Saturday, August 28, 2010

Government takes away Tullow oil licence

An oil rig prepares to drill in western Uganda, near the shores of Lake Albert, June 15, 2007. FILE PHOTO
An oil rig prepares to drill in western Uganda, near the shores of Lake Albert, June 15, 2007. FILE PHOTO 
By John Njoroge  (email the author)
Posted Friday, August 27 2010 at 00:00
Government has taken back a major oil field in western Uganda over a tax dispute, bringing Tullow Oil’s operations in the country to a standstill. The oil-rich Kingfisher field is part of block 3A that Tullow shared with Heritage Oil but which it acquired after buying out Heritage’s 50 per cent stake for $1.5billion.
Tax war The sale has sparked off a dispute over $405 million that government says Heritage must pay in capital gains tax. Heritage, which says the transaction does not attract tax, paid $121m to Uganda Revenue Authority out of $1.045b it received from Tullow and put another $283m in an escrow account, pending resolution of the dispute through arbitration.
Government says the tax must be paid in full and Energy Minister Hilary Onek last week wrote to the oil companies informing them that the exploration licence they hold over block 3A, which expired in February, would not be renewed until the tax is paid in full.
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“We put our foot down and nothing moves until they have paid tax,” Mr Onek told Daily Monitor yesterday. Government officials say Tullow was advised not to pay the amount in dispute to Heritage but went ahead and did so.
This development means that while Heritage shareholders are due to share a special dividend of £315m today, having cashed in their interest, Tullow, which plans to sell two-thirds of its interest in the blocks on to France’s Total and China’s CNOC for development, finds itself without its money and without its oil field.
Tullow’s shares on the London Stock Exchange fell by 59 pence, on the news, wiping over £500m off the company’s value. The slide also sliced £3.8m off the value of Tullow CEO Aidan Heavey’s stake in the group, which is now worth £79.2m.
Earlier on Wednesday, Mr Heavey told the Dow Jones financial publication in London that the tax dispute between the government of Uganda and Heritage Oil will ruin the country’s infant oil industry.
Tullow attacks Heritage He accused Heritage Oil of trying to avoid paying capital gains tax and said Tullow would, in fact, pay capital gains tax to the Ugandan government when it closes an agreement to sell two-thirds of its Lake Albert oil licences to China National Offshore Oil Company.
“Tullow will owe capital gains tax and we will pay it without question,” Mr Heavey said. “We need to sit down with the government and calculate the amount due once the deal is complete.
The tax is due; it’s just a matter of the quantity. It does the oil industry no good for Heritage to deny all its capital gains liability. The dispute should be resolved quickly to demonstrate to the Ugandan people that the oil industry is legitimate,” Mr Heavey told Dow Jones.
Tullow’s Corporate Affairs Manager in Uganda, Mr Jimmy Kiberu, said, “The issue of capital gains tax payment is obvious. Tullow will pay its bit and so should Heritage whom we bought off.”
Heritage’s sale of its Ugandan assets means it no longer has any interests in the country and it is understood it will continue to fight the demands, analysts said. Tullow has no get-out clause it can use to wriggle out of the Heritage deal, and has no way of forcing its former partner to cough up.
The oil reserves in western Uganda are estimated at two billion barrels and it is understood that once the tax is paid, Tullow will receive a go-ahead to start a $10 billion project to get the oil out of the ground in conjunction with Total and CNOC.

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