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Museveni cornered on Shs 446 bn oil money

Oil firms react

The oil companies meanwhile insist Uganda’s oil project is still on schedule. However, behind the scenes, they appreciate the difficulty within which they have to work to produce oil by 2023—Uganda’s latest timeline for first oil.

“Total together with its partners CNOOC and Tullow will continue to focus its efforts on progressing the development of the Lake Albert oil resources and will work closely with the Government of Uganda and the Government of Tanzania to conclude the negotiations on the remaining matters required to reach FID,” Nathan Morgan, Total E&P Uganda’s public affairs director told The Independent in an email sent on Sept.7.

“We believe that together with our Partners CNOOC and Tullow and the Governments of Uganda and Tanzania, we will succeed in starting the Development phase of the project, paving the way for investment and oil production in the country”

Morgan told The Independent that it is crucial that key project documentation, such as the host government agreements and shareholders agreement for the EACOP project are finalized and put in place in order to reach the coveted Final Investment Decision.

Accusations that the oil companies are playing money games emerged from the smokescreen around why Tullow failed to sign sale and purchase agreements (SPAs) agreed with Total E&P and CNOOC way back in January and instead allowed them  to expire on Aug.29. The SPAs had been extended a few times in the past but that was not possible this time.

Tullow, CNOOC and Total are equal joint partners in a venture to develop the most advanced section of Uganda’s oil fields in western Uganda expected to yield up to 230,000 bpd at peak production with over 1.4 billion barrels of recoverable oil resources.

Under the expired SPAs, however, Tullow which is an oil exploration company not renowned for venturing into production has sought to sell portions of its current 33% holding to Total and CNOOC.  The deal is worth US$ 900 million. The trouble is Tullow does not want to pay the URA assessed taxes; including Capital Gains Tax of US$ 167 million.

Behind the latest dispute

In January 2017 Tullow signed a sale and purchase agreement with Total, agreeing to transfer 21.57% of its 33.33% interests in Exploration Areas 1, 1A and 2 in the Lake Albert Development Project worth US $900 million (Shs3.2 trillion).

Tullow was expected to receive US$200 million (Shs720 billion) in cash—consisting of US$100 million on completion of the transaction and US$50 million at both Final Investment Decision and first oil. The balance of US$700 million (Shs2.5 trillion) in deferred consideration was meant to fund Tullow’s share of the development and pipeline costs.

However, in February 2017, CNOOC Uganda exercised its pre-emption rights to acquire 50% of the interests being transferred to Total.

Tullow in September 2017 notified the government about the farm-down to Total and CNOOC. Senior energy ministry officials say the government agreed to the farm-down and slapped Tullow with a $167m (Shs600b) capital gains tax.

Eng. Irene Muloni the Minister of Energy and Mineral Development told The Independent last December that she gave a conditional consent on Nov.21, 2018 for the transaction to proceed subject to Tullow’s payment of the tax obligations as assessed by Uganda’s tax body.

Tullow disagreed. It argued that it was not liable to pay Capital Gains Tax because it was transferring shares to another investor for re-investment in the project. The Uganda Revenue Authority and government technocrats insist that Tullow must pay the capital gains tax.

In mid-January 2019, President Yoweri Museveni is believed to have met with the chief executives of the oil companies in an effort to end the standoff.

Apparently Total and CNOOC wanted to move on to the next stage; the Final Investment Decision (FID) into production with even bigger money at stake.

In a meeting with Museveni, Total’s Pouyanne is said to have agreed to pay US$82 million of the disputed US$167 million as a loan to Tullow.

Tullow Oil Plc, Tullow Uganda Pty’s parent company chief executive officer Paul McDade also met the president around the same time. After the meeting, McDade indicated that Tullow would settle the tax payments to Uganda’s treasury in phases with a final figure partly tied to the oil field project’s progress. The deal appeared closed.

But Tullow continued sounding frustrated.

“What we put together we thought was in the best interest of all parties including the government of Uganda,” Tullow CEO Paul McDade told Bloomberg on June 26.

“We feel somewhat frustrated two-and-half years later that the efforts on that farm-down structure have been unsuccessful in completing.”

Then Tullow on Aug.29 announced its termination of its proposed farm-down to Total E&P and CNOOC.

“Tullow has worked tirelessly over the last two and a half years to complete this farm-down which was structured to re-invest the proceeds in Uganda,” McDade said in a statement on Aug. 29.

It said the agreed sale and purchase agreements (SPAs) had expired and it had failed to secure another extension of the SPAs from Total and CNOOC. It is not clear why the joint venture partners failed to conclude the SPAs.

