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Uganda plays hardball with Tullow over $1.3b windfall

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  1. BAK

    BAK JF-Expert Member

    Jun 6, 2010
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    Uganda plays hardball with Tullow over $1.3b windfall

    A Tullby oil rig near the shores of Lake Albert in Uganda. File Photo
    By Michael Wakabi and Ester Nakkazi

    Posted Monday, June 7 2010 at 00:00

    The Ugandan government has refused to allow Tullow to gain full control of Heritage Oil and Gas until it looks at the production shareholder agreement (PSA) that it signed with Chinese oil firm CNOOC and France based Total.

    Tullow claims it has nothing to show because the Chinese and French firms will only sign this document that outlines how they will share revenues from Uganda’s oil after the Ugandan government gives up its right to block the Heritage sale to Tullow.

    Uganda seems to be hardening its position because it feels that it is losing out on crucial revenues arising from transactions that have seen oil prospectors acquire exploration rights on the cheap and sell them in the global market for billions of dollars when they hit oil.

    The current dispute arose after oil explorer Heritage Gas and Oil sold its stake in the Ugandan oil fields to Tullow for $1.3 billion, a transaction on which the Uganda Revenue Authority, expecting a share of these windfall profits, has slapped a capital gains tax bill of $400 million. Tullow is protesting this tax bill and has so far declined to pay.

    URA has been underperforming in collecting some categories of taxes and is counting on this money to help bridge a deficit estimated at $100 million.

    This is the second time that Uganda has lost out on these deals. Australia-based Hardman Resources sold its Ugandan interests to Tullow for $1.1 billion in September 2006, but it was not taxed.

    The failure by URA to collect these taxes has been blamed on the country’s weak laws.

    The dispute between the government and Tullow over the oil windfall is apparently the main reason the former has not given its consent for the transfer of Heritage’s interests to Tullow, further pushing the timeline for development of Uganda’s oil resources into the indefinite future.

    Sources say that the government — suspecting that Tullow may be just interested in gaining total control of the fields before selling up and walking out — has refused to sign the deal until the latter furnishes specific production shareholder agreements with its “farm down” partners Total and the China National Offshore Oil Company (CNOOC).

    People familiar with the matter said Heritage sees no obligation to pay the $400 million that the Uganda Revenue Authority describes as “income tax on gains on disposal” in an April 9 demand note.

    The money in question would be due on the $1,350,000,000 in revenues accruing from the disposal of Heritage’s licence interests in Ugandan oilfields to its partner Tullow, which is executing its pre-emptive rights under the partnership.

    “Looked at from Heritage’s perspective, this is tricky for them because when they sought shareholders’ approval for the disposal, they mentioned a sum of $1.35 billion. How does the management survive shareholder wrath when they turn around to report that the proceeds will be $400 million less because of taxes?” asked the source.

    Quoting section 17(2) of the Income Tax Act, URA Commissioner for Domestic Taxes Moses Kajubi wrote to Heritage: “The disposal of the licence interests in blocks 1 and #A gives rise to income sourced in Uganda under section 799g) and 79(s) of the Income Tax Act.

    “Income tax has been charged on the gain on disposal at 30 per cent. In accordance with part vi of the Income Tax Act, gains have been computed by deducting acquisition costs from consideration,” Mr Kajubi writes before putting the taxes due at $404,925,000.

    “Please make payment to Uganda Revenue Authority Tax Collections — USD Account Number 2362032291 — at Bank of Uganda on the assignment approval date or within 45 days of service of this notice, whichever is earlier.”

    According to sources, Heritage holds the view that it has not sold any property and the transaction is, therefore, not subject to capital gains tax. The explorer also points to a precedent four years ago when no taxes were levied after Australia-based Hardman Resources sold its Ugandan interests to Tullow for $1.1 billion in September 2006.

    It is also understood that privately, Heritage believes the tax claim is motivated by a desire by the Uganda Revenue Authority to find a soft target that would help them plug a revenue shortfall that is expected to close the year at around $100 million.

    The government is however standing its ground, arguing that the circumstances back then were different.
    Confirming that conclusion of the deal was still some way off, Uganda’s Junior Minister for Energy Simon D’ujanga remarked, “That is what they feel but what does the law of Uganda say?”

