Mixed bag of fortunes for Tullow Oil: As it exits DRC, it gets a deal on tax

Monday March 21 2011

Tullow has had interests in the Lake Albert Rift basin in Uganda since 2004 when it acquired Energy Africa. It has drilled approximately 40 wells with all but one encountering hydrocarbons. Photo/FILE

Tullow has had interests in the Lake Albert Rift basin in Uganda since 2004 when it acquired Energy Africa. It has drilled approximately 40 wells with all but one encountering hydrocarbons. Photo/FILE 

By KENNEDY SENELWA Special Correspondent

Tullow Oil Plc is withdrawing from Democratic Republic of Congo (DRC) and dropping a legal suit contesting ownership of two exploration blocks.

Chief executive officer Aidan Heavey said 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 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, enables Tullow, China National Offshore Oil Corporation (CNOOC) and Total to proceed with basin-wide development with government’s full support.

The MOU provides a process which will result in the government granting for Tullow’s purchase of Heritage’s interests in the Lake Albert Basin as well as farm down interest to CNOOC and Total in Uganda’s nascent industry.

It is expected to resolve the impasse created by Heritage and Tullow tax situations, development of Kingfisher field, grant of extension in respect of Exploration Area 1 and parts of 3A in recognition of the time lost.

The MOU is conditional upon the signing of sale and purchase agreements (SPAs) between Tullow, CNOOC and Total in 10 working days from March 15.

Back to the 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 decrees gave Blocks 1 and 2 to Caprikat Ltd and Foxwhelp 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 Foxwhelp 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.

He said 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 National Offshore Oil Corporation (CNOO) and Total to accelerate development.

Tullow on January 17, 2010 exercised right to pre-empt Heritage’s sale of its interests in Uganda to a third party.

Tullow acquired 50 per cent interest in exploration areas (EA) 1 and 3A for $1.45 billion on July 26, 2010.

About $1.05 billion was paid to Heritage, $121 million was deposited with Ugandan Revenue Authority (URA) and $283 million put into escrow Awaiting resolving of capital gains tax between the government and Heritage.

Uganda had granted conditional approval for purchase and farn-in but it later argued final approval for both transactions will not be received until a basis for resolution of Heritage capital gains tax dispute.

Negotiations

Tullow and Uganda negotiated and a legally binding Memorandum of Understanding was drafted to pave way for farm-down and development of all assets within the Lake Albert Rift basin by Tullow, Total and CNOOC.

Mr Heavey said although good progress had been made recently, the elections on 18 February affected timing of a final agreement, the parties had engaged in negotiations to resolve issue.

“Good progress has been made on the first phase of the EA 2 development. An extended well testing programme is planned for the second quarter of 2011 with test crude to be sold to a domestic industrial user,” he said.

Field development plans have also been submitted to Uganda for the Waraga, Mputa and Nzizi discoveries as required at the end of the appraisal period.

It is anticipated Kasamene Field Development Plan will be submitted in the second quarter of 2011.

Front-end engineering and design phase for the Nzizi and a Kasamene development project has been completed.

Work is under way to progress development. Nzizi gas field development will deliver gas to a new power plant in the Lake Albert area.

First gas is subject to sales agreements and power plant is expected to ready in 2012.

Timing of Kasamene development, based on a production facility with an initial capacity of up to 10,000 bopd, is under review to determine how development will be best integrated into the overall Lake Albert plan.

After completion of farm-down to CNOOC and Total, partners will work closely with Government on a development plan aimed to deliver over 200,000 barrel of oil per day for refining.

The refining option cover supply of oil products to region as well as pipeline export routes to international markets.

The target for achieving significant oil production from this phase of the development is currently 2015.

Heavey said yellow has paid focus to capacity building in Uganda by focusing on maximising recruitment of locals to ensure the long-term sustainability of the project and of the industry as a whole.

“Over 80 per cent of the team working in Kampala, Cape Town and London are Ugandans. Competencies continue to build through on-the-job experience and formal training,” he said.

Tullow has also stepped-up programme to build capacity in the supply sector by encouraging local businesses to partner with international specialists.

A logistics suppliers open day held in January 2011 attended by over 500 service providers, was a forum for debate on the way in which access to the industry by local entrepreneurs can be supported.

More events are planned to expand efforts to every sector of the industry.

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