Down, but not out, and Italian ENI have clearly decided to go into a second round: This time, Permanent Secretary in the Ministry of Energy, Fred Kabagambe-Kaliisa, threw himself behind ENI’s efforts to acquire Heritage Oil’s assets: “We will approve a company whose market capitalisation is three times the size of the required investment,” he is cited in the local press. That, of course, has little to do with anything. What is curious, however, is that this issue should come up again in the first place:
In December 2009, Italian ENI had first announced that they would acquire Heritage Oil’s Uganda assets, i.e. the 50% each in block, even though Tullow Oil quickly announced that they intended to exercise the pre-emptive rights contained in their contract with Heritage.
Not everyone saw the immediate benefits of observing the contractual agreements between Tullow and Heritage: Energy and Mining Minister Hilary Onek wrote to Tullow stating that the government supports the ENI deal, and that the government was concerned about a monopoly situation. In contrast, the Finance and Trade Minister had denied government backing for the ENI deal. Shortly after Onek’s surprisingly strongly worded statement about the ‘dangers’ of letting Tullow Oil control both blocks fully, his assistant minister, in another official statement, withdrew this and the president eventually clarified that the government would respect Tullow’s right to pre-empt.
Stick with the Programme
In reply to ENI’s latest moves, Tullow Oil have again kept their comments brief, merely reiterating that there would be no opportunity for ENI to participate in the two blocks.
ENI’s market capitalization is of little importance here: Tullow have, after the commercial viability of the oil field had been confirmed, begun a selection process to bring in a partner for the basin development as this would exceed both their technical and financial capacities as an exploration company. Their recommendation to the government had been to partner with both CNOOC and Total, with each partner holding 33.3% of the shares. The companies have been waiting for the government’s approval for longer than anticipated now.
More Money Matters
There is clearly some persistent pressure on the Ugandan government to favour ENI, and to further complicate matters, Uganda’s treasury is now also demanding USD360m in capital gains taxes from Heritage Oil, issuing a notice that the company would have to pay this within 45 days. After outright refusing this initially, Heritage have now offered to pay USD108m now and seek arbitration in London, with the USD108m to be refunded should the arbitration decide that the no capital gains tax is due. Energy Minister Hilary Onek, however, said that he had no intention of going to London.
In principle, capital gains tax falls due on any business sold at a higher amount. As with the ENI sale, it is unclear whether Heritage have received inadequate legal advice – or have, in fact, neglected to seek any. In trying to take the case into arbitration, Heritage will argue that previous oil asset transfers had not incurred capital gains tax. A waiver could be granted, but would probably have to go through parliament – and there will be limited public sympathy for such a case.
In the meantime, the tax dispute holds up the progress in the basin development: Government wants to see production sharing agreements between Tullow Oil and the proposed partners who, however, refuse to sign any binding agreements until it is clear that government will authorise their participation in the venture. Tullow Oil will seek to separate the tax issue from the ownership transfer.
Perspectives
The wrangling over Uganda’s oil blocks shows one thing: That Uganda now has oil assets worth wrangling about, and this will bring governance issues to the fore:
- The ENI case will be closely watched for any indications whether government respects existing agreements and contracts, or whether anyone seeking to undermine them will find ways of doing so. There is little ambiguity in the Tullow-Heritage agreement, and Tullow have been consistent in their exploration and basin development, so it is unclear why ENI’s bid is still being considered by government officials.
- The tax dispute also indicates that legal and regulatory challenges in managing the oil sector will mount, and it is clear that Uganda will have to enhance its technical capacities quickly.
Recent news indicate that the Ugandan government is still shopping around: Talks with Indian Essar, already refinery investors in Kenya and telecoms license holders in both Kenya and Uganda, have been mentioned, and the newly incorporated Africa Middle East Resources from Dubai were also in talks with the Ugandan government.
Previously, there had been a less palatable – at least in geopolitical terms – discussion partner: Iran had offered to finance all of Uganda’s oil infrastructure requirements. This proposal will not please the US, traditionally a strong ally of the Ugandan government, but that is what makes it so useful: If Western governments start grumbling about governance, then Uganda has not only the medium and long-term prospect of oil revenues to wriggle out of the restrictions from aid donors, but has some leverage even in the short term while it still needs financial support and is also looking for oil sector and infrastructure investors: If Western governments turn out to be insufficiently co-operative, there are others ready to step in. Even if it’s the Axis of Evil.
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