5 March 2012

Mozambique: Government Will Tax Sale of Cove Energy

Photo: Wikipédia
Mozambique- Confluence Limpopo- Shashe.

Maputo — The Mozambican government is no longer prepared to tolerate the sale of Mozambican assets abroad without Mozambique itself receiving any benefit.

Last Thursday, the Minister of Mineral Resources, Esperanca Bias, declared that if the sale of the British company Cove Energy goes ahead, Mozambique will impose a capital gains tax. The rationale behind this is that the only reason other companies wish to buy Cove Energy is its Mozambican natural gas assets.

Cove is part of the consortium headed by the American company Anadarko exploring for petroleum and gas in offshore area one of the Rovuma Basin, off the coast of the northern province of Cabo Delgado.

Anadarko has announced enormous gas discoveries in several of its appraisal wells. The amount discovered so far is thought to be in excess of 30 trillion cubic feet. Anadarko intends to build a liquefied natural gas (LNG) plant in Mozambique, at an investment which could reach 18 billion US dollars by 2018, the earliest possible date for starting production.

Anadarko is the operator of Offshore Area 1 and holds a 36.5 per cent share of the gas fields. Cove Energy is one of its partners with a holding of 8.5 per cent.

Larger companies are now bidding to take over Cove Energy, and it is that 8.5 per cent stake in Rovuma Basis Area One which is attracting them. The first to express an interest was Royal Dutch Shell, which put in a bid of 1.6 billion US dollars for Cove. Subsequently the Thai state oil company PTT put in a bid of 1.8 billion dollars, and the Indian state firm ONGC (Oil and Natural Gas Corporation) also expressed an interest in buying Cove.

These bids are not remotely hostile - Cove announced in January that it was putting itself up for sale.

Last year, the Mozambican government came under severe criticism inside the country for failing to intervene in the takeover of Riversdale Mining of Australia by Rio Tinto, and not raising a penny in tax revenue from this transaction. Riversdale's main assets were the coal exploration and mining licences it holds in the western Mozambican province of Tete. Without these licences, Rio Tinto would have had little interest in Riverdale.

A more muscular attitude towards tax issues was shown in February when the Mozambican state obtained almost 72 million Australian dollars (77 million US dollars) in capital gains tax on the sale of shares held by the Australian Talbot Group in the company Minas de Revobue, in Tete.

The tax amounted to 40 per cent of the Talbot Group's capital gains on the sale. It could be regarded as a precedent for taxing such transactions.

The announcement from Bias led to an alarmed reaction for Cove which immediately said it would "seek clarity" from the Mozambican government.

The question raised by financial journalists in London is whether there is a tax stabilization clause written into the Rovuma Basin contracts, which would prohibit the government from levying new taxes. The contracts are not in the public domain - but the very fact that Cove refused to say whether it was covered by a tax stabilization clause suggests that perhaps it isn't.

With the takeover bid suddenly looking uncertain, the value of Cove shares tumbled by over ten per cent on Friday. Cove insisted, however, that the sale will go ahead.

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