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Tullow’s Shs 3 trillion farm-down to Total and CNOOC terminated over a tax dispute

Gov’t maintains that all the assessed taxes should be paid.

The proposed farm- down of part of the assets of Tullow Uganda Operations Pty Ltd to Total E&P Uganda and CNOOC Uganda has been terminated following the expiry and non- extension of the Sale and Purchase Agreement (SPA), Tullow Oil Plc has announced. Tullow Uganda Operations Pty Ltd is a subsidiary of Tullow Oil Plc – a British oil giant.

In the statement, Tullow noted that the company was unable to secure the extension of the Sale and Purchase Agreement (SPA) with its Joint Venture Partners – Total E&P Uganda and CNOOC Uganda Ltd despite previous extensions having been agreed upon by all the parties. In a brief statement, Tullow said it has been informed that its farm-down to Total E&P Uganda BV and CNOOC Uganda Ltd will terminate on August 29, 2019 following the expiry of the Sale and Purchase Agreement.

“Tullow has worked tirelessly over the last two and a half years to complete the farm-down which was structured to re-invest the proceeds in Uganda,” Paul McDade, the Chief Executive Officer (CEO) of Tullow Oil Plc said in a statement.  McDade noted that Tullow committed to reducing its operated equity stake in Uganda.

He added, “It is disappointing to report this news at a time when we are making so much progress elsewhere towards the growth of the Group with our recent oil discovery in Guyana and first export of oil from Kenya.”

The termination of the transaction, McDade further said is a result of being unable to agree on all aspects of the tax treatment of the transaction with the government of Uganda which was a condition for completing the Sale and Purchase Agreement.

“While Tullow’s Capital Gains Tax [CGT] position had been agreed as per the group’s disclosure in its 2018 Full Year Results, the Ugandan Revenue Authority and the Joint Venture Partners could not agree on the availability of the tax relief for the consideration to be paid by Total and CNOOC as buyers,” the statement reads in part.

ENTER THE TAX DISPUTE

In January 2017, Tullow announced that it had agreed to farm-down 21.57% of its 33.33% interests in Exploration Areas 1, 1A, 2 and 3A in Uganda to Total E&P Uganda and CNOOC Uganda Ltd for a total consideration of $900 million (Approximately Uganda Shs 3.2 trillion). The farm-down has to be approved by government upon satisfaction that the relevant taxes –  in this case, Capital Gains Tax has been paid.

After the announcement, Uganda Revenue Authority slapped a $ 167 million (approximately Shs 617bn) tax bill on Tullow for its proposed farm-down. Tullow objected on grounds that given the costs it had incurred, $167m tax bill was not correct and that it intended to re-invest the money in the country– sparking a stalemate.

As a result, Tullow sought for a political settlement to a tax dispute with President Museveni who in meetings with the company bosses insisted that the tax dispute should be settled with URA and not him.

However, in the statement Tullow said the company will initiative a new sale process to reduce its 33.33 percent operated stake in the Albertine project. The termination of the transaction is likely to further delay the Final Investment Decision (FID). Joint Venture Partners had initially agreed to make a FID by the end of 2019.

GOVERNMENT RESPONDS

Weighing in, Robert Kasande the Permanent Secretary, Ministry of Energy and Mineral Development defended government’s position. He insisted that Tullow has to pay Capital Gains Tax from the farm down. “The government’s position is that the assessed tax should be paid in line with the laws of Uganda,” Kasande indicated in a statement.

In another statement, Total said it was still committed to Uganda. “Despite the termination of this agreement [Sale and Purchase Agreement], Total together with its partners (CNOOC and Tullow) will continue to focus all its efforts in progressing the development of the lake Albert oil resources,” Arnaud Breuillac, Total’s President in-charge of Exploration and Production said.

By: Edward Ssekika
Edited by Muhumuza Didas