the Oil Industry’, Business and Politics 4 (3):275-300; Kolk and Lecy, ‘W’inds of Change’.
101 Miguel San Sebastián and Anna-Karin Hurtig, 2004, ‘Oil exploitation in the Amazon basin of Ecuador: a public health
emergency’, Pan Am J Public Health 15(3):205-2011
102 Jon Birger Skjærseth and Tora Skodvin, 2003, Climate change and the oil industry: Common problem, different strategies,
Manchester & New York: Manchester University Press; Sybille van den Hove, Marc Le Menestrel and Henri-Claude de Bettignies,
2008, ‘The oil industry and climate change: strategies and ethical dilemmas’, Climate Policy 2: 3–18.
32
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Indigenous communities, such as the pictured Houaorani, live in the Amazon forest region,
where the said 12% of Petroamazonas’ profits are supposed to be invested
It is now stressed that the industry’s direct association with the depletion of the ozone
layer, through greenhouse gas emissions, renders it imperative for private and public
actors alike to come to terms with demands for an environmentally sustainable oil industry.
Calls for “Greening the Oil Industry” have been made from near and far. Ecuador has
been contending with these issues. In one of its court battles, the environmental case of
Ecuador vs Chevron, we clearly see the importance of environmental audit, environment-
responsible field operations, remediation, and periodic restoration and monitoring of
water systems, waste management structures, and other environmental controls.103
3.2.1 The Futile Yasuni-ITT Initiative (see Annex IV)
Ecuador’s section of the Amazon region, La Amazonía, consists the Amazon jungle
provinces wherein high-level biodiversity and indigenous communities inhabit. The region
hosts the huge Amazon-forest-based national parks and Amerindian untouchable zones.
These areas are set aside for the Amazon “Amerindian” ethno-linguistic communities
that continue to live a traditional lifestyle of hunting, fruit gathering, and fishing. This
high-biodiversity and ecologically attractive region has the largest oil and gas reserves in
Ecuador. Oil companies, mainly Petroamazonas and Repsol, have extensively exploited
parts of the upper Amazon region, and threaten to encroach on the controversial Yasuni
National Park, part of which hosts the Yasuni Ethnic Reserve. Although damage had been
done by decades of petro-exploitation in Ecuador, the Park proved to be a touchy issue
for both the state and oil companies. Following civil society demands to preserve the park,
the Yasunı´ Ishpingo Tambococha Tiputini (Yasunı ITT) Initiative was “proposed to enact a
103 Kimerling, ‘Indigenous Peoples and the Oil Frontier in Amazonia’; Chevron Corp., ‘Texaco Petroleum, Ecuador and the Lawsuit
against Chevron’
33 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
permanent ban on oil exploration and extraction activities within an Ecuadorian National
Park and to obtain financial resources from the international community to compensate
(partially) forgone oil revenues.”104 The proposal was later promoted and owned by the
government, which apparently sought to protect the vital national park with unrivalled
global importance. The people who live in voluntary isolation within the park’s boundaries
also needed protection. Demands for the protection of their environmental rights were
also increasing within and beyond the region. Had this initiative sailed through, it would
have placed “the Ecuadorian state at the center of revenue generation by potentially
eliminating not only (foreign) oil corporations but extraction itself completely within a
small area of significant importance for its oil reserves and biodiversity.”105 Gosh!, the
initiative failed. The Park is set for exploration and exploitation.
According to Guillaume Fontaine, policy design explains the policy failure of the Yasuni-
ITT initiative. The design of this initiative had an impact on institutional coordination,
operational consistency. The design of the initiative also blurred and fragmented
institutional agency, hence creating competing interests and actors. Faced with
controversial policy processes, there emerged competing interpretations of existing
constitutional and legal instruments and provisions, which presented implementation
difficulties. These difficulties of interpretation and application led to uncoordinated
response to a national policy issue with competing policy options. Two contradictory
policy options were presented for deciding whether or not to exploit oil in the park:
Option A was concerned with not exploiting oil reserves in the Yasuni/Conservation
area for the future of humanity, subject to international funding for such conservation.
Option B: indicated that in case of failure to raise funds from international sources, for
the biggest oil operation in the country which was needed for economic development,
exploitation might follow.
104 Pellegrini, et al, ‘The demise of a new conservation and development policy?’, p.1
105 Murat Arsel and Natalia Avila Angel, 2012, ‘‘’Stating’’ Nature’s Role in Ecuadorian Development: Civil Society and the Yasuní-ITT
Initiative’, Journal of Developing Societies 28(2): 203–227 (at p. 212)
34
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Study Tour Participants in the land of indigenous Houaorani, Nov. 2016
The Yasuni-ITT initiative was designed as a kind of self-limiting either-or. At its core lay
the issue of national sovereignty: how does a country retain sovereignty when it depends
on decisions from international financiers to make choice of its development trajectory?
Every policy choice has an alternative. Ownership and control over the policy process is
key to the success and sustainability of any policy. The proposition that the Yasuni-ITT
Trust Fund would be managed by the UNDP [United Nations Development Program),
not the Ecuadorian state, was problematic. This offer seems to contravene Ecuador’s
coveted energy security and sovereignty, as well as decisional autonomy. Little wonder,
therefore, that option “A” failed. Domestically, the Yasuni-ITT design (i) weakened the
main authorities, the environment ministry, while also strengthening other options and
the responsible authorities. This in turn (ii) weakened, as well, non-state actors (such as
environmental coalitions who were opposed to the exploitation) while strengthening the
developmentalist and pro-exploitation coalitions. Intrastate institutional jostling formed
part of the processes leading to policy failure: by eroding inter-institutional coordination,
and watering down regulatory consistence, domestic jostling weakened the international
interest in funding option A.106 The failure was presented as a demonstration of betrayal by
international funding sources while at the heart of it were developmental and sovereignty
concerns. Clearly, these domestic policy-related overlaps were deliberate and effectively
instrumentalised.
106 Guillaume Fontaine, 2016, ‘The Lost paradigm: Ideas and Institutions in the Yasuni-ITT Initiative Failure’, presentation to the
Study Tour workshop, under Panel “Extractive Nationalism in Latin America”, 8 Nov. 2016
35 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Map 3: Location of the Yasuni National Park in Ecuador107
Indicative of the controversial nature of the Yasuni-ITT initiative and the politico-ideological
convictions that informed the design and institutional fuzziness surrounding the project
is the way the Ecuadorian government approached the issue. President Rafael Correa
opted for an executive order, presidential decree, instead of a referendum on the issue,
for he was aware that the latter option would not pass. This contrasts with constitutional
prohibitions on exploitation of oil in a national park, and with provisions of the 2008
constitution which declares the region one of strategic national interest. Changing this
constitutional provision requires q of the National Assembly. The decree was extended 4
times, beyond the initial one year, to weaken the possible opposition from anti-exploitation
forces/coalitions and legitimize the final decree. This created institutional debates which
helped in erasing veto players against the president’s desired policy option. Blocks
43 and 31 are located in the park. 20% of Ecuador’s oil reserves lie in these blocks.
Exploitation will continue.108 The lesson to learn, and its accompanying temptation to
avoid, is clear: when a policy process is deliberately dragged, and suffers jostling within
the international politico-economic space, domestic and international interest wanes or
is exhausted, and the transaction cost is lowered, creating incentives for action without
resistance. The future of the Yasuni-ITT Initiative, at this point, lay in the hands of the
executive arm of government led by president Correa. It remains to be seen whether
future developments on the political scene overcome the complex interplay of foreign-
funding and domestic-political factors to recover the initiative.
107 From: https://www.pachamama.org/news/ecuador-will-vote-on-oil-drilling-in-yasuni-national-park, 3 March 2017)
108 Fountaine, ibid.
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EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
River Napo/Napou flows through the forests of Yasuni National Park
The failure of the Yasuni-ITT initiative reveals three issues. First, state and market interests
in oil wealth remain too strong for effective non-state resistance: the initiative would have
protected biodiversity, respected indigenous peoples’ territory, and mitigated future
contributions to climate change.109 But it was watered down by the combined interests
of state and non-state petro-interests. The possible collusion between oil companies and
the state cannot be underestimated here. Second, the contentious relationship between
the oil industry and climate change responses remains a difficult balance. Ecuadorian
officials estimated that “leaving oil underground would prevent the CO2 emissions
associated with burning this fossil fuel, thereby helping to combat climate change.”110
109 Matt Finer, Remi Moncel and Clinton N. Jenkins, 2010, ‘Leaving the Oil Under the Amazon: Ecuador’s Yasun´ı-ITT Initiative’,
Biotropica 42(1): 63–66 (at p. 63)
110 Ibid, p.63
37 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Yet the evolving narrative about the climate-change impact of expanded oil and gas
exploitation did not convince both the state and the market about the importance of
reduced CO2 emissions as well as the potential damage caused by further deforestation
in the park.111 Third, reputation (both national and leadership) and sovereignty are
important aspects of the oil industry. Their neglect can stifle joint development initiatives.
The avoidable tendency for northern development institutions to superintend southern
counterparts has had counterproductive consequences for the global environmental and
climate change agenda.
