CNOOC flew in Xu Keqiang after a major fall out over the pipeline. Apparently, apart from disagreements over the implementation and financing of the pipeline, CNOOC was incensed that while in Tanzania to launch the pipeline works, Total officials made sure that they denied the Chinese access to the president.
This appeared to worsen already existing tensions. CNOOC now wanted one of the blocks—block2—which was initially being operated by Tullow and which stood to go to Total following the farm down.
Because Total E&P had already done work on the project, President Museveni intervened on their behalf and offered the Chinese a new block for exploration. It is this block that CNOOC recently entered a Memorandum of Understanding (MoU) to explore with the Uganda National Oil Company (UNOC).
As a result, tensions between the oil companies sort of reduced and Tullow’s farm out deal was only awaiting tax treatment and finally approval.
But the tax dispute now stands a major huddle for the deal.
Heading to international courts?
Up until now all appeared on course after Museveni decided that Uganda’s oil should go through Tanzania putting an end to a fight in which Tullow and CNOOC pushed to have the oil go through Kenya. With this decision, Total E&P, which had been pushing for the Tanzanian route, had a green light to now negotiate the nitty-gritties of the deal.
Indeed, early last year, Museveni and the Tanzanian counterpart signed the Heads of State agreement concretising the Hoima-Tanga route. And a week later Energy minister Irene Muloni and Tanzania’s minister for Constitutional and Legal Affairs, John Palamagamba Kabudi, signed the Intergovernmental Agreement (IGA) binding the two countries on the EACOP.
With the IGA out of the way, the players were now negotiating the Host Government Agreements, which would pave way for the Shareholders’ Agreements, which would define the terms for EACOP Company known as Pipe Co. These terms would then pave way for negotiations on financing terms that would be agreed under the Financing Agreement.
However, the disagreements struck as the officials were in the process of negotiating the Host Government Agreements.
It is not clear whether the latest disagreement will also end up in international arbitration. If that happens, the uncompleted transaction could further delay oil production.
In order to skip such a huddle, in the past government has forced oil companies to first pay the whole or part of the tax in order to approve deals and allow for critical processes to continue as arbitration goes on.
Indeed, government forced Tullow to pay part of the tax demanded from Heritage Oil. Tullow had acquired Heritage assets in a $ 1.45 billion deal. When Heritage declined to pay CGT off it, government forced Tullow Oil to first pay the tax and collect it from Heritage. As a result, Tullow sued Heritage in an international tribunal.
Heritage also took Uganda for international arbitration. Both Uganda and Tullow defeated Heritage. As a result, Uganda got its full share of CGT on the $1.45 billion deal and Tullow also recovered the money it had paid to government on Heritage’s behalf.
It is not yet clear how both government and the company plan to resolve the latest impasse. It is in the interest of both parties to resolve the dispute amicably and clear way for oil production.
Once this transaction is completed, Tullow said it would cease to be an operator in Uganda but would retain a presence in the country.
Tullow’s Chief Executive, Aidan Heavey, on Jan.9 2016 said that the deal would increase the likelihood of FID this year and ‘First Oil’ by the end of 2020. Government had asked the companies to focus on the 2020 deadline. But these disputes can only mean further delays.
By press time, Tullow Oil, URA and the oil sector regulator, Petroleum Authority Uganda (PAU) had not responded to our requests for comments on these issues.
Still without delving in details, Total E&P’s FRIGA-NOY, told The Independent in an email response that the finalization of the Tullow farm-out deal is subject to government approval adding that discussions are ongoing to achieve this goal.
“We continue to work towards achieving the Final Investment Decision as soon as possible,” the Total E&P Corporate Affairs Manager added.