This deal is important for Tullow. It represents an excellent start towards our target of raising $1 billion to strengthen the balance sheet, and also secure a more conservative capital structure.
Government will take only Shs54.6b ($14.6m) on the transaction down from Shs310b ($85m) which Tullow offered initially on the premise that part of the money ($700m) was going to be reinvested in the development phase but government rejected the offer and insisted on $167m (Shs609b) tax assessed by Uganda Revenue Authority.
Under the new deal, Total E&P will pay Tullow Shs2.1 trillion ($575m) for the stake, with Shs1.8 trillion ($500m) paid once the deal has been approved by government, and the balance of Shs780 billion ($75m) paid whenever Final Investment Decision (FID) has been reached.
In addition, Total E&P committed on “conditional” or bonus payments to Tullow when commercial oil production starts in the future, and only if a barrel of brent crude—the global benchmark for oil—will be trading upwards Shs232,285 ($65) per barrel.
Prices for crude oil have been tumbling over the past months against a backdrop of the global Covid-19 pandemic which grossly affected demand, and the Russia-Saudi Arabia price war.
By press time, brent crude had picked up 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 days.
Total’s group chief executive Patrick Pouyanné was quoted as saying the acquisition will now help the company to work with China’s Cnooc “to move the project forward toward FID, driving costs down to deliver a robust long-term project.”
The acquisition is big score for Total E&P, which will now pay Shs1.2 trillion ($325m) less of the initial Shs3.3 trillion ($900m) price for the farm down transaction when it was first floated in January 2017.
Initially, in 2017 Tullow intended to sell only 21.57 per cent of its interests and remain with 10 per cent in non-operatorship capacity in each of the three exploration areas to Total E&P for $900m.
The transaction was structured in two ways; $200 million (Shs722b) in cash consisting of $100m (Shs361b) on completion of the transaction and $50m (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.
This deal collapsed last August after almost one year of haggling between Tullow/Total E&P, and government over Capital Gains Tax (CGT), and other commercial issues over the proposed East African Crude Oil Export Pipeline (EACOP) from Hoima to Tanga port in Tanzania.
The discussions on the matter were revived in September and concluded the following month in October following a meeting between President Museveni and oil company executives, leading to yesterday’s long overdue announcement.
Also, government will be raking in only Shs54.6b ($14.6m) on the transaction down from Shs310b ($85m) which Tullow offered initially on the premise that part of the money—$700m—was going to be reinvested in the development phase while government, which didn’t buy the argument, insisted on $167m (Shs609b) assessed by Uganda Revenue Authority.
During the subsequent discussions Total’s chief executive had offered that his company would make a top up of Shs300b ($82m) to break the impasse but in exchange for Tullow’s contemporaneous rights and obligations over its shares and assets, which resulted in another protracted discussion.
Explaining the change in CGT, Tullow’s head of corporate affairs George Cazenove said: “This deal has a different structure, price and equity so whatever discussions we had on the previous deal are not relevant to this deal. The tax owing from the deal was reached, as the release says, after supportive discussions with the URA and the Government.”
In a statement yesterday, Tullow said the transaction will “strengthen their balance sheet as part of its financial strategy to move to a more conservative capital structure.”
Meanwhile, according to the terms of the joint venture agreement, Cnooc has rights to exercise its pre-eptive rights to acquire 50 per cent of the 33.33 per cent stake floated to Total E&P, as they did the same in March 2017 which sparked another protracted haggling over management of Tullow’s lucrative oil fields.
Energy ministry Permanent Secretary Robert Kasande, however, said since the contentious issue has been ironed out over the last months the deal “should be easy to conclude.”
“We will be waiting for the partners—Total and Tullow to notify us officially about the sale,” he said.
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