In Brief: Tullow Oil to Resolve Tax Dispute with Ugandan Government
Wednesday, 09 March 2011
No details are available yet, but news reports indicate that the tax dispute in Uganda may be resolved shortly – some movement in this protracted stand off had been expected once the February 2011 elections were concluded. This would allow Tullow Oil to reprise exploration activities - reportedly the Kingfisher license will be restored as well - as well as move ahead with the farm in of Total and CNOOC to begin production.

Heritage Oil had sold their 50% stake in two jointly operated blocks to Tullow, but argued that the transaction did not incur capital gains. Tullow had then effectively been taken hostage over this. The Ugandan government had spent extravagantly in the run up to the election, and the USD404m on the USD1.45bn transaction must have looked too good to let go. Heritage eventually agreed to pay USD120m directly to the GoU and put the remainder into an escrow account with the offer to go into arbitration in the UK, but GoU refused to agree to this.

The stand off has yielded some insights into how the nascent oil sector in Uganda may develop:
  • More corruption? The agreement between both exploration firms gave Tullow pre-emptive rights in case Heritage should want to exit. When Heritage announced their plans to sell their share in the two blocks to Italian ENI, Tullow instantly countered that they intended to exercise their pre-emptive rights. It was then curious to see the Minister for Energy and Mines, Hilary Onek, vociferously weighing in on ENI’s side. Later, the suspension of the Kingfisher license had also been seen as a potential opening for ENI. However, given the overall weak governance levels in Uganda, allegations of corruption around this deal did not come as a surprise - it was probably merely a matter of time until this would hit the oil sector.
  • Not enough transparency? The production sharing agreements (PSA) on the two blocks were never made public (although leaked versions exist), so the exact terms and conditions of the agreements between the GoU and the exploration firms are difficult to assess. The dispute in the past months obviously suggests that more transparency would be useful, but that would be incompatible with vested interests.
  • Limited capacity: As a new oil producer, Uganda still has limited technical capacities to manage its nascent oil sector, both in terms of skilled human resources as well as with regard to institutions. GoU’s reluctance to agree to arbitration in the UK had been explained with concerns over its limited legal capacities. Several donors and the exploration firms have offered capacity building support, but as with the production sharing agreements, this becomes less palatable when more competent staff and institutions then compete with vested interests.
Aside from delaying the onset of oil production, now anticipated for 2012, the dispute has provided worrying indications of how Uganda will manage its oil sector. Uganda needs substantial investment to build this industry and the related infrastructure like a refinery and pipeline, and potential investors have watched GoU’s actions closely. The support given by government officials to ENI muscling in on a contract that clearly allocated pre-emptive rights and the pressure exerted on Tullow over what are Heritage’s tax liabilities do not yield a very positive verdict.

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