Anglo-Irish firm Tullow Oil has signed a deal with French oil major Total to surrender all its interests in Uganda’s Lake Albert oil project for $575 million.
The announcement made on April 23, comes after long drawn-out negotiations and disagreements, which saw talks between Uganda Revenue Authority and the oil companies collapse over the assessment of the capital gains tax that Tullow was expected to pay from the sale of its assets in the Lake Albert project.
The disagreements saw Uganda and the joint-venture partners in the oil project miss the August 2019 deadline deadline they had set for Final Investment Decision (FID), prompting Total—the lead investor in the East Africa Crude Oil Pipeline—to suspend all activities on the $3.5 billion pipeline project.
Total chief executive Patrick Pouyanne said Tullow deal, which is expected to be concluded later this year, is a major development as it takes Uganda and its partners in the oil project back on course towards FID, and eventually production.
With Tullow’s exit, the joint venture partners in Uganda’s oil now are Total and China National Offshore Oil Corporation (CNOOC).
“We are pleased to announce that a new agreement has been reached with Tullow to acquire their entire interests in the Lake Albert development project for less than $2 per barrel in line with our strategy of acquiring long-term resources at low cost, and that we have an agreement with the Uganda government on the fiscal framework,” Mr Pouyanne said.
“This acquisition will enable us, together with our partner CNOOC, to now move the project forward toward FID, driving costs down to deliver a robust long-term project,” he added.
Uganda’s Minister for Energy Mary Goretti Kitutu welcomed the deal, saying “the agreement is a significant milestone in Uganda’s oil and gas sector and is a critical development that takes the sector towards the Final Investment Decision that the country is eagerly waiting for.”
The FID is expected to bring an investment of over $20 billion, and accordingly, the government agencies are reviewing the sale and purchase agreement to facilitate grant of the necessary approvals and conclusion of the transaction, the minister added.
Last month, Total said it would cut its investment spending for 2020 by $3 billion and save $800 million this year on operating costs compared with 2019, instead of the $300 million previously announced.
Other super majors—BP, Exxon Mobil and Royal Dutch Shell—have all announced similar drastic plans to save money and cut investments, according to a study by market analyst Wood Mackenzie which says the upstream of the African oil sector will reduce its investment by approximately 33 per cent this year.
Debt triggered sale
Analysts say that Tullow was in a “weak financial position” as its debt stood at $2.8 billion at the end of 2019, forcing the company to scale down operations by laying off workers in Uganda and Kenya.
Industry analysts add that in this position, the London Stock Exchange-listed Irish firm therefore “had no option but to sell” as it had a grown huge debt which it needed to start reversing this year.
Tullow executive chair Dorothy Thompson confirmed this when she announced on Thursday that net proceeds from this sale will be used to reduce the company’s debt, strengthening its balance sheet, reducing ongoing financial costs and moving Tullow towards a more conservative capital structure.
“This deal is important for Tullow and forms the first step of our programme of portfolio management. It represents an excellent start towards our previously announced target of raising in excess of $1 billion to strengthen the balance sheet and secure a more conservative capital structure,” she said in a press release announcing the deal.
Under the terms of the deal, Total will acquire all of Tullow’s existing 33.3334 per cent stake in each of the Lake Albert project licenses EA1, EA1A, EA2 and EA3A and the EACOP.
The transaction is subject to the approval of Tullow’s shareholders, to customary regulatory and government approvals and to CNOOC’s right to exercise pre-emption on 50 per cent of the transaction.
But experts say the industry is currently reeling from the collapse of crude oil prices by about 55 per cent since start of 2020, now at about $30 per barrel; because of this, companies are scaling down investment and operations, which may see the takeoff of Uganda’s projects delayed.