The idea that UNDP—instead of the Ecuadorian government—would manage funds
for the Yasuni-ITT initiative was perceived to display an underlying and bothersome
assumption that Ecuadorians were incapable of managing their own resources and
development process. This may have evoked reputational counter-reaction as it also
unacceptably threatened the sovereign sanctity of the Ecuadorian state. Consequently,
Petroamazonas’s Block 15 and 16, and the Spanish oil company, REPSOL, operate
amongst indigenous communities in the Amazon Forest/Region where the park is located,
where indigenous communities like the Waorani (Houaorani), the Quichua, the Tagaeri,
the Huinatare, the Oñamenane, and the Taromenane, live.112
Some of the indigenous communities—specifically the Houaorani—have been accessed
by oil companies and the state, and are being ‘modernised’.113 Other communities remain
hostile and inaccessible to-date, and have been legally allowed to remain isolated and
un-contacted within the Yasuni Ethnic Reserve. These communities may not remain in
isolation much longer and/or survive the approaching petro-exploitation following the
failure of the Yasuni-ITT initiative. Petro-modernity is fast engulfing them.
3.2.2 Beyond Yasuni-ITT – Other Initiatives
Beyond the futile Yasuni-ITT initiative, other innovations have been undertaken to ensure
environmental sensitivity in oil and gas sector. Most of these initiatives have been
initiated by civil society actors defending the environment and indigenous communities’
rights or decrying ecological damage wrought by oil and gas exploitation, or by social
entrepreneurs. Two key initiatives are analysed here: (i) the legal/court battles that highlight
environmental damage, petro-politics, the power of oil companies, and afflictions suffered
by indigenous communities; and (ii) the Optimización Generación Eléctrica and Eficiencia
Energética (Optimal Electricity Generation and Energy Efficiency OGE&EE) project.
111 Arsel and Angel, ‘‘’Stating’’ Nature’s Role in Ecuadorian Development’, p. 215
112 Personal observations during the Study Tour, November 2016
113 The Estación Científica Yasuní (Yasuni Scientific Station) is a scientific research centre of the Catholic University of Ecuador (See
website: http://www.yasuni.ec/inicio/), and is located in the Yasuni National Park and Ethnic Reserve. It is dedicated to research,
training, environmental education, and management of natural resources constituting the rich biodiversity and ecosystem of that
part of the Amazon region.
38
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Court/Judicial Struggles
Court battles with northern oil companies and pressure groups have been both curses and
blessings to the government. Some are won, others lost, others protracted. Some sought
justice for affected indigenous communities; others were disputes over interpretation
and application of the evolving laws and contracts. At some point the indigenous Kichwa
and Huaorani united to protect and assert their claims over the territorial space in which
new health problems were engendered by oil-company operations. In November 1993, a
year after Texaco Inc.’s contract had expired, U.S.-based attorneys who had read about
the Amazon Crude study filed a class action lawsuit against Texaco in a federal court in
New York.114 The suit, Aguinda vs. Texaco, Inc., filed on behalf of an estimated 30,000
(with 74 plaintiffs named) indigenous and colonist residents harmed by pollution from the
company’s Ecuador operations, included both common law and international law claims.
Texaco and Ecuador sought an outside court settlement, and signed a series of agreements
in 1994-1995 (aka the “Remediation Contract”), in which Texaco agreed to undertake
some environmental remediation work; pay Ecuador for socio-economic compensation
projects; “negotiate contributions to public works with municipal governments of
four boom towns that sprang up around the company’s operations." Government of
Ecuador and Petroecuador also agreed, in exchange, to release and liberate Texaco, its
subsidiaries and successors, from all claims, obligations, and liability to the Ecuadorian
State and Petroecuador. Texaco did little in honour of this Remedial Contract. After nine
years, the Aguinda v. Texaco case was dismissed and told to sue in Ecuador, on the
ground of forum non conveniens.115 The lesson is that fruitless efforts to engage in legal
battles against powerful multinationals in defence of indigenous communities’ interests
and well-being ought to be avoided through legal-institutional cushions.
114 Before the merger with Chevron in 2001 (which birthed Chrvron-Texaco), Texaco’s corporate headquarters were located in
White Plains, New York. The complaint alleged that decisions directing the harmful operations were made here. Judith Kimerling,
2007, ‘Transnational Operations, Bi-National Injustice: Chevrontexaco and Indigenous Huaorani and Kichwa in the Amazon
Rainforest in Ecuador’, American Indian Law Review 31: 445-508, at p. 464
115 This legal doctrine allows court to dismiss a case that could be tried in another. Kimberly, p. 466
39 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Wastewater pits, such as these ones in Ecuador, have damaging consequences upon the
environment and surrounding communities116
According to Kimberly, “The final release of Texaco and its corporate family reflects the
enduring political and economic power of the company and the selective application
of the law in the oil frontier. In as much as it liberates the company from environmental
obligations to the state, it also raises serious questions of law and legitimacy.”117 The
case seems to have attracted state-market collusion against the plaintiffs: the company
supposedly held closed door negotiations with government in the absence of the
complainants or their representatives. The US court accepted Texaco’s proposition that
Ecuadorians controlled the relevant decisions regarding Texaco’s operations. Court
accepted the defendants’ argument that no one from Texaco or operating out of the US
made material decisions or was involved in designing, directing, guiding, or assisting
Texaco’s activities that caused pollution. It also maintained that environmental practices
were regulated by Ecuador. This places weak states and their people’s interests at the
mercy of strong multinationals. What can weak states like Kenya, Uganda, Tanzania, do
in the event of such scenarios developing? The best option is to avoid such long court
battles through cautious legislations and contract negotiations.
Another significant court process involved Occidental Exploration & Production Company
(OEPC) and Chevron (see Annex V). The 2002-2004 case, OEPC vs. Republic of Ecuador,
took place in the London Court of International Arbitration (Case No. UN 3467) and was
arbitrated by Prof. Francisco Orrego Vicuña, as President; Mr. Charles N. Brower; and
Dr. Patrick Barrera Sweeney.118 It involved contentions over interpretation of contracts,
treatment of OEPC, and compensation issues. The 2004 ruling by this “ad hoc arbitral
tribunal” awarded OEPC US$ 75 million over the Ecuadorian tax system, interpretation
116 Online Sources (From: https://selvavidasinfronteras.files.wordpress.com/2011/02/gas-lift-production-pool-14.jpg and http://
stevendonziger.com/ecuador-oil-pit-the-chevron-pit-blog/, 16 March 2017
117 Kimberly, p. 466
118 London Court of International Arbitration, 2004, Occidental Exploration and Production Company v The Republic of Ecuador,
London: LCIA (http://www.biicl.org/files/3914_2004_occidental_v_ecuador.pdf, 23 Feb. 2017)
40
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
of contracts, unfairness in the treatment of OEPC, and respect for the Ecuador-US
bilateral agreement of the 1980s and 1990s when OEPC provided oil production services
to Petroecuador. This relationship had changed over the years. Minor agreements and
expressions of understanding between the two companies, OEPC and Chevron, had
been reached.119
Other cases, such as Burlington Resources Inc. v Republic of Ecuador, raised questions
regarding the exercise of the State’s sovereign taxing power as against expropriatory
taxation under conditions of bilateral treaties.120 Protracted court cases can have
negative consequences. They should be avoided or minimised for they can exhaust weak
states and economies with litigation costs, and create opportunities for back-door deals,
corruption and collusion between state and oil-company representatives. Second, states
should ensure legal and contractual forthrightness to sidestep oil companies’ limitations
in environmental sensitivities and readiness to avoid some taxes, which can later scare
away oil companies and create new cracks in the sector. Finally, states’ avoidance of
these scenarios prevents suffering and victimisation of directly-affected communities.
The OGE&EE Project
The OGE&EE project, an innovative social investment enterprise operating alongside
Petroamazonas, reflects local content (through skills development, employment),
environmental conservation, community benefits and profit generation. It deviates
from traditional winner-loser arrangements in capitalist conceptions of oil-resources
exploitation. Instead of wasting AG, flaring it into the atmosphere, and hence increasing the
facilities’ greenhouse gas emissions and contamination of the atmospheric environment,
the project turns what would have been waste into a lucrative resource: energy. The
oil industry gets electricity as do neighbouring communities, while the country acquires
a reduced-AG-flaring sector. While there are new global initiatives, such as the World
Bank’s Zero Gas flaring programs121 information about the OGE&EE project draws from
interactions with its founding executive and the documents and presentations he has
developed. Policy interest and support was necessary to implement the project. This
was necessary to ensure that energy efficiency intentions go hand-in-hand with binding
agreements in the oil and gas sector.
119 Susan D. Franck, 2005, ‘Occidental Exploration & Production Co. v. Republic of Ecuador. Final Award. London Court of
International Arbitration Administered Case No. UN 3467’, American Journal of International Law 99 (3): 675-681
120 Arno E. Gildemeister, 2014, ‘Burlington Resources, Inc v Republic of Ecuador: How Much is Too Much: When is Taxation
Tantamount to Expropriation?’, ICSID Review 29 (2):315-320
121 World Bank, 2015 (Sept. 22-23). Global Initiative: Combining Forces to End Routine Gas Flaring, Washington DC: World
Bank. WB/IGU/SE4ALL Regional Gas Seminar Maputo. (from http://www.igu.org/sites/default/files/7-3%20World%20Bank%20
-%20Anas%20Benbarka%20-%20Gas%20Competence%20Seminar%20-%20September%2023%202015.pdf, 21 Nov. 16);
Francisco J. Sucre, 2016. ‘Introduction to Routine Associated Gas Flaring’, Training on Zero Routine Gas Associated Gas
Flaring Washington DC: World Bank; Francisco J. Sucre/ Berend van den Berg, 2016, ‘Best Practices for Gas Flaring Reduction
(Monetizing Stranded Gas), Training on Zero Routine Gas Associated Gas Flaring’, Quito: Latin American Energy Organisation
and World Bank.
