Uganda: Tullow Optimistic About the Ongoing Negotiations With Government

17 November 2019

Despite the stalemate in Uganda, the company is making significant inroads in the neighbouring Kenya, according to the report.

Tullow Uganda Operation Pty Limited - a subsidiary of Tullow Oil Plc is optimistic that the ongoing negotiations between Government and Joint Venture Partners (JVPs) will solve the stalemate over the capital gains tax on the sale of her stake to Total E&P and CNOOC Uganda. In its November 2019 trading update report, Tullow Oil Plc notes that the company is supportive of the negotiations.

"The Joint Venture Partners remain supportive of the development and conversations with the Government of Uganda that are ongoing," the 5 page update report reads in part. The JVPs - Tullow Uganda Operations Pty Ltd, Total E&P Uganda and CNOOC Uganda Limited have been embroiled a dispute with government following the termination of the Sale Purchase Agreement (SPA).

In August 2019, Tullow announced that its farm-down to Total and CNOOC lapsed following the expiry of the Sale and Purchase Agreements (SPAs). The expiry of this transaction was a result of being unable to agree all aspects of the tax treatment of the transaction with the Government of Uganda which was a condition precedent to completing the Sale and Purchase Agreements.

"While Tullow's capital gains tax position had been agreed, as announced in the Group's 2018 Full Year Results, the Uganda Revenue Authority and the Joint Venture Partners could not agree on the transfer of capital allowances related to the consideration to be paid by Total and CNOOC as buyers," the report reads.

Total responded by suspending work on the East African Crude Oil Pipeline (EACOP) project following the collapse of the farm-down, a move that could result in laying off of workers. Recently, both Total and CNOOC closed their field offices in Hoima town.

However, government has called for negotiations with the oil companies to end the deadlock. For instance, on October 31, 2019, President Yoweri Museveni met with the Chief Executives of Tullow Uganda Operations Pty Limited, Total E&P Uganda and China National Offshore Oil Corporation (CNOOC) to try and reach a deal. Museveni reportedly gave the oil companies one month within which to agree on a deal with government.

REDUCING EQUITY STAKE

In the report, Tullow notes that it is determined to reduce its equity stake in Uganda's oil sector despite the collapse of the farm-down to Total E&P Uganda and China National Offshore Oil Corporation (CNOOC) Uganda Limited. "Tullow remains committed to reduce its equity stake in the project ahead of the Final Investment Decision [FID] and when appropriate, will initiate a new sales process to achieve this," the company noted.

In the meantime, Tullow retains a 33.33% stake in the Lake Albert project which has over 1.5 billion barrels of discovered recoverable resources and is expected to produce over 230,000 barrels per day at peak production.

IN-ROADS IN KENYA

In the statement, Tullow reports making inroads in Kenya's oil development and expects to make a Final Investment Decision (FID) in the second half of 2020. "On 26 August 2019, East Africa's first ever export of oil, a cargo of 240,000 barrels, was flagged off from the port of Mombasa. This was the first lifting of oil from the Early Oil Pilot Scheme (EOPS) to the international market," the report reads.

Kenya's Early Oil Production Scheme produces 2,000 barrels of oil per day that is transported by road from Lokichar (in Turkana region) to Mombasa.

The Joint Venture Partners and the government of Kenya are set to commence discussions with prospective lenders for the project financing of the export pipeline that will run from Turkana to the new Lamu Port at Manda Bay. Tullow hopes to reach a FID for the Kenya oil project by end of 2020. The company praises the Kenyan government for strong support towards land acquisition for the pipeline among other efforts.

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