Writes Leo Odera Omolo
Tullow Oil plc is reportedly withdrawing from the Democratic Republic of Congo {DRC} and dropping a legal suit contesting ownership of two exploration blocks.
International news agencies recently reported its Chief Executive, Aidan Heavey, as having said in its London headquarters that the decision was made after it became clear the firm’s rights were not likely to be upheld as the government maintained it had the right to ignore or revoke earlier award to Tullow.
This happened in the same week that Tullow, after months of the discussions, signed a memorandum of understanding with Uganda, on the capital gains tax dispute to facilitate the development of oil fields..
The MOU which satisfies Uganda’s taxation concerns enable Tullow, China National Offshore Oil Corporation {NCOOC} and Total to proceed with basin-wide development with government with governments full support.
The MOU will result in the government granting Tullow’s request to purchase Heritage’s interests in the Lake Albert Basin as well as farm down interest to CNOOC and Total Uganda’s nascent industry.
It is expected to resolve the impasse created by heritage and Tullow tax situations, grant of extension in respect of Exploration Area 1 and parts of 3A in recognition of the time lost.
The MOU is conditional upon signing of sale and purchase agreements {SPAs} between Tullow, NCOOC and Total in 20 working days from March 15,2011.
In in DRC, in 2006, the DRC government awarded blocks 1 and 2 in the Albertine basin to Tullow with compatriot Heritage Oil as a joint venture partner without a presidential decree raising risk the acreage could be transferred to other prospectors.
In June 2010, DRC through presidential decree gave Blocks 1 and 2 to Caprikat Ltd and Forwhelp Ltd that are respectively registered in British Virgin Islands.
Tullow instituted legal action in the British Virgin Islands, but with limited success. The firm obtained an injunction preventing Caprikat and Forwhelp from carrying out any work pending legal determination of Tullow’s rights. Tullow also lodged a case against the DRC at the International Court of Arbitration in Paris.
“Given the expenses of further proceedings and the difficulty in enforcing any award against DRC even in the event of success, the board has taken the decision to discontinue the legal proceedings,” said Mr Heavey in the report.
He was further quoted as having said that Tullow plans, upon getting government approval, to accelerate production stage of successful Ugandan blocks where oil was discovered and the acreage lies across the Lake Albert water.
Tullow has had interests in the Lake Albert Rift basin in Uganda since 2004 when it acquired Energy Africa. Since then, Tullow has drilled approximately 40 wells with all but one encountering hydrocarbons.
Tullow expects the basin to be producing in excess of 200,000 barrels of oil per day {BOPD}. It wants to farm-down a one third interest to China Offshore Oil Corporation NCOOC} and Total to accelerate development.
Tullow, on January 17, 2010, exercised right to pre-empt Heritage’s sale of its interest in Uganda to a third party. Tullow acquired 50 percent interests in exploration areas {EA} 1 and 3A for USD 1.45 billion on July 26,2010.
About USD 1.05 billion was paid to Heritage, USD 121 million was deposited with the Uganda Revenue Authority {URA} and USD 283 million put into escrow awaiting resolving of capital gains tax between the government and heritage.
But last week reports emerging from Kampala says that with Uganda still reeling from a public purse emptied after spending 85 percent of the 2010 and 2012 budget in the first six months to December, it was emerging that the country may have entered into a window-dressing deal in which it could surrender its claim to the USD 283 million in taxes owed by Heritage Oil, further hurting the state’s revenues.
Information received from Kampala, says Uganda and Irish oil prospector Tullow are in for arbitration over a new tax dispute, just a week after they signed a memorandum of understanding that potentially unlocks the long the long delayed commercial development of Uganda’ oil fields.
A source has revealed that despite signing the MOU in which it committed to paying some USD 590 million in taxes, Tullow feels it has been over-assessed.
Although the MOU was scanty in detail, information made available by alternative sources indicates that the figure includes what Tullow will pay Uganda in settlement of USD 283 million owed by its erstwhile partner Heritage Oil as well as its own capital gains tax on the farm-down to Total and the NCOOC.
“When we signed the MOU, but made clear that we were not satisfied with the tax assessment. We all agreed to take our grievances to the Uganda Tax Tribunal and we shall respect the outcome”, said source at Tullow’s offices in Uganda.
However, officials at both the ministry of Energy and the Uganda Revenue Authority {URA}have not been forthcoming on the exact breakdown of what Tullow is paying.
According to independent sources, the USD 590 million announced by Energy Minister Hilary Onek is a compound figure that includes the USD 283 million outstanding from Heritage’s capital gains tax and the USD 307 million due on Tullow’s own sale of a 60 percent interest to CNOOC and Total. However, Tullow disputes this valuation and is only wiling to pay USD 469.million.
Apparently , the dispute stems from Tullow’s desire to have the 30 per ent advance that Heritage paid Uganda last year to unlock its sale to Tullow credited as part of its overall tax obligation.
The basis for computation of Tullow’s capital gains tax has been the subject of protracted negotiations, with the prospector trying to drag the baseline north by including what it has spent on the Ugandan program while government negotiators felt that the tax should be based on the difference between what Tullow paid Heritage and what it is getting from CNOOC and Total.
Based on earlier reports attributed to Tullow in the Irish press that suggested the company would earn USD 2.9 billion from the farm-down, Uganda, should have expected at least USD 465m million if Tullow were to inherit the USD 283 million owed by Heritage.
It is however, understood that Tullow could have earned much less than the reported figure because Total and CNOOC have raised questions over the actual value of oil reserves claimed by Tullow and the security of its rights given pending deadlines that it is not in position to meet. While a figure of one billion barrels in confirmed reserves and a prospective 1.5 billion in undiscovered reserves has been thrown about, in reality, well appraisals suggest only about 870 million barrels of oil on the upper side and 720 million on the lower end.
Well appraisal information, that this writer has seen, shows the Bufalo and Giraffe prospects contain 430 million barrels on the upper side and 380 million on the lower while the other large prospect, Kingfisher, can yield 200 million barrels at the maximum and 189 million on the lower estimate.
The Warthog, kasamene and Maputo wells are estimated to respectively contain 120 million,100 million and 20 million barrels of oil at most .With such numbers and a new round of licensing just around the corner, Tullow’s partners are apparently driving a hard bargain.
As Tullow’s Uganda woes appear to be finally on the path to resolution, the question that remains is the status of the USD 283 million in escrow and how Tullow will recover that money.
Ends