41 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Petroamazonas, Ecuador’s prime state-owned oil company, collects Waste Water that
is separated from crude oil into a Reserve Tank [not unlike other tanks to be found at
Central Processing Facilities (CPFs)]. The water is then pumped into deep wells three
(03) kilometres underground–below the water table–to avoid contamination of below-
surface water sources as well as the land-surface environment. The OGE&EE’s $1.2
billion energy efficiency and environmental conservation project in Ecuador taps the
Associated Gas (AG) produced by Petroamazonas and converts it to electricity. The
power is then used by the oil industry processes of the company, some of it served
to neighbouring communities, and the rest connected to the national electricity grid.
Uganda legislated against gas flaring, and intends to cycle waste-water back to oil wells
to maintain oil-flow pressure. What are other African countries doing or planning to do?
Policy interest was also needed to convince oil companies that the OGE&EE project
might work. Oil companies are transitioning from simply producing oil to becoming
energy-efficient and energy-sufficient companies that create ‘win-win’ scenarios for
all stakeholders once the gap between political interest and technical capabilities is
bridged. Unfortunately, “the voices of the hands-on people are usually absent at high-
level meetings.” The result is a separation between decision making and action: “The
problem arises when policy and decision makers on the world stage lay out objectives
and non-binding agreements without paving the way for funding, local competence and
other essentials to provide the deliverables and potential game changers required in the
industry. The fact of the matter is that the gap between policy makers and people who
actually can get things done is widening.”122 The OGE&EE project is consistent with the
World Bank global Initiative, launched in April 2015, to end routine gas flaring by 2030,
by working with governments, oil companies, and development agencies to stop the
wasteful AG flaring to which some countries have committed.123 It is indicated that AG
flaring is wasteful (Annex VI).
122 Berend van den Berg, 2015 (March 6). ‘Petroamazonas brings energy efficiency to Ecuador’, World Finance (from http://www.
worldfinance.com/markets/Petroamazonas-brings-energy-efficiency-to-ecuador, accessed 20 November 2016).
123 Dominic Chavez, 2015 (May 22). ‘Initiative to Reduce Global Gas Flaring’, Washington DC: World Bank (from http://www.
worldbank.org/en/programs/zero-routine-flaring-by-2030/brief/initiative-to-reduce-global-gas-flaring, 20 November 2016); World
Bank, 2016. Global Gas Flaring Reduction Partnership (GGFR), Washington DC: World Bank (from http://www.worldbank.org/en/
programs/gasflaringreduction, 21 Nov. 16); World Bank, 2016 (August 18). ‘Nigeria Endorses 2030 Flaring Initiative; Raises Own
Goal to 20202’. Brief, Washington DC: World Bank (online: http://www.worldbank.org/en/programs/zero-routine-flaring-by-2030/
brief/nigeria-endorses-zero-flaring-initiative, 20 November 2016)
42
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Figure 4: Gas Flaring at the Central Processing Facility (CPF), of Petroamazonas’ Block 15,
Amazon Region, Ecuador, Nov. 2016
43 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Lessons for Uganda
• Like Ecuador, Uganda faces threats to her highly biodiverse Albertine Graben.
Protection of this environment and tourism attractions amidst oil-sector
developments is a necessary compromise.
• Uganda’simpressionuponJVPsonzerogasaringinthelawgivesweaksanctions
in the law. These can be strengthened and enforced.
• Ifoilcompaniesarehesitant,governmentcanattractotherinvestorstotapAGand
turn it into electric energy. OGE&EE investors & partners and World Bank initiatives
can help integrate projects for AG-power conversion and utilisation in the sector
• Attractingfunding,for instance from the WorldBank’sZeroGas Flaring initiative
and global environment/climate change funding sources, can finance zero flaring
initiatives in Uganda
• Deepwellsfordepositing[whereneededalso saving]wastewater isapromising
environmental consideration, instead of open wells. Uganda’s intended cyclising
and re-pumping of waste water into oil wells for flow-pressure maintenance can be
supplemented by deep wells.
• Avoid protracted court processes through careful legislation and contract
negotiations for court cases can drain national resources, energy, and time. Filling
the legal-institutional loopholes that may lead to such cases is consistent with
the old wisdom: prevention is better than cure. Uganda’s recent experience with
Heritage remains illustrative on this issue.
3.3 Diversification
Diversification reduces dependence on one or few sectors or investments and demands
simultaneous departure from the present market structure to reallocate resources to more
than few production areas and new industries. The energy industry is diversifying from
hydrocarbons to green and other forms of energy, driven by new technological changes
and demographic adaptations, advances in social science knowledge, socio-political
interests, and cultural endowments, which affect the supply of institutional change in the
oil and gas sector.124 It is deliberate and calculated. Diversification may also be planed
before the sector to be diversified reaches maturity, demonstrating awareness about
the sector’s strategic future. Dependence on exhaustible oil and gas revenues can be
dangerous when global and regional prices fall due to changes in product demand, new
technological and scientific innovations, emergence of substitutes or politial turmoil.
Diversifying oil and gas economies entails development of sectors like tourism,
agriculture, manufacturing, and service sectors, to avoid overdependence on the former
124 For details on the theory of Institutional Innovation, see: Vernon W. Ruttan and Yujiro Hayami, 1984, ‘Toward A Theory of
Induced Institutional Innovation’, Journal of Development Studies 20 (4):203-223.
44
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
as does Ecuador. The country considered several diversification strategies, based on
upstream, downstream, and sectoral diversifications (vertical integration), and undertook
sector-related diversification to build linkages based on estimated exhaustibility of the
reserves, and costs of inputs, in order to augment sectoral investments with oil revenues.
In terms of horizontal diversification, Ecuador sees petroleum as capital/money that
offers a wide range of possibilities. Rents are used to overcome fiscal constraints and to
finance development in other sectors using government fiscal accounts. As a result, the
population that previously did not directly relate with the sector benefited from the sector
as oil revenues provided the much-needed capital for investing in other sectors.125
Consideration for certain contextual factors is important: exhaustibility of oil resources,
local capacity and potential for capacity development, type of development trajectory
sought, domestic political economy issues, and issues of natural comparative advantage
to develop international comparative advantage inform country-specific diversification..
Chile diversified basing on copper. Indonesia diversified to agriculture and mining. Dubai/
UAE seeks to diversify to services (financial, luxury tourism). Export-oriented high-
tech industries in Malaysia were intended to get away from oil and natural resources
dependence. Malaysia’s Cyberjaya has been designated for hi-tech innovations, research
and development.126 Uganda and African countries should, thus, develop country-specific
diversification strategies that cater for their development needs.
From the foregoing, diversification: (i) allowed the country to strategically invest its
oil revenues; (ii) is slowly reducing the country’s dependence on oil and gas revenues
by expanding other potential sources of tax revenues; and (iii) allowed the country to
increase its energy production and self-sufficiency, hence reversing energy dependence.
Some elaboration is worthwhile on the energy sector. Ecuador has transformed its energy
matrix in less than 10 years. Its National Agenda 2016-2024 and grand plan for energy
and electricity will contribute to the sustenance of the country’s development goals by
providing revenues from energy exports. This goal will be achieved with clearly-specified
policy considerations:
• Promotion of efficient behavior in the energy sector to ensure energy security and
energy sovereignty. With support from foreign investors and organisations, Ecuador
hopes to further diversify its energy while promoting efficient behavior in order to
consolidate an inclusive and comprehensive energy sector; develop the post-2024
national energy-sector master plan for increasing energy coverage and access. The
country intends to reach 6 million households with energy by 2040, cater for vulnerable
groups/communities, coordinate inter-sectoral participation in the energy matrix, and
encourage private-sector investments in the energy sector.
• Diversification of the energy sector includes investment in clean and renewable
energy, thermal and wind energy; reduction of AG flaring, hence mitigating GhG
125 Amir Lebdioui, 2016, ‘Diversification Strategies in Mineral-Resource-Rich Countries’, presentation to the ELLA Study Tour,
Quito, Nov. 2016
126 The author visited Cyberjaya in 2014 and was impressed by Malaysia’s deliberate effort to develop the necessary infrastructure
for an innovations and R&D city.
45 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
emissions; expansion of hydro-electric energy to 70% of the country’s energy needs
by 2040; environmental remedies and fighting climate change impacts; and promoting
efficient energy consumption.
• Prioritisationofenergy sovereignty and security, to reach energy security levels of
self-sufficiency, supply the whole country, and expand energy exports to the region.
Ecuador's strategy of developing adequate energy infrastructure, energy extraction
from biomass and bio-combustibles, extending the horizon of hydrocarbon production;
becoming a major exporter of combustibles by 2030, and reaching 10% dependence
on gasoline replacing it with clean energy—will depend on the development of high-
quality energy infrastructure that supports national development and strengthens
human talent to tap local capabilities to manage the country’s key energy systems.
• Equitable energy systems through energy access and affordability and practices
(efficiency in production and transmission), legal reforms, boosting market
mechanisms, and promotion of start-ups are key provisions and evolving practices.
Financing for energy sector is also part of this strategy. This is an ongoing process
within which the OGE&EE project was conceptualized.
• Regional energy integration through joint planning, joint marketing, and joint
consumption of energy resources in the region. The country encourages regional
energy integration to foster regional energy empowerment. This demands regional
cooperation, solidarity and complementarity, which the country is trying to negotiate
with neighbours. This whole agenda is complemented by the Comprehensive Vision
of the Energy Sector in the short, medium and long terms.127
A key element of Ecuador’s energy diversification is the OGE&EE project that is presented
as a case of successful social entrepreneurship, local content and national participation,
biodiversity conservation, community benefits and profit generation in a single model
(see Annex VII).