As Ugandans were mulling over the implications of the oil companies’ failure to conclude the farm-down, a week later, on Sept. 05, Paris-based Total SA, the parent company of Total E&P Uganda said it was suspending all its planned activities on the EACOP. Tullow and Total backed their double cancellation with laying off staff in their operation.

Apparently the Chinese firm, CNOOC has remained quiet but it has also laid-off staff in Uganda following the collapse of the Tullow Oil deal. Several observers saw the decision as a reaction to the collapse of the Tullow deal.

The suspension of activities on the EACOP attracted different reactions in the country. Civil society organisations, majority of which are based in the Albertine region on Sept.6 asked the government not to bow to pressure from the oil companies.

The CSOs that work together to promote good governance in the oil and gas sector noted that suspension of activities around the pipeline project by Total may be a trick by the oil companies to pressure the government so that it does not collect the assessed tax including the Capital Gains Tax of US$ 167 million that Tullow Oil is required to pay.

But much as the CSOs expressed their support to the government, they observed that Uganda’s oil sector is facing many challenges because the government has failed to be transparent.

“Why is it that every time the companies make profits and they are asked to pay taxes, they insist on not paying? Is it because bad PSAs were signed or our laws are unclear?” a statement from civil society said.

“Is it mere impunity on the part of the companies or is there connivance between oil companies and corrupt government leaders to create disputes and when those disputes are resolved, they get rewards for arguing the cases?”

The CSOs recalled the 2010 dispute between Heritage Oil and the government over US$ 434 million Capital Gains Tax that Heritage Oil was supposed to pay. This dispute was only resolved through a costly arbitration in London.

Even when Uganda won the case, the long court battles depreciated the value of the money that was won. When Tullow Oil sold two thirds of its assets at US$ 2.9bn to Total and CNOOC in 2012, another tax dispute ensued.

Tullow did not want to pay the US$ 407 million Capital Gains Tax it was supposed to. The company ended up committing to pay less tax and out of pressure, the government accepted only US$ 250 million.

In 2016, extracts from the Panama Papers revealed how Heritage Oil and Gas Ltd attempted to avoid paying over US$ 400 million in Capital Gains Tax to the government.

Realizing that they would be hit by a big tax bill, Heritage Oil executives made efforts to avoid it by moving it to the country where the company was registered (Bahamas) to Mauritius, leaked emails obtained by the International Consortium of Investigative Journalists showed.

Mauritius has a double-tax agreement with Uganda, meaning companies can pay tax in only one of the two countries. Since Mauritius does not impose any Capital Gains Tax, charged on the sale of assets,this meant Heritage would reduce its bill to zero. An accountant acting on behalf of Heritage said the move to Mauritius would act as a “second line of defence” in efforts to eliminate the potential tax charge imposed by the Ugandan authorities.

“We are looking to re-domicile Heritage Oil and Gas Ltd to Mauritius (primarily due to the double tax agreement between Uganda and Mauritius). Heritage is due to complete the sale of an asset in Uganda within the next 11 days,” the BBC reported.

“Due to tax reasons emanating from Uganda, the directors have been advised by tax accountants to re-domicile Heritage to Mauritius from Bahamas before completion.” The re-domiciliation of Heritage had tax avoidance manoeuvres written all over it,” URA officials said at the time.

10 comments

  1. Good job government. But we need that cash. Thanks

  2. Uganda should seriously consider “the use it or lose it policy”..

  3. Just like the US has a policy of no negotiation with a terrorist,we should hold our ground on this.The capital gains tax law isn’t new in this country and am sure these guys well read the laws of the country before committing to invest here.Lets look at other options within the contract that we can exploit to our gain.We should not be bothered by who wins the contract rather may the best option for us take the deal.

  4. Decision well taken Mzee don’t be bothered by what others say but stick to what can benefit the whole country.

  5. Like Mzei Mr. President said once about any other minerals,” they have been there for millions years until now” stick with your guns until other channel are found

  6. In order for Africa to overcome the ‘curse’ our negotiators in this deal must remain very sobber, informed and alert . Note these are the very companies that have created this oil curse due to their crippling deal. Uganda MUST not succumb in any circumstance.

  7. A beggar always has no choice…

  8. Amazing things here. I’m very happy to see your article.

    Thank you so much and I’m having a look forward to touch you.
    Will you kindly drop me a mail?

    • The president is definitely right. The oil vultures are using their usual blackmail to skin us like all the other African countries they have cornered. Unfortunately the President and key people in Government will not escape the sanctions from these guys as they are not willing to take it lying down.
      For once Government is on the side of the citizens…

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