Plans by London-listed Tullow Oil to sell its stake in Uganda to France’s Total E & P and China’s CNOOC have collapsed over a tax dispute with Uganda Revenue Authority (URA), a development that could see more delays in the planned Final Investment Decision for the Albertine oil development project to 2020.
Tullow said in a statement on Thursday that its farm-down to Total and CNOOC will terminate at the end of today, 29 August 2019, following the expiry of the Sale and Purchase Agreements (SPAs).
“Tullow has been unable to secure a further extension of the SPAs with its Joint Venture Partners, despite previous extensions to the SPAs having been agreed by all parties,” said the firm, according to its statement seen by ChimpReports.
“The termination of this transaction is a result of being unable to agree all aspects of the tax treatment of the transaction with the Government of Uganda which was a condition to completing the SPAs,” added Tullow.
It all started in January 2017 with Tullow signing a purchase agreement with Total, agreeing to transfer 21.57% of its 33.33% interests in Exploration Areas 1, 1A and 2 in the Lake Albert Development project at $900 million (Shs3.2 trillion).
Tullow was expected to receive $200 million (Shs720 billion) in cash—consisting of $100 million on completion of the transaction and $50 million at both Final Investment Decision and first oil.
The balance of $700 million (Shs2.5 trillion) in deferred consideration will fund Tullow’s share of the development and pipeline costs.
In February 2017, CNOOC Uganda exercised its pre-emption rights to acquire 50% of the interests being transferred to Total.
Tullow in September 2017 notified the government about the farm-down to Total and CNOOC. The government agreed to the farm-down but slapped on Tullow a $167m ( (Shs600b) capital gains tax, leading to the new tax dispute.
Tullow said it was not liable to capital gains tax because it was transferring shares to another investor for reinvestment in the project. Uganda Revenue Authority and government technocrats insist that Tullow must pay the capital gains tax.
Ending the Standoff
In mid-January 2019, President Museveni met chief executives of the oil companies in an effort to end the standoff.
In a meeting with Total chairman Patrick Pouyanne, Museveni reached an amicable agreement, and Pouyanne reportedly agreed to pay $82m (Shs302b), out of the $167 million (Shs600b) tax as a loan to Tullow. Tullow Oil Plc, Tullow Uganda Pty’s parent company chief executive officer Paul McDade also met the president around the same time.
They reportedly agreed to the principals on how the tax in dispute would be cleared, seemingly unlocking the standoff. After the meeting, McDade indicated that Tullow would settle the tax payments to Uganda’s treasury in phases with a final figure partly tied to the oil field project’s progress. But the issue still seems to be unresolved even among the joint venture partners.
The Independent recently reported that one of the sticky points holding the finalization of the final approval of the farm-down deal is that the government insists that Tullow should be given $167 million invoice.
But Tullow insists that it should be given an invoice of $85 million since Total agreed to pay $82 million. Tullow also reportedly asked to pay the $85m (Shs316b) million in installments.
In a statement today, Tullow said while its capital gains tax position had been agreed as per the Group’s disclosure in its 2018 Full Year Results, the “Ugandan Revenue Authority and the Joint Venture Partners could not agree on the availability of tax relief for the consideration to be paid by Total and CNOOC as buyers.”
Tullow said it would “initiate a new sales process to reduce its 33.33% Operated stake in the Lake Albert project which has over 1.5 billion barrels of discovered recoverable resources and is expected to produce over 230,000 bopd at peak production.”
The Joint Venture Partners had been targeting a Final Investment Decision for the Uganda development by the end of 2019, but the termination of this transaction is likely to lead to further delay.
Mcdade today said Tullow has “worked tirelessly over the last two and a half years to complete this farm down which was structured to re-invest the proceeds in Uganda.”
He added: “Whilst this is a very attractive low-cost development project, we remain committed to reducing our operated equity stake. It is disappointing to report this news at a time when we are making so much progress elsewhere towards the growth of the Group with our recent oil discovery in Guyana and the first export of oil from Kenya.”
The government of Uganda projects that Tullow, Total and China’s Cnooc Ltd will start production by 2022.
Uganda has close to 2 billion barrels of recoverable oil in the Albertine Graben.
At peak production, Uganda will produce about 230,000 barrels per day with an estimated revenue of US$43 billion over 25 years.
It is estimated that construction of the pipelines will take between three to four years. The crude export pipeline will transport crude oil from the refinery located in Kabaale in Hoima District to Tanga Port in Tanzania.
Uganda expects a total investment of US$ 20 billion in exploration and production, refinery, pipeline and supportive infrastructure such as an international airport in Kabaale, and the oil roads. Such investment are expected to create more than 300,000 direct, indirect and induced jobs.