In 2007, Ecuador created a Ministry of Electricity and Renewable Energy (MERE), passed
two constitutional amendments in May and July 2008 to restructure the sector, created
National Electricity Company (CNEL) and National Electric Company (CELEC EP) in late
2008 and early 2009 respectively, and established a single electricity tariff for distributors.
Another 19 state distributors were consolidated. The CNEL manages all electricity
distribution companies. The CELEC EP centralized the management of most generation
and the transmission companies. Government undertook to expand power capacity
by over 60%, building 10 large wind and hydroelectric projects, and awarding most
construction and equipment contracts to Chinese and Russian state-owned companies
owing to Chinese and Russian financing. The 1500MW Coca-Codo Sinclair hydroelectric
project, the largest in Ecuador intended to supply 33% of her electricity needs, was
constructed by China’s Synohydro. A 500 KV high voltage transmission system linking
Quito and Guayaquil to the 1500 MW Coca-Codo Sinclair plant was awarded to a Chinese
127 Davalos, ‘The National Energy Agenda, 2016-2040’.
46
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
contractor in July 2013. Ecuador currently promotes the sale of locally-produced electric
cooking stoves as an alternative to the government-subsidised LPG on which majority
of Ecuadorians still depend for cooking, water heating, and other household uses at an
estimated cost of $3.7 billion annually.128
In 2010, government set up Special Economic Development Zones (ZEDEs). ZEDEs are
subject to special trade, tax, and financial rules. Imported goods entering these zones are
exempted from tariffs. Existing free trade zones were permitted to continue operations in
accord with their original authorisation. Administrators and users were required to adjust
to new procedures defined for the ZEDEs.129 In these zones, other sectors, such as fishing,
telecommunications (here Brazil is a major investor), and innovations are facilitated.
A final element of diversification is regional diversification. Latin America has a history of
failed regionalism. Region-wide policy inconsistency remains a difficult issue since the
sovereign independence of countries remains a defining feature. Countries like Ecuador
consider it important to set up supra-regional institutions, such as the Quito-based
UNASOL (Union of South American countries with health, strategic planning, and other
councils). But the existence of regional institutions with supranational mandate and quality
depends on political goodwill for positive outcomes to follow. The minister admitted a
high risk of policy inconsistencies but added that it can also help in tightening regional
institutions in order to overcome threats from national policy flaws. He decried absence
of a standardization agency in the global south because of lack of [political] vision.
The issue is hardly discussed in regional arenas, and has not, therefore, been espoused
in the global south. Geneva-based ISO meetings are dominated by discriminatory, old-
school, non-UN logics, where big players block small players’ interests. In addition to
lack of vision and understanding of the issues, lack of technical knowledge and skills also
hampers global-south standardisation. According to Arauz, 90% of the 3,000 technical
standards in Ecuador are adaptations of foreign standards! The country is working to
achieve high level interest in terms of research and policy discussion, to fill this gap
through policy engagements within the region.130
Lessons for Uganda
Uganda is unambiguous in its stated objective of investing oil and gas revenues for
infrastructure development, human capacity development, and “using finite resources to
create lasting benefit to society.”131 This is consistent with the intent of ensuring efficient
resources management. Ecuador’s recent experience offers vital lessons for Uganda:
128 Department of State, 2014, Ecuador: 2014 Investment Climate Statement, Quito: US Embassy (from https://www.state.gov/
documents/organization/228171.pdf, 13 March 2017).
129 ibid
130 Andres Arauz, Presentation on “Industrial and Knowledge Policy in Ecuador: Lessons and Challenges”, Quito, 14th November
2016. Arauz is the Coordinating Minister for Knowledge and Human Talent, Ecuador.
131 NOGP, p. 19
47 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
– Energy diversification is important for ensuring energy sovereignty and security.
Uganda lacks adequate energy today, and attempts can be made using petroleum
and non-oil revenues to increase its energy production and consumption in order
to spur economic development.
– Diversification of the economy–through the use of oil revenues to spur development
of non-petroleum sectors–is a fundamental step toward avoiding overdependence
on the oil and gas sector. Uganda has minimum legal provisions on this subject the
implementation of which awaits developments in the sector.
– Lack of diversification makes the country beholden to the global market forces and
political economy of oil and gas, making the country politically and economically
vulnerable. More rhetoric and interest than is warranted has been directed at
Uganda’s petroleum potential and expectations of development / productive
diversification are mounting by the day.
– Clearly-identifiable sectors can be targets of oil-revenue investments. These
include agriculture value chain, social services, tourism, R&D, ICT, pharmaceutical
production, and industrialisation. Ecuador’s delays can be avoided, but national
consensus on these priorities remains elusive in Uganda.
– The dollarization of the Ecuadorian currency in 2006, due to uncontrolled inflation,
threatens the country’s sovereign control over its fiscal and monetary policy (e.g.
debt servicing) and social control. Currencies are instruments of socio-political
control. Reliance on a foreign currency indicates that control over economic
activities and exchanges within the country depend on a foreign institutional
instrument, indicating sovereign bankruptcy. Uganda can tread carefully not to fall
victim to currency collapse and hyperinflation as the oil and gas sector evolves.
– Regional cooperation is important. Uganda’s attempt to involve regional players
in its sector, such as through the East African Regional Refineries Development
Strategy (EARRDS) adopted by the Partner States of the East African Community
(EAC) in 2008, is a step in the right direction. This remains dependent upon the
progress made at regional level in undertaking joint/regional development programs.
The EAC suffers commitment and sovereignty concerns that need to be overcome.
3.4 Exit Strategy: Strategic Investment of petro-
Revenues.
The analysis in previous sections indicates that Exit Strategy for the oil and gas sector
cannot be time-oriented for it is difficult to ascertain at the beginning of the industry
how much oil and gas deposits a country has, which technological developments may
in future affect the exploitability of the resource, and how world market and political
conditions may influence the direction of the industry. Ecuador uses an “operational-
composite” exit strategy, involving time estimations based on the amounts discovered,
48
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
development orientation of the country, and what I call “Context-Oriented” exit strategies
as contained in the diversification and investment choices made by the government.
Ecuador has become adaptive and dynamic in the management of the oil and gas sector
in order to enhance capabilities for responding to future exigencies as the industry
unfolds. This repositioning has three dimensions: (i) the necessity and justification for
continued investments in the oil and gas sector given prevailing market conditions and
alternatives to petroleum products, such as alternative energy sources; (ii) costs and
constraints associated with choices between continuity of the sector and alternatives to
hydrocarbons in a climate-change-sensitive world; and (iii) awareness about exhaustibility
of oil wealth and thus the need to plan for post-oil development and wellbeing through
progressive reduction of dependence on the sector.
By using petroleum wealth to develop its critical infrastructure; save for future generations;
restore, conserve and protect the environment; and develop human resource capacity
that will run other sectors of the economy, Ecuador is destined to more ably meet its
medium term development needs, such as housing, while catering for the needs of
future generations, such as long-term infrastructure and parallel sectors. It follows that
exit strategy, sustainability and efficiency are interlinked and difficult to distinguish in
a manner that serves both theoretic-analytic and policy-relevant interests. The design
and crafting of viable institutions for ensuring oil-sector efficiency; strategic investment
of petro-revenues; environmental protection and conservation before, during, and after
exploitation of petroleum; and diversification of the economy and energy industry are all
elements of an exit strategy for they preclude overdependence on the sector. To say that
a country invested its petroleum revenues is to indicate that it used these rents to invest
in non-oil sectors, akin to diversification. But the additional imperative here is that the
country invests in those sectors it considers critical to domestic capacity development,
strategic transformation of the economy, and relative independence from a single/
dominant sector—especially sectors historically dominated by western capital, finances,
technology, skills and political interests.
This investment may be preceded by sectoral and institutional reforms, induced by crises,
or rooted in leadership initiative. The intent is to ensure that oil money is neither spent
in wasteful investment nor squandered through political and bureaucratic corruption.
Depending on the country’s strategic interests, different countries have different long
term development visions. Ecuador’s investment in energy, infrastructure, social services
and R&D, and tourism, indicate its development choices and exit strategy. What needs
emphasis, however, is specification of exit-strategy-like areas of strategic importance in
which Ecuador invests its oil revenues since 2007.
• Oil and Gas Sector itself: Integration of state and non-state local content practices;
and expansion of the state’s role are important in ensuring Ecuador’s strategic
objectives of ensuring maximum benefits from and control over the sector.
• Energy Diversification and Investment: Promotion of efficient behavior in the
energy sector, and Diversification of the energy sector all ensure energy sovereignty
and security, promote equitable energy systems, and reduce petroleum-sector
dependence and facilitate other sectors.
49 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
• Regional energy integration through a “Comprehensive Regional Vision of the Energy
Sector”, akin to the East African Refineries Development Strategy, help the country
and region to share synergies and support regional sectors.
• Investment in other sectors, like mining, tourism, and agriculture
• Social Services Provisioning through funding education and research, health sector
development, housing and other social spending strategies, constitutes the grand
plan of human development that eases people’s non-dependence on the oil and gas
sector.
