Uganda has lost 256 billion in tax revenue to Irish Tullow

The Ugandan government has lost Shs256b in tax revenue as a result of the latest deal between Irish Tullow and French oil giant Total E&P. The transaction was announced by both companies yesterday morning. According to Tullow’s press release, the sale will remove the company from all future capital expenditures associated with the Lake Albert Development Project. However, the company will retain potential benefits linked to production and the oil price through the contingent payments.

This deal is of significant importance to Tullow. This represents an excellent foundation for achieving our goal of raising $1 billion to reinforce the balance sheet and also secure a more conservative capital structure.

Irish Tullow

The government will accept only Shs54.6b ($14.6m) of the original Shs310b ($85m) offer from Tullow, which included the stipulation that part of the money ($700m) was to be reinvested in the development phase. However, the government rejected this offer and insisted on $167m (Shs609b) in tax assessed by the Uganda Revenue Authority.

The revised agreement stipulates that Total E&P will pay Tullow a total of Shs2.1 trillion ($575m) for the stake. The initial payment of Shs1.8 trillion ($500m) will be made upon government approval, with the remaining balance of Shs780 billion ($75m) payable upon reaching the Final Investment Decision (FID).

Furthermore, Total E&P has agreed to make conditional or bonus payments to Tullow when commercial oil production commences in the future, subject to the global benchmark for oil, brent crude, trading at a minimum of Shs232,285 ($65) per barrel.

The price of crude oil has been in decline over recent months, due to the global impact of the pandemic and the competitive pricing environment between Russia and Saudi Arabia.

By the time of going to press, brent crude had risen to $20 per barrel, amid tensions in the Middle East stoked by US President Trump’s order to US Navy ships to shoot down any Iranian vessels deemed a threat, up from less than $10 per barrel over the last few days.

In a statement, Total’s group chief executive Patrick Pouyanné said the acquisition will enable the company to collaborate with China’s Cnooc to advance the project towards a final investment decision (FID), while reducing costs to deliver a robust long-term project.

The acquisition represents a significant gain for Total E&P, which will now pay Shs1.2 trillion ($325m) less than the initial Shs3.3 trillion ($900m) price for the farm-down transaction, which was first floated in January 2017.

In 2017, Tullow’s initial plan was to sell only 21.57% of its interests and remain with 10% in non-operatorship capacity in each of the three exploration areas to Total E&P for $900m.

The transaction was structured in two parts: $200 million (Shs722b) in cash, comprising $100 million (Shs361b) upon completion of the transaction and $50 million (Shs180b) at both FID and first commercial oil; and another $700 million (Shs2 trillion) in deferred consideration, which will be used by Tullow to fund the company’s share of the costs of the upstream development project and the associated export pipeline project.

The deal was terminated last August after almost one year of negotiations between Tullow/Total E&P and the government regarding capital gains tax (CGT) and other commercial matters related to the proposed East African Crude Oil Export Pipeline (EACOP) from Hoima to Tanga port in Tanzania.

The matter was discussed again in September and concluded the following month in October following a meeting between President Museveni and oil company executives. This led to the announcement that was long overdue.

Furthermore, the government will only receive Shs54.6b ($14.6m) from the transaction, a significant reduction from the Shs310b ($85m) initially offered by Tullow. This was based on the premise that part of the money, specifically $700m, was to be reinvested in the development phase. However, the government did not accept this argument and insisted on $167m (Shs609b), as assessed by the Uganda Revenue Authority.

Subsequently, Total’s chief executive proposed a supplementary payment of Shs300b ($82m) to resolve the impasse. However, this was contingent on Tullow retaining contemporaneous rights and obligations over its shares and assets, which led to further discussions.

In an effort to clarify the recent change in CGT, Tullow’s head of corporate affairs, George Cazenove, offered the following explanation: “This deal has a different structure, price and equity, so the discussions held regarding the previous deal are not applicable to this one.” As stated in the release, the tax liability resulting from the transaction was determined following constructive dialogue with the URA and the government.

In a statement released yesterday, Tullow announced that the transaction will “strengthen their balance sheet as part of their financial strategy to move to a more conservative capital structure.”

Meanwhile, in accordance with the terms of the joint venture agreement, Cnooc has the right to exercise its pre-emptive rights to acquire 50 per cent of the 33.33 per cent stake floated to Total E&P. This is similar to the situation in March 2017, which led to further protracted discussions regarding the management of Tullow’s lucrative oil fields.

Energy Ministry Permanent Secretary Robert Kasande stated that, given the resolution of the contentious issue over the past few months, the deal should be straightforward to conclude.

“We will await official notification from the partners, Total and Tullow, regarding the sale,” he said.