Oil & gas

$575m Tullow-Total Oil Deal: Hopes for Final Investment Decision Come Closer

By Busein Samilu

The $575m oil deal between Tullow Oil PLC and Total E & P Uganda B.V (TEPU) has been sighted as an indicator that the Final Investment Decision may be realised soon, putting the chances of seeing Uganda’s first oil closer than earlier announced.

Tullow Oil this week announced that it had sold off its entire 33.3% assets in Uganda to TEPU Total E & P Uganda B.V at $575 million.

A cash payment of $500 million on deal completion and $75 million at Final Investment Decision (FID) Contingent payments linked to oil price to be paid after production commences were agreed upon.

The transaction attracted a $14.6m as the Capital gain Tax for the transaction.

“We have already made good progress with the Government of Uganda and the Uganda Revenue Authority in moving this Transaction forward; by agreeing the principles on tax treatment, and we will work closely with the Government, Total and CNOOC over the coming months to reach completion as quickly as possible,” said Dorothy Thompson, the executive chair of Tullow.

The transaction had failed for over three years after oil companies failed to agree with the government on the tax treatment of the deal.

In August 2019, Tullow announced the cancellation of the Sales Purchase Agreement which led to the failure of the $900m Tullow-Total deal. This prompted TEPU to temporarily suspend its activities on the East African Crude Oil Pipeline (EACOP), which brought a setback in the project. TUOL was intending to sell 21.5% of its 33.3% to TEPU.

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Peter Muliisa, the Communication Officer at the Uganda National Oil Company (UNOC), said the transaction gives hope to the sooner realisation of the Final Investment Decision.

“This is good for the industry and shows commitment of Joint Venture Partners (JVP) to Uganda. It further gives a clear view on the FID. We continue to work hard to ensure FID is achieved as soon as possible.”  Peter Muliisa UNOC

Stephen Kaboyo, the Managing Director of Alpha Capital said the transaction is a major breakthrough towards reviving the fortunes of Uganda’s oil industry.

“It is at least positive news amid the doom and gloom in the oil markets,” said Kaboyo.

“This milestone also opens up room for Uganda to progress towards closure and having a final investment decision in place that will set everything else in motion and provide visibility on the timelines.  The official statement suggests that there is alignment among all the players and the key aspects especially on the fiscal regime seem to have been agreed.”

In August 2016, the government granted 8 production licenses to a Joint Venture of three companies; TEPU, CNOOC and TUOL. These companies were obliged to develop infrastructure to facilitate the production of oil. A sum of between $15bn and $20bn is expected to be invested in the sector by these companies in the next three to five years.

The deal indicates that Uganda’s oil sector now remains with two major player; TEPU and CNOOC (U) Ltd.

Oil companies are required to develop infrastructure, which included; drilling and completing more than 400 wells, setting up two central processing facilities, laying of over 200km of in-field flow lines, laying approximately 150km of feeder pipelines, construction of base camps and minor access roads.

They also are expected to carry out the Front End Engineering Designs (FEED) studies of two field development projects of Tilenga Project which shall produce 190,000 barrels of oil per day and covers Buliisa and Nwoya districts.

The Kingfisher Project is expected to produce 40,000 barrels of oil per day, covering Hoima and Kikuube Districts, before making their final investment decisions (FIDs) for two central processing facilities (Tilenga and Kingfisher projects).

Way forward

Yusuf Masaba, the Head of Corporate Affairs at the Petroleum Authority of Uganda (PAU), said the companies completed the FEED studies for the development of the fields in the Tilenga and the Kingfisher Projects during 2018.

“This included the technical design of the oil and gas facilities, preparation of the project scope, cost estimates, and execution strategy,” he said.

He added that companies have also undertaken a re-evaluation of the resources in the oil fields, which has enabled a better understanding of these fields. “The PAU’s role is to ensure the recovery of the oil and gas resources in the most efficient manner,” he said

Enock Twinoburyo, a Senior Economist and a policy analyst says in spite of the advantages that are associated with the transaction,  the 2.5% tax rate on the $14.6m Capital Gains Tax was too low, which poses a question on Uganda’s bargaining capacity.

“The industry will now profit from the well capitalized firms engaged in production but this however calls for Uganda’s need to bolster its negotiation to avoid the trend of exploitation,” he said.

“The back and forth has been there. With TEPU increasing its stake and become the largest gives it leverage but also reiterates intent to see production of oil become reality in Uganda and the FID and others could much sooner than 2025, all factors constant,” Twinoburyo emphasised.

At peak production, Uganda will produce about 230,000 barrels per day with an estimated revenue of US$43 billion over 25 years

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