Tourism, mining, and agriculture, are some of the key sectors with great potential. While
Ecuador has many tourist attractions, and great agriculture potential, the government’s
efforts to develop the sector are only recent. Nature-oriented and community tourism take
a considerable component of the country’s attractions. Travel and tourism contributed
about US$1,959.9mn (1.9% of GDP) in 2014. This is expected to grow by 3.8% per
annum to US$2,829.2mn (remaining 1.9% of GDP) by 2025. The sector generated an
estimated 127,500 direct jobs in 2014 (1.7% of total employment), including employment
by hotels, travel agents, airlines and other passenger transportation services, activities
of the restaurant and leisure industries directly supported by tourists, and related service
providers. It is estimated that by 2025, the sector will account for 165,000 direct jobs,
2.7% annual increase over the next 10 years.132
Ecuador’s mining sector, though strategically important, remains underdeveloped but
is now open to foreign investment. Her mining potential is concentred in gold, copper,
and silver. Since 2008, legal and institutional changes have taken place in the sector,
aimed at making the sector more efficient and allow more national participation, but have
negatively affected western mining companies in Ecuador. In January 2010, government
established a new National Mining Company (ENAMI) to engage in joint ventures with
state and private companies and increase government investment in the sector. ENAMI
has the legal right of first refusal to establish mining operations in areas considered “of
interest” by the state and in areas where no previous concession exists. Pre-2013 high
commodity prices led to increased interest in mining in Ecuador. But US sources fear that
problems with the regulatory frameworks, possible disapprovals from local communities
over mining rights, and legal uncertainties, negatively impact the sector.133 An evolving
nationalistic approach to both petroleum and mining sectors is driving national choices
regarding investments in mining.134
Lessons for Uganda: Is there an Exit Strategy?
Uganda may claim to have specified a semblance of an exit strategy and plan for strategic
investment of oil and gas revenues, but until implementation and progressive reform and
132 World Travel and Tourism Council, 2015. Travel and Tourism – Economic Impact 2015: Ecuador, London: World Travel and
Tourism Council (from http://www.tourism-generis.com/_res/file/3750/49/0/Ecuador2015.pdf, 10 March 2017)
133 US Dept. of State, Investment Climate Statement
134 Quote from: Barbara Hogenboom, 2012, ‘Depoliticised and Repoliticised Minerals in Latin America’, Journal of Developing
Societies, 28 (2):133-158. Quote at p. 147-8
50
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
adaptations of these institutional specifications is observed little can be said about its
efficacy. The aim of strategic investment is creation of lasting wealth and socioeconomic
transformation. This strategy is, at best, more expressed as political rhetoric in Uganda.
Though the Petroleum Fund, Sovereign Wealth Fund, and Petroleum Investment Reserve
Fund, are specified in the law, there are no strong provisions on parliamentary oversight
and independent third-party monitoring and oversight, fund transfers and utilisation, and
control over political excesses.135 What would be vital for exit from the oil and gas sector
is an institutional framework for ensuring proper management of these revenues. Already,
the Auditor-General’s office has reported delays in remittance of petroleum revenues to
the Petroleum Fund contrary to the provisions of the law.136 There are also concerns that
the recent award of UGX 6 billion (before tax) to officials who were involved in a case
between Government of Uganda and Heritage Oil and Gas over capital gains tax, and
resulting Court awards accruing from the suit, were improper. This portends to future
corruption and collusion in the sector.
A parliamentary committee has embarked on investigations in the said “presidential
handshake” from which 42 public officers were reportedly awarded “for winning the
London tax oil arbitration case”.137 While awarding good performance motivates public
servants, especially those working under considerable pressure from the powerful
MNOCs, it can demotivate other equally-dedicated officials and create precedent for
similar demands when not handled according to laid-out procedures. Few lessons can
be drawn from Ecuador’s experience in court cases, Uganda’s very recent experience of
legal battling and post-litigation developments, and on exit strategy:
– Specification of areas and sectors of strategic interest, and subsequent priority
investment in these sectors is a critical component of an exit strategy and ensures
strategic benefits from petroleum returns.
– Multi-stakeholder participation in determining the strategic investment areas/
avenues is important for enhancing legitimacy and acceptance to the public.
Consensus hardly exists on these priorities.
– Some sectors of the economy, when given sufficient attention, can help the economy
to retain minimum robustness and resilience against petro-industry shocks. Some
sectors may become more important than others as the economy transforms in the
medium and long run, such as ICT today. Others are central to the sovereignty of
the state and strategic security of a people, such as agriculture and food security,
and health.
135 Republic of Uganda, 2015, Public Finance Management Act, 2015 (PFMA), Entebbe: UPPC
136 According to CSCO, contrary to the provisions of the PFMA “the auditor general noted that US$36,058,501 was collected in
June 2015 and the remittance to the Petroleum Fund account was done at the end of October 2015 almost 4 months later.”, p. 4.
See: Republic of Uganda, 2015, Report of the Auditor General on the Financial Statements of ‘Strengthening the Management of
Oil and Gas Sector in Uganda’ for the Financial Year ended 30th June 2015, Kampala: Office of the Auditor-General
137 CSCO, Op Cit; Rep. of Uganda, 2017, ‘COSASE Kickstarts Probe into 6 Bn Handshake’, Kampala: Parliament of the Republic
of Uganda (from http://www.parliament.go.ug/index.php/about-parliament/parliamentary-news/1108-cosase-to-probe-shs6-
presidential-handshake, 15 March 2017)
51 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
– Relegation of other sectors should be avoided. Sectors with potential to generate
government revenues, like tourism, ICT, manufacturing, agriculture modernisation,
and human capacity development, help the economy to avoid overdependence on
oil and gas revenues and foreign human competencies. Ecuador did so for many
years, and become too oil-and-gas-dependent, suffered hyperinflation by 2005, to
the extent that the country was forced to adopt a US dollar as national currency in
2006.
– Plan for investment in energy diversification, energy security, and energy sovereignty
during initial planning, design, and implementation of oil-sector operations. The oil
and gas sector can hook most sections of society onto modern electricity usages
through urbanisation, expansion of the middle class, and increased economic
activities that require electric-energy use. Ecuador has realised this challenge and
is addressing it aggressively. Uganda’s energy sector can expand beyond hydro-
electric energy when petroleum revenues are invested in energy diversification
areas.
– An exit strategy for a nascent oil and gas sector cannot be time-oriented. This
is because it is difficult to ascertain at the beginning of the industry how much
oil and gas deposits a country has. Technological developments may in future
affect the exploitability of the resource. How world market and political conditions
may influence the direction of the industry remain difficult to foretell. What may be
attempted is “operational-composite” exit strategy. This involves estimations of
longevity and potential returns based on the amounts of deposits discovered, goal/
mission orientation, and a “Context-Oriented” exit strategy which entail adaptive
and dynamic management of the sector in order to enhance capabilities for
responding to future exigencies and meeting future financing needs as the sector
unfolds.
– Exit strategies need not be limited to investments; they may entail sovereign wealth
funds, savings in hard currencies, and new innovations that may unfold in future.
States and societies endowed with petroleum wealth need to keep their eyes on
techno-scientific developments in order to modify, widen, and deepen their exit
strategies.
– The mining sector is equally important and needs institutional preparedness.
Ecuador delayed to develop its mining sector, but started off with institutional
specification of the role of the state in mining and mineral-sector processes.
Uganda needs a National Mining Company (NMC) to work alongside private-sector
companies and to embody the State's interest in the sector. The country's huge
mineral potential, and quantities and qualities and nature of our minerals, justify
this viewpoint. Over time, petroleum revenues would be used to strengthen the
capacity and productivity of the NMC—akin to local content, national participation,
national presence, and control and ownership of the mining sector.
52
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
4 Conclusion & Recommendations
4.1 Conclusion
The lessons drawn from Ecuador's experience with the oil and gas sector speak to the
importance of political goodwill, institutional innovativeness, and national commitment,
in crafting and implementing, amidst difficulty, a strategic framework for promoting
sustainability, efficiency, and developing an exit strategy by a petroleum-depend economy.
Although Ecuador may have taken decades to regain control over the petroleum sector,
the country has, since 2006, rediscovered its place in the industry. Its emphasis on
institutional and structural reforms, local content and national participation, diversification
of the economy and energy sector, utilisation of oil revenues to build infrastructure and
provide political goods, and identification of strategic areas of investment for future
generations provide key defining features of a refocused polity. It may be that the country
has received huge amounts of money in the form of Chinese funding for oil and gas
supplies, to achieve these development ends.138 It may be that the country had some
reserve funds which were then spent on development. It may be the case that Ecuador,
through rationalisation of institutional operations and reduction of wasteful expenditure
and corruption, all of which may have been part of its new social development program,
the bottom line is that the country was able to save huge amounts of money thanks to
high oil prices during the period. Whatever the case, Ecuador’s new interventions led to
tremendous success in the country’s economy, infrastructure, oil and gas sector itself,
social services provision, and have created incentives for strategic investment in R&D.
Political goodwill was central to this change.
Ecuador, however, faces environmental challenges. The biggest challenge lies in the
implications of exploiting oil and gas deposits underneath the Yasuni National Park and
Ethnic Reserve. This also raises concerns about the fate of indigenous communities
inhabiting the forests constituting the park, and their livelihoods. Even though measures
may be undertaken to provide corporate social responsibility (CSR) goodies like building
schools, sports grounds, and health centres as I observed Repsol did in the Yasuni Ethnic
Reserve, livelihood change is always slower than the rate of oil-wealth exploitation.
MNCs, NOCs, all are interested less in the wellbeing of affected communities and more
in, as one observer has put it: “getting the oil out of the ground, getting oil into the market,
and getting money in the wallet.”139 These concerns indicate the evolving ecological,
biodiversity, indigenous rights, climate-change, and public health concerns that nascent
as well as pre-existing oil economies have to contend with.140 Ecuador has not answered
these questions. But within and beyond Latin America, policy thinking and practice about
these issues remains growing. We wait to see what the future holds.