    Experts said part of the problem was the vagueness of Ugandan law and the multiplicity of institutions clamouring for control of oil revenues.

    “We are unlikely to go to court over the issues as long as we adequately cover our backs; what might not be clear is the ambiguity in the law,” said one tax expert.

    “The other problem is arising out of the government side is the interests of the different state institutions. With no proper institution in charge yet, and all of them wanting control of the revenue, it is proving difficult for policymakers to be on the same page.”

    Heritage announced an agreement for sale of its Ugandan interests to Italian energy giant ENI last January but the picture quickly got muddied as Tullow, which only weeks earlier had indicated plans to exit Uganda, quickly turned round to claim its pre-emptive rights.

    The episode is bound to be another source of embarrassment for President Yoweri Museveni, who has refused to make the country’s oil deals public and has recently adopted a belligerent stance towards donors, in anticipation of the economic independence that oil money promises to bring.

    Uganda is drafting a new Oil and Gas Policy, but it is not yet clear to what extent it will remedy the omissions of the past, as it still maintains a generally opaque stance and concentrates power in the hands of bureaucrats as opposed to transparent institutional procedures.

    There is now a general consensus that the shareholder agreements signed by the government and the oil companies earlier, were entered into at a time when Uganda’s knowledge of the oil industry was relatively limited and the production expectations very modest.

    “All that has changed; exploration has been ongoing for over 10 years now and we have confirmed reserves in the region of 2 billion barrels.

    Early indications are that the agreements we signed are highly disadvantageous to Uganda, consequently it is of great importance that the company we choose as a partner is willing to review the agreements and allow the government some concessions intended to improve the deal for Uganda,” observed one commentator.

    Tullow dealings still suspect

    Once bitten, twice shy, Uganda is now tightening the screws on oil explorer Tullow, refusing to give consent to a deal that would see the former buy out the Heritage Oil and Gas interests in Uganda’s oilfields.

    The two companies own the fields, which contain at least 800 million barrels in confirmed oil deposits although the final figure is expected to be in the region of 2 billion barrels.

    Besides owning 100 per cent of Block 2, Tullow also owns 50 per cent of Block 1, where Heritage is the operator. It is also operator and owner of 50 per cent of Block 3.

    Sources privy to the behind-the-scenes negotiations say the Ministry of Energy last month wrote to Tullow telling it that consent to the Heritage deal would not be forthcoming until it provided copies of its production sharing agreements with proposed farm down partners Total and CNOOC.

    A stalemate emerged, however, after Tullow wrote back saying it did not have any agreements in place as the partners would only sign after assurances that Ugandan consent to the Tullow-Heritage deal had been obtained.

    In private conversations, Tullow has been blaming its failure to consummate the buyout of Heritage on the latter’s non-payment of taxes on the sale to the Uganda government.

    It is, however, now understood that the government, which feels safer letting in Italian energy giant ENI, is apparently suspicious of Tullow’s intentions because it had not firmed up a development plan for the oil fields.

    Until Heritage announced its agreement to sell its stake to ENI, Tullow had been shopping for buyers because it did not have access to the $8-10 billion investment needed to develop the oilfields.

    It was only on January 19 that the company announced a change of plan after it scuttled the Heritage-ENI deal, insisting on exercising its pre-emptive rights. Finding the $1.35 billion to conclude the buyout became possible only after the Royal Bank of Scotland extended credit.

    The suspicion in Ugandan circles is that Tullow’s game plan revolves around gaining 100 per cent control of the Ugandan fields before calling the shots and selling to the highest bidder.

    Uganda is intent on avoiding giving such monopoly powers to a single operator and insists ENI must have a piece of the cake.

    ENI officials are reported to have made contact with President Museveni during his recent visit to Turkey and were due to meet him formally in Kampala, but the flights disruptions caused by the volcanic ash clouds over Europe interfered with the arrangement.

    The government, which feels that ENI has a more solid track record than any of the other contenders, has put a minimum capital threshold of $24 billion for any intending participant in the farm down process.
    More doubts about the reliability of Tullow’s statements on Uganda’s oil