TULLOW OIL’S 3.1 BILLION US DOLLAR INVESTMENT IN BALANCE
As reported via a tweet shortly after it actually happened, the Ugandan government has withdrawn the licence of exploration block 3A, one of if not the richest oil basin found so far in the country. Only recently was I able to give a complete timeline overview of the events leading up to this – for Tullow Oil at least – catastrophic development. The company spent big bucks in Uganda, an estimated half a billion US Dollars for exploration and related activities, an estimated 1.1 billion US Dollars for the acquisition sometime ago of Hardman Oil’s Ugandan interests and only recently nearly 1.5 billion US Dollars when they paid for the interests of Heritage Oil, after invoking their pre-emptive rights at the last possible moment, after ENI of Italy had made Heritage an offer they simply could not refuse, while offering under the same deal a 14 billion US Dollar investment package in Uganda’s oil industry to government.
Heritage, now harshly critizised for their ‘cut and run’ however are by nature an exploration firm, and having done their job and discovered the biggest fields up to now in Uganda, they did rightly feel that their work was done and they should leave production to others more qualified to engage in this stage and move on. While the Hardman transaction did not attract taxes when Tullow bought their assets, Heritage was faced with a tax claim, and citing precedents to the contrary opted to refer the dispute to arbitration as provided for in the PSA (production sharing agreement). Once Heritage had formally objected to the tax claims, they went for the contractually provided arbitration, located in London / UK, deposited 30 percent of the tax claim as required under Ugandan law with the Uganda Revenue Authority and are keeping the balance of about 280 million US Dollars in an escrow account in the UK, to which Tullow had paid the ‘disputed’ amount following a probably misunderstood communication to them that this was or would be in order and acceptable to government.
Yet, this was clearly not so, as they – Tullow – found out the hard way when they incurred the wrath of the powers that be in Uganda who wanted the tax paid, in full, full stop. In order to make Tullow see ‘the light’ and technically entitled to do so, government has now started to withdraw their licenses and permits for Tullow, with the richest oil finds taken from them only yesterday, when Block 3A was recalled.
Government has now the option to re-advertise these blocks and hand them to the highest bidder, but could permit Tullow to be amongst the bidders putting proposals forward, and there is no indication how government is going to proceed at this stage. They might even return them to Tullow, but for sure only after the tax claims have been satisfied in full. Should the fields be re-advertised, with the knowledge of proven reserves, Uganda would in any case stand to gain a lot more as potential bidders now know what rich finds are underground, giving further rise to speculation what Uganda might in the end do.
For Tullow Oil now their entire investment in Uganda is at risk, as more deadlines for their remaining assets also loom, and it is not clear if they are willing, or financially capable to sweeten government’s mood by paying the tax claim a second time in order to retain their ‘fields’ and move towards production, but this option may rapidly run out of time too for them.
That notwithstanding though, Heritage is sitting comfy, having first sold their Uganda interests, then been paid in full and then – as one newspaper put it last week with ‘military precision’ – withdrawn all their expatriate staff from Uganda. The company’s office in the UK has only stated that they will fully submit to the arbitration ruling by the panel in London and would release the tax money now in escrow to the URA, should the decision go against them, but equally would expect URA to return the 30 percent deposit to them, should the decision be in Heritage’s favour. They also say that ‘the deal is done, we sold, we were paid and are now no longer party to anything to do with our former fields and operations, which now belong entirely to Tullow Oil, to which all enquiries should be directed’.
Tullow’s management, and in particular their legal advisors and key figures in Uganda, will be facing harsh questions from shareholders how they could have permitted such a situation to develop and put over 3 billion US Dollars capital outlay at risk – a story which surely will make a text book reading in the future for economics students, of how NOT to do things.
Production in Uganda, initially envisaged to start in 2011, will now undoubtedly be pushed back for some more time until these issues are resolved and the oil fields can be prepared for production, while at present the Tullow oil story will surely see some more twists and turns before the saga comes to a conclusion.