138 This concern was further revealed through ordinary interactions with Ecuadorians in Quito, November 2016.
139 Observation by one of the former officials of a donor agency in Uganda, Kampala, 28th February 2017.
140 Pellegrini, et al, ‘The demise of a new conservation and development policy?’.
53 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Dinner during the Study Tour, Quito, Nov. 2016
Ecuador has also demonstrated impressive performance in terms of institutional
reforms and development, investments reflecting an exit strategy, innovativeness in
environmental protection and reduction of AG flaring, and strategic investment of oil
revenues. It remains commendable that solid planning and institutional coordination has
transformed the Ecuadorian economy and society in one decade, providing a robust
energy sector, infrastructure backbone, and a process of wealth creation and national
development that makes Ecuador the region’s No.1, and the world’s No.5, in energy
security and sovereignty. These governance strategies ought to have been undertaken
during the 1970s, so that by the 1990s Ecuador would have been less dependent on oil
and gas revenues. Today the country acknowledges its vulnerability and has embarked
on programs that would enhance the productivity of its tourism, agriculture, and other
sectors. There is ongoing debate that Ecuador needs a Sovereign Wealth Fund, as a mid-
term to short-term cushion against volatilities, to cater for volatilities that result from oil
price fluctuations. Chile and Norway are examples. The challenges of managing such a
fund are the issues that need to be debated and institutionally catered for. These changes
were foregrounded in the country after 2006 following the change in political leadership.
The change brought with it ideological reorientation of the polity and renewed interest in
state control over the oil sector. This allowed government to realise more returns from
petro-wealth. The new leadership under Rafael Correa worked to maximize returns from
the sector for current and future generations.
However, it should not take change of government to invest oil and gas revenues and
exploit oil-related technological and other capabilities for a country to sustainably and
54
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
productively manage its oil sector. Instead, institutional frameworks and structures should
be put in place to ensure that change of political leadership does not indicate change of
control over the trajectory of national development. Such institutional formations ensure
predictability of current and future behaviour and conduct with regard to governance of
the oil and gas sector, and provide safeguards against institutional bankruptcy. Thus,
while institutions are consciously constructed social formations, such as Correa has done
in Ecuador, they should be allowed to outlive their creators while remaining adaptive to
changing circumstances.
Uganda has made attempts to craft similar institutional forms, possibly displaying earlier
learning than Ecuador did. Major institutions have been put in place, and reforms are
on-going. Despite the fall in oil prices by 2016 multinational oil companies remained
in operation in Uganda. On paper the country has governance frameworks which have
minimum pointers to its interest in continuous institutional innovativeness, reforms,
and adaptations; provisions on environmental protections and respect for the rights of
affected communities; caution to avoid sacrificing other key sectors of the economy at
the altar of petro-exploitation; and there is at least some political rhetoric indicating the
intention to ring-fence petroleum revenues to infrastructure development and human
capacity development.141 The lesson is clear: governments of oil-rich countries, and the
societies over which they rule, ought to not wait for negative impacts of the petroleum
sector on the economy, environment, and socio-political configurations of their country.
Instead, acting proactively, governments can learn important lessons on institutional
design, zero-flaring of AG and related environmental cushions, strategic investment of
petroleum revenues, energy and economic diversification, and promotion of meaningful
local content and national participation in order to ensure efficiency and sustainability.
4.2 Recommendations
• Continue with Institutional Development: Ecuador, like Uganda, needs to continue
with a process of institutional capacity building and strengthening in order to improve
governance of the oil and gas sector.
• Measure localness of Local Content: Both countries need to develop tools for
assessing the percentage of products and/or services imported or produced/supplied
by local suppliers in order to determine the localness of local content. This requires
an in-depth inquiry in the productive capacity of local companies, use of local raw
materials and local human resources, for there can seem a façade of high-level
local content while this content is itself foreign. Localness transcends being locally
domiciled.
• Give equal Priority to other Sectors: Both Ecuador and Uganda need to lay stronger
141 Hon. Hood Katuramu, a legislator and member of Uganda’s ruling National Resistance Movement, indicated to CSOs which
were meeting the Parliamentary Committee on Commissions, Statutory Authorities and State Enterprises (COSASE), on 15th
March 2017, that Cabinet has resolved to ring-fence oil revenues for infrastructure development among others, a claim not yet
verified. President Yoweri Museveni has, on several occasions, spoken on the same issue. The researcher, however, is aware of
the distinction between political rhetoric and governmental action, and the importance of state structures in these efforts. The
future will tell.
55 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
emphasis than is presently the case on the development of other sectors of the
economy. Just as Ecuador has not exploited immense opportunities presented by
the tourism industry, Uganda should not relegate agriculture, industrialisation, human
development and R&D even as both countries focus on infrastructure development.
• Careful on nationalisation and/or liberalisation of the petroleum sector: Uganda
should tread carefully in the debate between nationalisation (national participation
via state-owned oil companies) and privatisation (via private-sector international oil
companies): excessive nationalisation is not a good choice. Neither is excessive
privatisation. A middle-ground position—which stresses mutual coexistence between
MNOCs and NOCs as well as other local/domestic stakeholders—should be crafted
during countries’ early stages in the sector.
• Capacity Development for Future Takeover: States may be compelled to take over
the ruins and remains of MNOCs in future as Ecuador did. This can be done smoothly
in a manner that avoids legal battles, and other pressures on the state’s politico-
bureaucratic leadership. Emphasis on local capacity development is important at the
beginning of the industry and a key element of this possible exit strategy. Uganda
should undertake focused skills training that will smoothen future takeover of the
sector by local technical and managerial expertise in case MNOCs withdraw or are
compelled to close shop. Ecuador has done so.
• Benchmark the OGE&EE and similar Projects: Governments and oil companies
in East Africa should benchmark the OGE&EE and similar projects in order to avoid
AG flaring while also generating valuable electric energy. They should also consider
the practice of pumping waste water in deep underground wells—in Ecuador
Petroamazonas pumps waste water three (03) kilometres underground—to avoid
contamination of water sources and the environment. Uganda’s legal provisions
on zero flaring need strengthening, implementation and monitoring, and additional
innovations on environmental sensitivity. The efficacy of waste-water-recycling needs
constant monitoring.
• More than laws, regulations, guidelines—on paper: oil governance transcends
governance frameworks on paper. Laws alone are not enough; exemplary leadership
and conduct should be demonstrated, not just stated on paper. Systems of
implementation, practices, and good, professional and patriotic conduct of key
stakeholders are equally—if not more—important. This demands bureaucratic
commitment and political will. The experience of Ecuador and Uganda during and after
the court cases referred to in this study indicates that respect for rules of the game
requires moral and ethical conduct by public officials, whose work ethic, patriotic
commitment, and good judgement are important here.
• Strengthen the institutional capacity and mandate of regulatory institutions:
Regulatory and independent third party oversight agencies and institutions should be
allowed to operate in a free environment with cross-institutional checks. This will allow
56
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
for monitoring of institutional conduct, follow-up on commitments and promises of oil
companies, the state, MNCs and the rest of the society.
• Establish mechanisms for institutional coordination: Like Ecuador established
a coordinating ministry, Uganda should strengthen the coordinating mandate and
capacities of relevant institutions: PAU, Directorate of Petroleum, Parliament and other
key state institutions. Coordination between ministries and agencies, on such issues
as land, energy, environment, and mineral development, revenues management,
should be facilitated to ensure regular exchanges of information. Instead of sectoral–
institutional separatism, there is need to create synergies from the efforts of various
players in the sector toward a common goal.
• Establish an ecosystem for Quality Control: Key stakeholders should be impressed
and convinced about the importance of an ecosystem whereby the networks,
constituted through national committees for quality control, for instance, can help
in monitoring and measuring local content practices and outcomes and high quality
investments. The debate about, and practice of, local content, demands thinking and
doing the needful on local capacity development and quality assurance for the oil and
gas industry is subject to international standards. Local suppliers and producers must
comply with these standards, benchmarks, and best practices.
• Identify and exploit other Energy Mixes: The focus on oil and gas should not cloud
out the potentialities of exploiting existing energy mixes that can provide clean and
renewable energy. Energy and productive diversification are major development
challenges. Ecuador’s commitment to implement the plans that have been made
in this respect—the move to hydro-energy, wind energy, and other forms of green
energy—is important for considering what alternative energy opportunities exist. In
terms of clean energy, it is unclear whether Africa has enough water resources to
generate the hydro-energy that can feed a developed African continent.
• Develop the Mineral Sector: Uganda should give its mining industry sufficient
attention as part of the country's diversification strategy. The country needs a National
Mining Company (NMC) to work alongside private-sector companies. The NMC, just
like Ecuador's, should embody the State's interest in the sector. The country's huge
mineral potential, the quantities and qualities and nature of our minerals, should
provide impetus to act upon this viewpoint. When petroleum revenues become
available in future, they should be used to strengthen the capacity and productivity of
the NMC - akin to local content, national participation, national presence, and state
control over and ownership of the mining sector.
• More Research: We speak and write—but know little—about the origins,
metamorphosis, and mechanisms of political goodwill and bureaucratic commitment.
If these factors, call them attributes, are important for efficiency, sustainability and
exit strategy in the oil and gas sector, indeed in any society’s development trajectory,
then we need an in-depth inquiry in the processes of engendering and/or enhancing
57 EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
political goodwill and bureaucratic commitment. Why and when do these factors
obtain/arise? How can these attributes be built in a society or social system? Ecuador
made significant strides since 2006, mainly because of the goodwill of its political
leadership, yet political will, bureaucratic commitment, and leadership capacity to
speed up national development using available resources remains elusive in many
African countries. Such study would solve serious development puzzles.
