Kampala — Government yesterday okayed the sale of Heritage Oil assets to its former partner Tullow Oil, signaling an end to the first contentious period in the country's nascent oil sector.

With a stroke of the pen, the Minister of Energy, Mr Hilary Onek, also made history by approving the single biggest transaction in Uganda's history. "These were essentially two approvals" said Ernest Rubondo, the technical head of the national petroleum programme. He said government had on the one hand allowed Tullow to buy the assets from Heritage on conditional terms and on the other approved Tullow's partners in the transaction, Total and the CNOOC [China National Offshore Oil Corporation].

The deal worth 1.5 billion dollars (Shs3.3 trillion--nearly half Uganda's annual budget) had been held up in part because Heritage had refused to pay 30 per cent capital gains tax levied on it and secondly because government was studying how the trilogy [Tullow, CNOOC, and Total] would operate.

As a result, the dual approvals come tied to conditions.

"We have approved the sale on condition that Heritage Oil deposits 30 per cent of the ($404 million which is about Shs1bn) assessed capital gains tax on the transaction with the Uganda Revenue Authority," Mr Onek told the media yesterday. The remaining seventy percent would be secured by a Bank guarantee executed by Heritage until such a time that the tax dispute is settled through arbitration.

This means, however, that if the dispute is resolved in the favour of Heritage the government will not get a cent in taxes. Yesterday Jimmy Kiberu, Tullow's Corporate Affairs manager said the company would make a formal statement after studying the documents detailing [other aspects] of approval. "What this means is that Tullow and its partners can now proceed to develop the fields," he said.

Offering an insight to the conditions, Mr Rubondo said yesterday that government had sought to dilute the monopoly Tullow would have had with its 100 per cent stake in the exploration blocks.

"Prior to this Tullow owned 100 per cent of exploration area 2 and only 50 per cent of exploration areas 1 and 3 [ the rest being owned by Heritage]. The conditions are attached to how it will [integrate] its partners in the new areas it acquires from Heritage," Mr Rubondo explained.

Thus the government has demanded that in moving forward, the three partners [Tullow, CNOC and Total] will be joint licenses for each of the exploration licences. However each exploration area will be operated by one of the partners.

"No single licensee is allowed to operate more than one license," Rubondo said adding that this was an essential practice in the oil industry, a stipulation also contained in the upcoming oil and gas law. "It allows us to implement the provisions of that law in this transaction," he added.

The road to yesterday's agreement however was characterised by some of the biggest tests for the government team steering the national petroleum programme towards its commercialisation phase.

When Heritage announced its plans to dispose of its assets to Italy's ENI - it sparked a war over its assets, forcing Tullow to exercise its legal right of first purchaser - known as pre-emption.

ENI fate

This left ENI in the cold - but not yet out of Uganda's oil sector according to insiders, who say new licensing areas are due once the government sets up the legal framework and institutions that will run the sector.

What followed after the pre-emption was weeks of delay as compromises were negotiated between the government and Tullow.

Last month PFC, a consultancy firm hired by the government advised that the partners be approved.

The trio will, however, have to submit written documents on their agreements for further approval now that they have received the nod. Heritage shares soared on news of the approval.

Yesterday's events now place Uganda's oil sector irreversibly on the global oil map with the participation of such giants as CNOOC and Total, a major boost to the country, which last week became part of the Common Market of East Africa.