Economic AND Business News By Leo Odera Omolo In Kisumu City.
The Irish multinational oil firm, Tullow Oil is likely to lose billions of dollars under its existing exploration deal, which appear to be heading to the rock.
The simmering battle between Uganda and the oil exploration companies boiled up over last week with Irish firm, Tullow Oil losing its rights in the 400 million-barrels Kingfisher oil well, located I Western Uganda.
This development is well captured in a shocking in article published this week by the influential weekly, the EASTAFRICAN. The report revealed in detailed account the fallout between the government and two Oil companies, Tullow and Heritage oil.
The development comes just weeks after Tullow oil paid its business partner in the blocks, Heritage Oil, nearly USD 1.5 billion for its stake – in a move that the industry players- had already described as “reckless”.
Citing section 20 {1} and {2} of the Petroleum Exploration and Production Ac/Cap 150,the Uganda’s Minister for Energy Hillary Onek last week made point blank clear to Tullow and Heritage that the period within which they should have applied for a Petroleum Production license 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 {Kajiburuzi} Discovery Area has ceased to form part of the Petroleum Exploration Area 3A {EA-3A} under the Petroleum Exploration License grated to you on September 8,2004.”
The Minister’s letter went on, “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 USD 1.45 billion exit from Uganda, its east while partner Tullow, which has spent some USD 3.1 billion in acquisition and operations in Uganda, has been left severely exposed, adds the report.
Against the 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, the report says.
Uganda had refused to clear the deal until Heritage paid USD 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- USD 121 million-to the Uganda Revenue Authority, with the rest to be deposited in an escrow account pending the outcome of the arbitration proceedings in London.
However, the report says, Tullow proceeded to pay the remaining USD 287 million into an account with Standard Chartered in London, effectively putting the money out of reach of Uganda regardless of the outcome of the arbitration.
This development angered Ugandan officials, setting of counterattack that culminated in their invoking the law against Tullow.
Minister Onek last week told the EASTAFRICAN that the oil production Sharing Agreements signed with exploration firms were clear that tax disputes would be exclusively referred to Ugandan law.
“There is a whole page about tax in the Production Sharing Agreement, which puts tax disputes under Ugandan law and only other issues are subject to arbitration in London. There are also provisions for a tax tribunal under Ugandan law to which Heritage could take their dispute. Remaining 70 per cent of the dispute sum should have been deposited in a Ugandan bank, not Standard Chartered 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 so 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 USD 150 million of its dues for interests in any other field held by Tullow, sensing what was coming; they upped the game and got USD 100 million in cash instead.
This is part of the money they used to deposit the USD 121 million with the URA effectively leaving them in a position to deliver the USD 1.33 billion they had promised their shareholders.
The report says that Tulow 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 misrepresentation, says the report, include data on oil finds by Heritage, which at the time did not belong to Tullow. A collapse of the transfer deal would expose this, threatening the USD 3.1 billion that has so far been spent by the company in Uganda.
Tullow’s USD 3.1 billion exposure in Uganda is made up as follows. The USD 1.1 billion Hardman buyout, USD 500 million exploration of block 2 and the USD 1.45 billion Heritage buyout. Block 3A expires in 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 USD 150 million to explore 6,279 square kilometers, Tullow claims to have spent USD 500 million on much smaller area. Unless there are demonstrable geological differences to justify the costs, belong to Tullow’s costs, which are deductable fro sales.
Ends
leooderaomolo@yahoo.com