Oil & gas

Tullow on Failed Stake Sale: Uganda Didn’t Ink Tax Relief Agreement with CNOOC, Total

Tullow Oil has expressed disappointment over the failure to sell its stake in Uganda to French firm Total E & P and China’s CNOOC, Chimp Corps report.

Tullow Oil Uganda Managing Director, Jimmy Mugerwa told ChimpReports on Thursday night that, “Whilst a number of critical issues had been resolved, such as Operatorship and Capital Gains Tax, an agreement with the government of Uganda on the availability of tax relief for buyers was still outstanding.”

“Tullow is very disappointed that this transaction has been terminated, the funds from which would have been re-invested directly into Uganda to progress the development of the country’s significant oil resources,” he emphasised.

Cabinet okayed Tullow’s proposed transfer of interests priced at about Shs3.4 trillion ($900m) in Block 1, 1A, 2 and 3A to Total E&P as long as the oil firm paid a tax of $167m in capital gains tax.

Tullow asked to pay only $85 million in instalments.

The unresolved dispute is the refusal by Uganda Revenue Authority (URA) and Government to allow CNOOC and Total to claim their farm-in cost as deductible expenditure for income tax purposes.

The problem underlying the successive tax disputes between government and the joint venture partners remains the determination by government to front load its take – secure large financial windfalls from the project prior to production phase while the investors insist that both sides should benefit at the production stage, as per the terms of the Production Sharing Agreement.

This disalignment has caused a 7-year delay in oil production, denying the country billions of dollars needs to spur economic growth. 

Observers say the three upstream joint venture partners’ decision to let the farm-down agreement expire will paralyze momentum to Final Investment Decision (FID).

With no middle ground reached, Tullow today Thursday announced termination of the farm-down deal, following the expiry of the Sale and Purchase Agreements (SPAs).

The collapse of the deal was decried by one of the partners Total, who in a statement, said it was likely to hurt investors’ confidence.

Government position

The Energy Ministry’s Permanent Secretary, Robert Kasande today said government stood its ground on the decision to slap a $167m capital gains tax on Tullow Oil, saying the “assessed taxes should be paid in line with the laws of Uganda, and tax reliefs are treated in accordance with the laws of Uganda.”

He added: “We are therefore confident that as Tullow moves to reinitiate a new sales process, the Joint Venture Partners will remain committed to fulfilling their tax obligations.”

Tullow said it took a strategic decision in 2017 to farm down to a 10% non-operated position in Uganda in order to facilitate the progress to FID and first oil.

“We have re-set our business to deliver at this equity level and therefore remain committed to reducing our equity from its current level of a 33% Operated position to around 10%,” said Mugerwa.

The Lake Albert project remains an attractive low-cost development with over 1.5bn boe of high-quality oil gross resources and a well-advanced development plan targeting peak gross production of 230,000 barrels of oil per day.

Mugerwa said Tullow would “prioritise initiating a new sales process to reduce our equity although the termination of this transaction will cause further delays to the project’s FID and ultimately Uganda’s first oil.”

Tullow Oil said while this was a frustrating juncture for the Group, it remained confident it would be overcome, and that the Lake Albert project would deliver significant value to Government of Uganda, Tullow, and its Joint Venture Partners.

“Tullow continues to make good progress, delivering significant free cash flow from our low-cost production assets, with high-quality development and exploration assets that will deliver future growth,” said Mugerwa.

“With our recent oil discovery in Guyana, strong balance sheet and good progress being made in Kenya, there is plenty to look forward to.”

Regarding delay in the planned Final Investment Decision (FID) for the oil project, Kasande said government “will continue to work with the JVPs to ensure FID is achieved at the earliest and in a manner that safeguards the country’s interests and sovereignty, while delivering a health return on investment for the licensees.”

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