Tullow Oil Concludes USD2.9 Billion Ugandan Oil-Asset Sale

Tuesday, 28 February 2012

KAMPALA, UGANDA - After over six months of haggling, exploration company Tullow Oil inked an agreement to transfer part of its assets to French company Total and The Chinese National Offshore Oil Corporation PLC (CNOOC).

Under the deal Tullow transferred 66.6% of its assets in a transaction considered to be worth about $2.9b.
The deal got the green light after the government of Uganda signed Production Sharing Agreements (PSA's) and the production license for the Kingfisher oil field with Tullow Oil Uganda.

The asset transfer is equally divided with each of the three companies taking about 33.3333% and will operate different exploration areas.

"Total will operate Exploration Area-1 (EA-1) and Tullow will operate Exploration Area-2 (EA-2). In the former Exploration Area-3A, CNOOC will operate the new Kanywataba license and the Kingfisher production license," read a press release from Tullow Oil Plc.

The delays in signing this deal were mainly caused by clauses in the contract that the Uganda government did not agree to. It was almost as good as delayed by Parliament who had recommended that no deals on oil are signed before new laws on regulation and revenue management are debated.

The Uganda Government must have sighed with relief as any delay in the signing of the contracts would make the country pay the liabilities for redundant oil rigs.
But behind the handshakes, is the dispute over the capital gains tax that Tullow is supposed to pay the Uganda Revenue Authority.

As soon as Tullow Oil declared interest to sale 67% of its assets, URA made an assessment and slapped capital gains tax of $472m. Tullow agreed to pay in principle but claims that some calculations on two blocks are wrong and seeks exemptions on another block.

"We have 30% of the capital gains tax assessment we got from URA," said Jimmy Kiberu the Tullow Oil Uganda Spokesman.

In Uganda, for anyone disputing a tax assessment, they have to pay 30% of the amount to URA and then appeal to the Tax Appeals Tribunal in Kampala.

This is the second tax dispute that Uganda is involved in with oil companies. The previous one currently under arbitration in London, is where Heritage Oil rejected any form of payment to URA after it sold its 50% ($1.5b) stake in oil fields to Tullow.

Heritage challenged the $404m tax that URA had slapped on them but the Tax Appeals Tribunal ruled that the tax body was right and the tax should have been paid. The government and oil companies wait for what the arbiter will deliver.

The political bickering may still be going on in the corridors of power as the parliamentary adhoc committee on oil resumes its proceedings and there is also a pending censure motion for Irene Muloni, the energy minister allegedly for disregarding a Parliamentary resolution to sign deals with Tullow. That aside, there is renewed optimism that Uganda signed good deals compared to some of the oil producing countries.

"The Partners are now re-commencing drilling activities in the area to undertake a wide-ranging exploration and appraisal programme in 2012.

Immediate exploration priorities include drilling the Kanywataba prospect, west of the Nile starting with the Omuka well in EA-1 and further appraisal work in both EA-1 and EA-2," read a statement from Tullow Oil Plc.

By Frank Ahumuza: The East African Business Week Newspaper