Study tour Participants at the Petroamazonas Central Processing Facility (CPF), Block 15,
Amazon Region, Ecuador, November 201
A
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
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HEFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
ANNEXES
Annex I: Major Post-2006 Developments in
Uganda’s Oil and Gas Sector
Year Major Development Outcome
2008 Cabinet of the Republic of Uganda
approves the National Oil and Gas
Policy for Uganda; its implementation
commences
Uganda’s National Oil and Gas Policy
(NOGP).
Start of policy implementation
2008 Government contracted Foster
Wheeler Energy Limited Ltd (UK) to
conduct a feasibility study on building
a refinery in Uganda, 2010/2011.
Contract for Feasibility Study
2010/2011 Feasibility Study on Refining
undertaken by Government;
implementation commences
Refinery prospects. Study
recommends that development
of 60,000 bb/day refinery was
commercially viable with a Net Present
Value (NPV) of US$ 3.2 billion at a
10% discount rate and an Internal
Rate of Return (IRR) of 33%.
2008 to
2014
21 discoveries made.
116 wells drilled
6.5 billion barrels of STOIIP confirmed
499 billion cubic feet of gas observed
Initial implementation of the NOGP
2012 Oil and Gas Revenue Management
Policy approved
Tullow Oil’s acquisition of Heritage
assets is finalised and Farms down to
CNOOC and Total
Resettlement Action Plan (RAP) to
guide acquisition of the required land
was undertaken
Oil/Gas-Related Policy formulated
CNOOC and Total in the ‘Game’
RAP in place; land acquisition ongoing
2013
The Petroleum (Exploration,
Development and Production) Act
2013 enacted
The Petroleum (Refining, Conversion,
Transmission and Midstream Storage)
Act 2013 enacted
First production licence issued over
the Kingfisher field
Related Laws
Production Licence
I
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Year Major Development Outcome
April 2014 Memorandum of Understanding
(MoU) on Commercialisation signed
between Government and Licensed
oil companies – Joint Venture
Partners (JVPs)
Government-Companies
understanding
Increased company activity
Infrastructure development
Since
2014
Land acquisitions and plans for
construction of Refinery and Pipelines
Displacement of peoples. Land
occupation. Preliminary works on the
Refinery and Pipelines
2015 Public Finance Management Act
PEPD becomes Directorate
Petroleum Authority of Uganda
Government of Uganda Issues Five
(5) Petroleum Production Licences
to Tullow Uganda Operations Pty
Limited and Three (3) Petroleum
Production Licences to Total Uganda
B.V.
Established
Framework for managing Oil Revenues
Directorate of Petroleum
Petroleum Authority constituted,
Director appointed
Production Licences
2016 National Elections (Presidential,
Parliamentary, Local Government)
JVPs develop a Land Acquisition
and Resettlement Frameworks
(LARF), subject it to consultations
with stakeholders including CSOs
Consultations begin on the Local
Content Policy for Uganda’s Oil and
Gas Sector
Ruling Party/Government voted into/
retains power
LARF
Draft Local Content Policy
JEFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Annex II: Extract from the Law: Legal
Restrictions on Gas Flaring in Uganda
K
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Year Institutional Innovation/Establishment
1985 The first Petroleum (Exploration and Production) Act was enacted (now
repealed).
1991 • FirstProductionSharingAgreement(PSA)betweenPetronaExploration
Uganda and Government signed over the entire Albertine Graben.
• PetroleumUnitintheGeologicalSurveyandMinesDepartmentof
the Ministry transformed to the Petroleum Exploration and Production
Department (PEPD).
• PEPDcommencesfollowupofgroundgeologicalandgeophysicalsurveys
in areas identified by the aeromagnetic data.
1992 Universities: Colombia (USA), Leeds (UK), Lubumbashi (Zaire) and PEPD
acquire gravity data on Lake Albert in an effort to understand the Graben
1993 Petroleum (Exploration and Production) Regulations come into force
1997-2007 Different Licensing mandates for the Exploration of different areas in the
country, acquisition of seismic data, tests, and more technical undertakings
2006-2007 Development of the National Oil and Gas Policy
2008 Cabinet approves the National Oil and Gas Policy (NOGP) for Uganda
2008-2012 Development of the Oil and Gas Revenue Management Policy. Policy
approved 2012
2012-2013 • ThePetroleum(Exploration,DevelopmentandProduction)Act2013
enacted
• ThePetroleum(Rening,Conversion,TransmissionandMidstreamStorage)
Act 2013 enacted
• FirstproductionlicenceissuedovertheKingshereld,AlbertineGraben
April 2014 Memorandum of Understanding (MoU) on Commercialisation signed between
Government and Licensed oil companies
Since
2014-2016
• Landacquisitionsframeworksconsistentwithplansforconstructionof
Refinery and Pipelines
• LandAcquisitionandResettlementFrameworkdeveloped
• NationalLocalContentPolicyforUganda(notyetapprovedasofFebruary
2017)
2015 • EnactmentofthePublicFinanceManagementAct2015
Sept. 2015 Parliamentary approval of presidential appointees to the Petroleum Authority
of Uganda (PAU).
Oct. 2015 Inauguration of the Uganda National Oil Company (UNOC)
2016-2017 Consultations with Civil Society on National Local content Policy, Land
Acquisition and Resettlement Framework, and draft Resettlement Policy
Annex III: Recent Institutional Evolution in
Uganda’s Petroleum Sector
LEFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Annex IV: About Yasuni National Park, Ecuador
Yasuni National Park is one of–if not the very–most biologically diverse area on Earth,
and is at the centre of a small zone where amphibian, bird, mammal, and vascular plant
diversity maximise their productivity in the Western Hemisphere. The park breaks world
records for local-scale (less than 100 km2) tree, amphibian, and bat species richness,
and is rich in birds and mammals–holding a record 150 amphibian species and amphibian
diversity: The total of the park’s amphibian species are more than the United States
and Canada combined. Reptile species in the park are very high with 121 documented
species. Covering less than 0.15% of the Amazon Basin, Yasuni is home to approximately
one-third of amphibian and reptile species, harbours high-level fish diversity with 382
known species, a number greater than all fish species found in the whole Mississippi
River Basin (USA). Yasuni National Park is home to an estimated 800 million barrels of
crude oil – 20% of Ecuador’s reserves. These are located in the Ishpingo Tiputini, and
Tambococha (ITT) oil fields.
Environmentalists, indigenous communities, scientists, and activists urged Ecuador
to leave these resources untapped. Initial opposition from these and other actors, led
President Rafael Correa to launch a referendum-like initiative, called the Yasuni-ITT
Initiative, to protect the park’s natural resources, in June 2007. The initiative involved
a promise to leave the park undisturbed, and hence prevent 400 million metric tons of
carbon dioxide from entering the air, in exchange for compensation from the international
community. A Trust Fund was established. By 2009 pledges of support from around
the world came to around 1.7 billion dollars. Ecuador hoped to generate funds worth at
least 50% of the profits that it would receive were it to utilize the Yasuni-ITT oil reserves,
totalling about $3.6 billion over 12 years. Environmentalists hailed the plan as setting
precedent for reducing the burden of environmental preservation on the world’s poorer
countries. International celebrities and leaders joined in the flare.142 During the initiative’s
six-year history, only $336 million had been pledged, and only $13.3 million of that had
actually been delivered.
A disagreement erupted on how to manage these funds. Ecuador insisted that the
government alone would decide how any funds raised were spent. International funders
wanted to prescribe for Ecuador how such money would be spent. This apparently
threatened Ecuadorian sovereignty. In July 2013, President Correa formed a commission
to evaluate the Yasuni-ITT Initiative’s progress. The commission concluded that the
estimated economic results of conservation were not sufficient; moreover the promised
funding was not forthcoming. The promise had not been kept–six years on. Correa
scrapped the plan claiming on 15 August 2013: “The world has failed us.” He called
the developed world hypocrites who emit most of the world’s greenhouse gases while
expecting poor nations to sacrifice economic progress for the environment whose
destruction they (developing countries) least contribute to. Through an Executive Order,
Correa liquidated the Yasuni-ITT Trust Fund, formally ending the initiative. It seems clear,
therefore, that Ecuador will exploit the petroleum deposits in the National Park. How this
will be done in a manner that does not threaten the extant biodiversity and indigenous
communities’ existential spaces remains to be seen.
142 These included: Actors Leonardo DiCaprio and Edward Norton, filmmaker and global ecological activist/scientist Michael
Charles Tobias, and former Vice President of the United States Al Gore were among those who pledged support to the Ecuadorian
government. Countries contributing funds included Turkey, Chile, Colombia, Georgia, Australia, Spain and Belgium. Source: Grupo
FAR O
M
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Annex V: Occidental Exploration & Production
Company (OEPC) Vs. Ecuador
Occidental Exploration and Production Company v The Republic of Ecuador
“The Tribunal found that the contract did not include VAT refunds, and that the Claimant
was entitled to such refunds under the Ecuadorian tax legislation and the law of the Andean
Community. The Tribunal found further that the treatment accorded by Ecuador to the Claimant
was less favourable than that accorded to certain national investors who continued to benefit
from VAT refunds, which constituted a violation of the national treatment obligation. The
Tribunal also found that Ecuador’s conduct violated the obligations to accord fair and equitable
treatment and full protection and security. Other BIT claims were rejected. In compensation,
the Tribunal awarded the amounts of VAT paid by Occidental, whose refund was requested by
it and denied by Ecuador, as well as the amounts of VAT paid by Occidental but not requested
for refund. As a “conservative measure”, the Tribunal reduced the total amount by 1.5% to
account for possible impropriety of invoices and other defects. The Tribunal refused to award
future damages, i.e. the amounts of VAT to be paid and refunded in the future, as “contingent
and indeterminate”. The Tribunal took measures to prevent Occidental from obtaining ‘double
recovery’ given that domestic proceedings dealing with the same matter were still pending at
the time of the arbitral award. Interest was awarded using, as a basis, Ecuadorian legislation
applicable to delays of tax obligations but reduced the resultant amount by 50%...
