Problems on problems in Uganda

Uganda’s nascent oil and gas industry is very much in the news these days as a tax dispute between the government and Heritage Oil Co. escalates to include Tullow Oil, as well as Total SA and CNOOC.
At bottom, the dispute is over the amount of capital gains tax Heritage is to pay the government of Uganda after selling two 50% stakes in two oil fields in the Lake Albert Rift area to Tullow.

Tullow paid $1.4 billion to buy the stakes from Heritage, its partner in the region. The Uganda government now claims it is owed $405 million in tax on the deal, while Heritage disagrees.

When the deal closed in July, Tullow said it paid $121 million to the Ugandan treasury and put the remaining $283 million into an escrow account, pending the findings of an arbitration court.

Now, as a result of the ongoing dispute, Uganda’s energy minister Hilary Onek has withdrawn the license for the Kingfisher field, which forms part of Block 3A, saying the license expired in February 2010.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 said in a letter to Heritage and Tullow.

To a certain extent, Tullow had already been prepared for the move. In its half-yearly report issued to shareholders earlier in August, Tullow said that there might be a slow down in activities due to the tax problem.

“This includes development activities on the Kingfisher field where the Government have indicated that they will not grant an appraisal license extension until the tax matter is resolved,” Tullow said.

The tax dispute will also delay the implementation of joint venture agreements Tullow has already signed with Total SA and CNOOC to sell to each a third of its new stakes in the Lake Albert oil blocks.

The dispute between Heritage and Kampala has left a bad taste in everyone’s mouth, not least that of Tullow Oil, which has come under criticism for what one analyst called its “reckless” move in buying the stakes and selling them on to Total and CNOOC.

According to London’s Sunday Times, “it is understood that Heritage, which last week used the Tullow payout to hand its investors a £315 million dividend, will not rush the resolution of the tax issue. It has left Uganda and received most of its money. The pressure lies solely on Tullow.”
Indeed, market sources tell the Sunday Times that Tullow CEO Aidan Heavey may offer a guarantee to cover the disputed sum, pending the outcome of arbitration, or repay it in kind from future turnover. He could even pay the cash now and seek to recover it later from Heritage.

Any way you slice it, the dispute badly overshadows the dramatic finds made in Uganda by Tullow and Heritage. Let’s hope the dispute is resolved quickly and amicably to everyone’s best interests – especially those of the Ugandan people who will earn more from produced oil than from oil in the ground.