Following a two-year bargain with the Ugandan authorities over tax issues, the farm-down deal between British Tullow Oil and joint venture partners France’s Total E&P and China National Offshore Oil Company (CNOOC), has been called off.
In January 2017, the London-listed firm disclosed the signing of a Sale and Purchase Agreement (SPA) with Total to transfer 21.57 percent from its 33.33 percent interests in a joint venture partnership. CNOOC later exercised its pre-emptive right to claim a 50 percent stake in Total’s purchase as provided in the joint operating agreements.
Tullow was the official operator of four exploration areas with each of the partners holding equal shares of 33.33 percent in all of Uganda’s discoveries. Successful completion of the sale to both partners, which had been expected to close late last year, would have cut Tullow’s remaining stake to 11.8 percent.
Now, with the deal gone south, Tullow has said it will “initiate a new sales process to reduce its 33.33 percent operated stake in the Lake Albert project, which has over 1.5 billion barrels of discovered recoverable resources.”
Tax dispute
A tax dispute surfaced when the Uganda Revenue Authority (URA) first assessed the tax at $300 million over all Tullow’s assets which are valued at $900million. But the firm disagreed that the transaction was taxable. Negotiations followed over the amount and it was finally cut to $167million.
Moreover, Total and CNOOC failed to agree with the Ugandan government over the $185 million capital gains on the $617 million total investment in the project. According to Tullow, both companies could not reach an agreement with the URA on tax relief on the money they would have paid for the stake.
Existing tax policies suggest that Tullow’s $617 million investment is recoverable and tax-deductible. This means that if Tullow had not chosen to sell part of its interests, it would have recovered the amount when oil production begins without being taxed (not attracting additional capital gains tax) on the recovery of the cost.
The partners wanted the overall cost treated as a recoverable and deductible. But Uganda remained adamant it wants the already assessed $167 million in capital gains tax on Tullow’s total asset value, and it will not transfer tax deductions to Total and CNOOC on the investment as well.
This led to the majors declining to extend the deadline for the deal to be completed. In other words, the SPA expired without the buyers of its shares on offer (Total and CNOOC) showing interest to have it extended.
“Since 2017, all parties have been actively progressing the SPA. Despite diligent discussions with the authorities, no agreement on the fiscal treatment of the transaction has been reached. The deadline for closing the transaction has been extended several times, clearly demonstrating the endeavors of the parties to find an agreement,” Total’s President for Exploration and Production, Arnaud Breuillac said.
How the collapsed deal affects Uganda
The complication over the tax issue with Tullow and partners is critical to Uganda, the East African says. This is because the country is now challenged to assure investors of a good business environment, having de-risked the oil and gas sector due to high discovery rates.
Furthermore, no agreement has been reached going forward on the project, a development that will cause further delay in reaching the Final Investment Decision (FID). The partners had planned to reach a final investment decision on development by the end of 2019 but aborting the stake sale “is likely to lead to further delay”, Tullow explained.
Chief Executive Paul McDade told Reuters it was too early to give a new timeframe for the FID or to talk about potential new partners in the project. Also, Total and CNOOC are yet to indicate their view on a fourth partner coming in, while there is the question of whether the next investor will agree to pay the taxes.
Despite the bottlenecks, Ugandan Permanent Secretary Ministry of Energy and Mineral Development, Robert Kasande, has said Tullow will have to look for another buyer or find money from other sources to ensure that the project progresses. “As far as government is concerned we need the project to progress,” Kasande declared.
