sharing in governance of extractive industries

Tullow loses money and rights as oil deal goes bust (The East African)

By Michael Wakabi

The simmering battle between Uganda and exploration companies over oil revenues boiled over last week with Irish firm Tullow Oil losing its rights to the 400 million-barrel Kingfisher well.

The development comes just weeks after Tullow paid its partner in the blocks, Heritage Oil, nearly $1.5 billion for its stake — a move industry analysts had already described as reckless.

Citing section 20 (1) and (2) of the Petroleum Exploration and Production Act Cap150, Energy Minister Hillary Onek told Tullow and Heritage that the period within which they should have applied for a Petroleum Production Licence for the Kingfisher field expired in February 2010.

“In accordance with the powers entrusted in the Minister under Section 19 (1b) of the Act, I hereby direct that the Kingfisher (Kajuburizi) Discovery Area has ceased to form part of the Petroleum Exploration Area 3A (EA-3A) under the Petroleum Exploration Licence granted to you on September 8, 2004.

“You are therefore either jointly or severally to cease carrying out any activities under the Discovery Area,” the minister says in an August 17 letter to the two companies.

While Heritage may be home and dry as its shareholders share out part of the proceeds from its $1.45 billion exit from Uganda, its erstwhile partner Tullow, which has spent some $3.1 billion in acquisitions and operations in Uganda, has been left severely exposed.

The EastAfrican has learnt that, against conventional wisdom, Tullow rushed to pay its partner the full exit costs, even before the deal had secured full approval from the Ugandan government over a pending tax dispute.

Uganda had refused to clear the deal until Heritage paid $408 million in capital gains tax. As the deadline for expiry of Tullow’s pre-emption rights loomed in early July, the government relented, giving conditional approval to the deal after Heritage offered to pay 30 per cent of the dispute sum — $121 million — to the Uganda Revenue Authority, with the rest to be deposited in an escrow account pending the outcome of arbitration proceedings in London.

However, Tullow proceeded to pay the remaining $287 million into an account with Standard Charted in London, effectively putting the money out of reach of Uganda regardless of the outcome of the arbitration.

This angered Ugandan officials, setting off a counterattack that culminated in their invoking the law against Tullow.

Speaking to The EastAfrican about the tax dispute last week, Mr Onek said the Production Sharing Agreements signed with the firms were clear that tax disputes would be referred to Ugandan law.

“There is a whole page about tax in the Production Sharing Agreements, which puts tax disputes under Ugandan law and only other issues are subject to arbitration in London. There is also provision for a tax tribunal under Ugandan law to which Heritage should take their dispute. The remaining 70 per cent of the dispute sum should have been deposited in a Ugandan bank, not Standard Charted London.

“We therefore consider the agreement under which Conditional Approval was granted invalid until all the conditions for conditional consent are fulfilled,” Mr Onek said, adding that Uganda would not continue dealing with a “dishonest company.” “There are many other companies willing to come in,” he said.

Tullow is now carrying the cross all by itself having paid Heritage the full price of its exit from Uganda. While Heritage had earlier agreed to exchange $150 million of its dues for interests in any other field held by Tullow, sensing what was coming, they upped the game and got $100 million in cash instead.

This is part of the money they used to deposit the $121 million with the URA, effectively leaving them in a position to deliver the $1.35 billion they had promised their shareholders.

The EastAfrican has learnt that Tullow was desperate to close the deal because it had not been completely honest with its shareholders. For months, it had been making positive statements about the Ugandan business, which pumped up its share price on the London Stock Exchange.

Such misrepresentations included data on oil finds that included finds by Heritage, which at the time did not belong to Tullow. A collapse of the transfer deal would expose this, threatening the $3.1 billion that has so far been spent by the company in Uganda.

Tullow’s $3.1 billion exposure in Uganda is made up as follows: The $1.1 billion Hardman buyout, $500 million exploration of block 2 and the $1.45 billion Heritage buyout. Block 3A expires on September 7 while Block 1 expires next year.

Questions are also emerging on how Tullow racked up such huge costs for its operations in Uganda.
While Heritage spent $150 million to explore 6,279 square kilometers, Tullow claims to have spent $500 million on a much smaller area.

Unless there are demonstrable geological differences to justify the costs, something is not right with Tullow’s costs, which are deductible from sales.

Available: http://www.theeastafrican.co.ke/news/Tullow%20loses%20money%20and%2...

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