The Observer (Kampala)

8 January 2013

Uganda: Govt Rejects Dominion Sale

analysis

It is almost fair to say that the Uganda government has become a little hardened as a result of its gruelling battles with different oil companies to recover millions of dollars in unpaid tax.

And as such, government has learnt a thing or two about managing mergers and acquisitions in the murky and complex industry of oil and gas. Still pursuing millions of dollars in unpaid tax from the Heritage-Tullow oil deal in the unfamiliar setting of a London court of arbitration, the Uganda government has declined to recognize Ophir Energy's acquisition of Dominion Petroleum's assets, mainly on grounds that the latter still has some unfinished business in the country.

While there is no concrete indication that Dominion's sale of its assets to Orphir might not generate any capital gains tax, government wants to set a precedent where any company that fails to meet its licence targets will find it difficult to walk out of the country just like that. Last month, Irene Muloni, Energy and Mineral Development minister, said in a statement that Dominion was offered a licence for a maximum of six years, phased in three exploration periods with initial two years and renewals of periods of two years each, upon satisfaction of the obligations in the Petroleum (Exploration and Production) Act, 1985 and production sharing agreement (PSA).

In accordance with the PSA, Dominion drilled Ngaji-1 well located near Rwenshama, in Rukungiri district, but didn't encounter oil and gas. However, using information obtained from Ngaji-1 well, Dominion planned to acquire additional seismic data before drilling more wells to fulfill what was agreed upon in the PSA before the expiry of the licence.

In 2011, Dominion licence was renewed for the third and final period which expires in July this year. However, before the renewal could be granted, Dominion was asked to provide a detailed work programme for the third exploration period as agreed in the PSA.

"While in the discussions for renewal of exploration licence for the final period, government received a request for approval of acquisition of Dominions' shares by Ophir Energy Plc. The ministry of Energy informed Dominion to follow the legal and regulatory requirement before the Certificate of Surrender could be issued," Muloni said.

Currently, Muloni stresses, the ministry and Dominion are carrying out a verification exercise of assessing the assets to be handed over to government and other compliance issues in areas like environment and taxes, among others.

"Government neither renewed Dominion's Exploration Licence for the third Exploration period nor approved any transactions between Dominion Uganda Limited and Ophir Energy Plc or octant Energy Corporation as required by Section 44 of the Petroleum Act of 1985," Muloni stressed.

Dominion Uganda Limited, a subsidiary of Dominion Petroleum, a UK company, agreed to sell its interests and assets to Ophir Energy, a UK oil explorer for £118m ($186m). East Africa is Ophir's main focus, with its biggest assets in Tanzania, where it is looking for oil and gas. And now Ophir wants to sell its interests to Octant Energy Corporation, a Canadian oil firm. On an ordinary day, these deals should not raise eyebrows.

In any case, previous acquisitions like Tullow Oil's acquisition of Energy Africa in 2004 and Hardman Resources in 2006 went through smoothly. And the Petroleum Act of 1985, the current legislation governing the sector, does not impose any timeframe as to when a company should enter and exit the oil industry.

But in government's eyes, the Dominion-Ophir-Octant deals appear like nothing but a high-stake game of speculation, something that could leave a negative trend. For starters, Dominion was supposed to drill a second well. Then again its licence is yet to expire.

Mergers and acquisitions

It is important to note that mergers and acquisitions are common in the petroleum industry especially during the initial stages of exploration, where companies work together to spread their risks. Dennis Kusasira, an energy lawyer with Kusasira and Co Advocates, one of the few Ugandan law firms specializing in oil and gas, notes that the world over, governments have sovereign powers over natural resources and therefore Dominion can't transfer its assets to a newcomer without government consent.

Kusasira says that already there was little time left for Dominion's licence to expire and therefore it would be illogical for government to clear the transfer of assets since the newcomer would not have time to finish Dominion's work. According to Muloni, Dominion's exploration licence is due to expire in July 2013. After the expiry, the block will revert back to government just like Exploration Area 5, where Neptune Petroleum Uganda Limited, completed its final exploration in March after it drilled three wells at Iti-1, Avivi-1 and Mvule-1 but failed to locate oil.

"In actual sense, a newcomer would not have time to complete the work within the remaining short time. Imagine hiring and assembling a rig and drill wells within the remaining seven months. The newcomer wouldn't have time to complete the work," Kusasira notes.

He says it would be within the interest of government to let Dominion continue until its exploration expires and the block reverts back to government, which would be allocated to a new developer in the next round of licensing. He says that although government insists it is dealing with Dominion and doesn't know Ophir Energy, in reality, it can't deny that Ophir Energy bought Dominion assets worldwide, including exploration rights in Uganda.

"Since Ophir acquired Dominion's shares worldwide, it technically means, it also acquired assets of Dominion Uganda Limited. So, government can't say it does not know Ophir Energy," he says

Dr Emmanuel Kasimbazi, a law don at Makerere University, notes that government could have learnt a lesson for the tax gains dispute with Heritage. "I think government is more conscious than it was previously."

Is Dominion a speculator?

Analysts believe there is a lot of speculation in Uganda's petroleum industry and perhaps that is why some companies without the required financial and technical experts have acquired exploration licences and gone on to carry out work below government's expectations. However, Kusasira notes, the petroleum industry thrives on speculation.

"Even Tullow, Heritage, Neptune were all speculators. There is nothing wrong with speculation as long as it is active. The only problem is passive speculation," he says, stressing that almost all oil companies that have discovered oil in Uganda have at one time been active speculators.

"It is after these speculators have reduced the risk of finding oil that big players come on board," he says. To him, Dominion is an active speculator since it acquired the exploration licence and added value on licence.

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