Row over transfer of Tullow Oil’s past costs delays deal on Uganda oil

Tuesday July 23 2019

Tullow Oil workers at a rig in Buliisa in Uganda.

Tullow Oil workers at a rig in Buliisa in Uganda. PHOTO | FILE | NATION MEDIA GROUP 

HALIMA ABDALLAH
By HALIMA ABDALLAH
More by this Author

The final investment decision on Uganda’s oil remains uncertain as the oil companies and the government haggle over the tax treatment in Tullow Oil’s farm-down deal.

This is blamed on a disagreement over the transfer of Tullow’s past costs.

The EastAfrican understands that Tullow Oil has invested $617 million in its operations in Uganda’s Albertine Graben, and it is this investment that the multinational intends to sell to China National Offshore Oil Company (CNOOC) and Total E&P.

Tullow says the cost is recoverable under the Production Sharing Agreement (PSA) it signed with the Ugandan government. It wants it transferred to its successors in title — a position the government has reportedly rejected.

TAX DUE

In February, the government and oil companies agreed to a $167 million capital gains tax (CGT) assessed by the Uganda Revenue Authority (URA), down from $300 million, which had initially been calculated amid protests by Tullow, who said they were excessive.

Advertisement

The tax authority had maintained that the $300 million was a fair share from Tullow’s transaction valued at $900 million.

It has emerged that the companies — CNOOC and Total — are opposed to the government’s proposal on how to treat the past costs. While the companies’ view is that the cost is transferred to them as buyers, the government opposes this.

“The Uganda Revenue Authority wants the already assessed $167 million capital gains tax, but also effectively, and in economics terms, doesn’t want to transfer tax deductions of the $617 million to Total and CNOOC,” a source familiar with the discussion told The EastAfrican.

The companies want the overall cost ($617 million) treated as recoverable and therefore tax deductible, meaning that it does not attract additional CGT which stands at 30 per cent.

“I guess both sides are haggling over the values that are due to their shareholders, but as private sector we are bleeding because of the delays and timing of activities,” said Uganda Chamber of Mines and Petroleum chairman Elly Karuhanga.

NEGOTIATIONS

The economic argument is that the $617 million is money invested by Tullow which, under the existing tax regimes and PSA, is recoverable and tax deductible, and so, if Tullow had not opted to sell a portion of its interests, it would have recovered the amount when oil production begins, without being taxed on the recovery of the cost.

“We still have issues of how the tax will be paid but details are with URA. We also have issues that were not resolved concerning commercial agreements. When we resolve those issues, then we shall know when FID will be taken. Let us for now take one issue at a time,” said energy permanent secretary Robert Kasande.

Tullow in its trading report acknowledges that final agreement with the Uganda government is yet to be reached.

“We continue to work constructively with our joint venture partners and the government of Uganda to agree a way forward and the consequent timing of FID. Nevertheless, although negotiations continue, Tullow is currently considering all options in pursuing the sale of its interests in Uganda,” said Tullow in its trading statement.

The firm announced that it had signed a sale purchase agreement (SPA) on January 1, 2017 with Total E&P to transfer 21.57 per cent of its 33.33 per cent stake in the joint venture partnership, which includes China National Offshore Oil Company (CNOOC). Tullow will now own 11.7 per cent interest.

The development follows two years of haggling over the tax. Initially, URA assessed the tax at $300 million over all of Tullow’s assets valued at $900 million, but Tullow disagreed that the transaction was taxable. Since then, there have been negotiations over the amount, which finally came down to $167 million.

STUMBLING BLOCK

In January 2019, Tullow Oil’s and Total E&P’s chief executive officers met with President Yoweri Museveni at State House in Entebbe where a significant decision on the disputed tax was arrived at. Sources told The EastAfrican that Total agreed to meet part of the tax amounting to $82 million to move processes forward, largely because Tullow argued that it was excessive of actual payable tax.

But the tax issue has refused to go away and now has become one of the major stumbling blocks in reaching the FID.

Total’s spokesperson Anita Kayongo said progress has been made on the project “and technically they are ready.”

“But certain key issues remain unaddressed in order to take the FID, which includes the Tullow transaction and the finalisation of legal and commercial framework for the pipeline project,” she said.

Advertisement