Tullow Oil is initiating a new sales process to reduce its 33.3% stake in Uganda’s Lake Albert oil project after its planned $900 million sale to joint venture partners Total E&P and the China National Offshore Oil Corporation failed to get clearance from the Uganda government, the company said on Thursday.
A statement released by the London-based Tullow said it had failed to secure a further extension of the sale and purchase agreements with its joint venture partners, a “result of being unable to agree all aspects of the tax treatment of the transaction with the government of Uganda.” The agreements will therefore expire on Thursday.
The company said the Uganda Revenue Authority and Total E&P and Cnooc had failed to agree on tax deductions for the transaction price that the two firms would pay for Tullow’s assets.
Robert Kasande, the permanent secretary of the ministry of energy and mineral development, said Tullow had initially “sought transfer of its interest without payment of any capital gains tax arising from the sale, and also on the condition that certain tax deductions not ordinarily transferable to the buyers be transferred to the buyers.”
However, in its financials for 2018 released in February, Tullow said later agreed to pay capital gains tax on the transaction following meetings this January between President Museveni, its chief executive, Paul McDade, and Total’s chief executive.
“The government and the JV Partners are now engaged in discussions to finalise an agreement reflecting this tax treatment that will enable completion of the farm-down to take place,” Tullow said in its 2018 results statement.
The sale was conditionally approved by the energy ministry when it was first announced in 2017 subject to, among other things, “payment of the taxes as assessed by the Uganda Revenue Authority in accordance with the laws of Uganda,” according to Mr Kasande.
The Uganda Revenue Authority communicated its stand on the taxes that the three companies were required to pay in August 2018, following meetings between government representatives and the oil companies, Mr Kasande said in a statement.
“Government’s position is that the assessed tax should be paid in line with the laws of Uganda and tax reliefs are treated in accordance with the laws of Uganda,” the statement adds.
Tullow announced the farm-down in January 2017, with the initial statement saying the company would sell 21.6% of its 33.3% interests in Exploration Areas 1, 1A, 2 and 3A to Total, the French energy major. Two months later, Cnooc exercised its pre-emption rights as a joint venture partner and said it would be acquiring 50% of the interests Tullow was selling.
The transactions were however subject to government approval.
The three oil companies have equal stakes in the Lake Albert Exploration Areas 1, 1A-Lyec, 2 and 3-Kingfisher. This follows a 2012 farm-down by Tullow in which it sold 66.6% of its stake to Total and Cnooc.
On his part, Total’s president of exploration and production, Arnaud Breuillac, said Total and its partners will continue focussing efforts on the development of the Lake Albert project “despite the termination of this agreement.”
“The project is technically mature and we are committed to continuing to work with the Government of Uganda to address the key outstanding issues required to reach an investment decision,” Mr Arnaud said in a statement released by Total E&P Uganda.
“A stable and suitable legal and fiscal framework remains a critical requirement for investors.”
Tullow was however less guarded on the termination. “The joint venture partners had been targeting a final investment decision for the Uganda development by the end of 2019, but the termination of this transaction is likely to lead to further delay,” it said.
Tullow said it will initiate a new sales process to reduce its stake in the Lake Albert oil project. Total, on the other hand, said it reserves the right to “pre-empt any future transactions, in case any party divests part or all of its interest.”
“Government will continue to work with the joint venture partners to ensure the final investment decision is achieved at the earliest and in a manner that safeguards the country’s interests and sovereignty, while delivering a healthy return on investment for the licensees,” said Mr Kasande.