Implications/Initial Analysis
• This case, similarly to Feldman, poses a question of relationship between restitution
and compensation for damages. If a State unlawfully deprives an investor of property
and then returns this property, this is restitution. Here, the subject of deprivation was not
real or movable property but money. The State was ordered to return to the investor the
money that it had been unlawfully withholding; therefore this appears to be a case of
monetary restitution.
• Inthisnon-expropriatorycase,theTribunaldidnotdiscussthe standard of compensation
– presumably because there was no need to value damages, as the latter consisted of an
easily ascertainable monetary amount of VAT paid.
• Conservative estimation. The Tribunal adjusted the amount of damages by a “conservative
measure” in order to ensure that compensation did not exceed the actual amount of VAT
owed to Occidental. Generally, tribunals seem to prefer applying conservative analysis of
damages, in order to avoid excessive compensation.
• The amount of interest was also adjusted downwards, in line with the Tribunal’s
conservative approach (although without specific reasoning).
• TheTribunalrevertedtodomestic law when awarding interest, although the award was
made under the BIT.
• Therateusedtocalculatepost-awardinterestwashigherthanthatusedforpre-award
interest.
• TheTribunaldismissedthefuture damages claim on the basis that these damages were
“contingent and indeterminate” (taxes still had to be paid and requested for refund).
This approach seems to correspond to that taken in other cases of continuous breach,
eg LG&E v Argentina (future dividends) and Nykomb v Latvia (future payments under a
contract).
• The Tribunal thought it necessary to prevent the Complainant from obtaining ‘double
recovery’, the possibility of which was present given the pending proceedings in domestic
courts on the same subject-matter.”
Ruling (http://www.biicl.org/files/3914_2004_occidental_v_ecuador.pdf, 23 Feb. 2017
NEFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Annex VI: World Bank On AG Flaring
• About140billioncubicmetersofAG arereleasedannually,yetthis AGisenoughto
produce 750 billion kWh power
• About350milliontonsofCO2emissionsresultfromAGaringannually,equivalentto
about 77 million cars’ emissions of the same gas
• The black carbon from ares [tends to] deposit upon snow and ice caps, causing
melting of these frozen waters
• Under-developed and poorly functioning markets and infrastructure discourage
investments in flare elimination
• AconducivepolicyenvironmentisneededtoeliminateAGaring
• DistancefromAG/energyproductionpointstothenalusersmatters
• Managementofgascharacteristicsforaredgasistechnicallyimportantinmakingit
a viable investment option.143
143 World Bank, 2015 (Sept. 22-23). Global Initiative: Combining Forces to End Routine Gas Flaring, Washington DC: World Bank.
WB/IGU/SE4ALL Regional Gas Seminar Maputo. (from http://www.igu.org/sites/default/files/7-3%20World%20Bank%20-%20
Anas%20Benbarka%20-%20Gas%20Competence%20Seminar%20-%20September%2023%202015.pdf, 21 Nov. 16)
O
EFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
Annex VII: About the OGE&EE Project
Berend van den Berg, the initiator, revealed that the OGE&EE project was initially
designed as a $1.2 billion programme but has only been capitalised to about US$620
million, and consists some 120 projects in an area covering 25,000sq km, 17 oil blocks,
56 oil fields and 66 facilities. The project has multiple power plants which use AG as fuel
to produce more than 325MW of power; over 900kms power distribution facilities; and
approximately 100km of gas gathering and transportation facilities, bringing deteriorated
facilities up to standard and implementing waste heat recovery systems. This project
interconnects the integrated oil industry electric grid to the national electric grid, paving
the way to optimising excess hydro-electric power during off-peak hours. This, Behrend
biblically described as “transforming water into oil”, turning waste into wealth. Research
and development (R&D) in such areas as flexible fuel solutions, which can use AG, crude
oil, condensates, or a combination of each, is also undertaken. Instead of flaring the AG,
it is converted to power, monetised by means of virtual pipelines, and made technically
and economically viable to bring to market small volumes of remote AG. While previous
attempts have been made for natural gas (NG), the OGE&EE project uses only AG “with
low volumes at the source and high CO2, heavier hydrocarbons and water content.”144 The
project did not have its own R&D centre, but relied on WARTSILA, a Finnish corporation
with net sales totalling EUR 4.8 billion. The company manufactures and services power
sources and other equipment in the marine and energy markets, with emphasis on
sustainable innovation and total efficiency.145
The OGE&EE’s overall objective is to reduce the carbon footprint per extracted barrel of
oil (both in terms of emissions, costs, and other parameters).146 The project has already
generated net savings of more than US$ 600,000,000 and reduced close to 1,000,000
tons of CO2. In terms of design and funding, the project designers did not have R&D
capacity. However, they dictated the design criteria whereby the upfront expenses were
assumed by WARTSILA under a Service Agreement in which the OGE&EE only paid
subject to performance (“no cure no pay”) on a US$/kWh basis. There is also Combined
Cycle Power/Heat for Processing Facilities, which was also funded by the technology
company based on design criteria provided by the OGE&EE group. The payment was
done after a 10 day performance test. A Virtual Pipeline for Stranded Associated Gas
(VPSAG) was conceptually designed by the OGE&EE and then a development agency,
the Inter-American Development Bank, funded it on condition that it would be validated
by a third party. Presently, the OGE&EE is looking for funding for a pilot project on similar
innovations. The public sector tends to have reservations regarding funding R&D, since
the authorities normally fear the fact that not all R&D projects become successful. So,
OGE&EE transferred virtually all the R&D risk to the technology companies (pay per view).
The overall R&D budget was in the range of 3–4% of the total Project Cost (we invested
over US$ 650,000,000 whereby the R&D funds were in the range of US$ 30,000,000).
144 Interactions during visit to Amazon region, Nov. 2016
145 Details about the company, which relate to oil and gas and energy sectors, are found here: http://www.war tsila.com/oil-gas and
http://www.wartsila.com/energy.
146 Berend van der Berg, 2017, Email Correspondence with the Author, February 2017. All material in this paragraph is derived
from this email correspondence.
PEFFICIENCY, SUSTAINABILITY AND EXIT STRATEGY IN THE OIL AND GAS SECTOR
85% of these R&D expenses were financed by technology companies and paid over
time on a performance basis. Thus, the OGE&EE’s R&D works were mainly funded by
third parties (technology companies) whereby payments were only made based on actual
performance. Internally the OGE&EE, nevertheless, did the following R&D work:
• Highpressureassociatedgasbufferstocompensatepeaksandlowsinassociategas
supply.
• Adjustmentprimemoverssothat,withtheminimumgastreatment,theycouldrunon
raw associate gas (thereby reducing the overall investment cost and maximizing the
BTUs in the associated gas as fuel for power generation).
• Changefromoverheadtoundergroundcablesevenforhighervoltages.
With such projects as the OGE&EE, there is always a tremendous pressure to increase
local content. Such may be the right way to go. Nevertheless, there are risks when trying
to increase the local content without matching the local content with local competence.
As van den Berg warns, “any work in the hands of the wrong people will generate
unsatisfactory results. It is for this reason that I strongly believe that the push for local
content has to go hand in hand with capacity building through either joint ventures,
“inplants” (I was hired for 8 years to work together with Ecuadorians working for the
national oil company), etc.”147 These initiatives were allowed because of government’s
interest in expanding energy production.
147 Van den Berg, Email Correspondence.
ABOUT THE AUTHOR:
SR Rwengabo, PhD
Dr Sabastiano RWENGABO is a Research Fellow at a Kampala-based
regional think tank, the Advocates Coalition for Development and
Environment (ACODE), where he researches on the Governance of Oil
and Gas Wealth in Uganda and East Africa, and is a member of the
Evidence and Lessons from Latin America and Africa (ELLA) Community
born of the ELLA Learning Alliance and Study Tour on Local Content in the
Petroleum sectors in both continents. He holds a Doctor of Philosophy
(PhD) in Political Science from the National University of Singapore
(NUS). He was also a Research Scholar, President’s Graduate Fellow, and
Graduate Teacher at the same University before re-joining the Social Sciences community in Africa in
2015. Dr. Rwengabo has researched and published on Civil-Military Relations, International Politics and
Security, Regionalism, Urban Security, and Democratization. Currently a Country Expert for the Varieties
of Democracy (V-Dem) Project of the Department of Political Science, University of Gothenburg,
Rwengabo is also interested in strategic analysis, governance of strategic resources, the evolution
of regional and international organisation, peace building and conflicts resolution, nation building, and
transformational leadership development especially in/on Africa.
Advocates Coalition for Development and Environment
Plot 96, Kanjokya Street, Kamwokya,
P.O.Box 29836, Kampala, Uganda
Tel: +256 312 812 150
Email: acode@acode-u.org
Website: www.acode-u.org
Advocates Coalition for Development
and Environment
ISBN 978-9970-567-01-0
