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Oil sector boost

By Haggai Matsiko

Uganda survives fatal precedent on US$404 m Heritage Oil case

Uganda’s recent win in the US$404 million tax dispute against Heritage Oil and Gas Limited (HOGL) is critical not only because of the money involved but the precedent it sets for the country’s oil sector.

By challenging payment of Capital Gains Tax, Heritage had threatened to set a precedent that other oil companies could in future exploit and lead to endless and costly court disputes or loss of revenues to the government.


The London tribunal’s ruling in the three year dispute, allows Uganda to keep the taxes it had already collected, and save tax payers money spent on legal fees and other costs.

“…you come to do business, you must pay your dues and that the country will always ensure that what is due to it is paid …” Robert Kasande, the assistant commissioner Petroleum Exploration and Production Department, said underlying how critical the ruling is.

Peter Nyombi, the Attorney General, noted that the government would “now retain the collected taxes and move ahead with the development of our oil sector”.

Nyombi and his army of lawyers including those from the American law firm, Curtis, Mallet-Provost, Colt & Mosle LLP and Elly Karuhanga’s Kampala Associated Advocates had blown US$1.5 million by May last year. Nyombi was requesting another Shs5 billion to proceed with the cases including the one where Tullow Oil is challenging Uganda over the level of the tax suggested by the URA over its US$ 2.9 billion farm down to Total E&P and CNOOC at the International Centre for Arbitration of Investment Disputes (ICSID) in Washington D.C.

Unlike Heritage, Tullow argues that the US$472m assessed for its transaction is too much. And in accordance with the country’s tax laws, Tullow paid 30 per cent or $140 million to the URA as it appeals the assessment.

The tribunal was chaired by Prof. Campbell Maclachlan, the chairman of the tribunal, and included Julian Lew, a Heritage Oil representative and Ahmed Kosheri, for Uganda.

The case started when in November 2009, Heritage, which was Tullow‘s partner and operator of EA1 and EA3A, announced its intention to sell its entire Ugandan interests.

It had agreed with Italy’s ENI to close that deal that December. However, Tullow chose to exercise its contractual pre-emption rights and in July 2010, Heritage Oil sold its 50 percent stake in EA1 and EA3A, for US$1.45 billion to Tullow Oil.

The government demanded the 30 percent of the transaction in Capital Gains Tax, that is US$404 million but Heritage argued that there was no ground for Uganda to get the tax.

Owing to the controversy, Tullow opted to pay Heritage Oil only US$1.05 billion, deposited US$121 million with the URA and kept US$283 million in an Escrow in Standard Chartered London account until the dispute between Heritage and Uganda was resolved.

But there was gridlock and Tullow, which had acquired Heritage’s assets with an intention of farming out to other companies could not. This dispute is the reason the sector could not move for about a year.

It is this dispute that made Tullow officials allegedly contemplate a bribe to Museveni, lobby the British Foreign & Commonwealth Office (FCO) to defend them, with Foreign Secretary William Hague personally calling President Museveni to relieve Tullow of the tax and his Minister for Africa, Henry Bellingham on July 23 paying president Museveni a visit to make clear the UK’s strong support for Tullow.

Following these machinations, a legally binding Memorandum of Understanding signed in March 2011 between Uganda and Tullow, following six months of intense discussions over the impact of the tax dispute cleared the gridlock making possible Tullow’s farm-down to Total E&P and CNOOC.

Later on February 2012, Tullow signed two Production Sharing Agreements and completed its US$ 2.9 billion farm-down 18 days later on Feb.21.

Heritage Oil first sued Uganda in the country’s s Tax Appeals Tribunal, and lost with the tribunal ruling that its transaction was taxable.  When it went to London, Heritage maintained that the transaction was not taxable but Uganda maintained it was taxable and that Heritage Oil had forfeited its right to have the matter handled in London when it subjected itself before the Uganda Tax Appeals Tribunal and that the London tribunal could not determine the tax. The tribunal upheld all these.

While URA’s Ali Ssekatawa, the assistant commissioner for litigation told local media that “as far as it relates to tax, this matter is closed”, Heritage is not convinced yet.

Following the news of its loss, Heritage on April.4 issued a press release faulting the Ugandan government for the “inaccurate” press comments as well as breaching the requirement of confidentiality imposed upon both parties to the proceedings.

“While the arbitral tribunal concluded that it does not have jurisdiction to hear arguments relating to the underlying substantive Ugandan tax matters,” the press release reads, “Heritage is delighted that the tribunal has rejected the Ugandan Government’s challenge to jurisdiction to determine the central question as to the propriety of the alleged imposition of tax with reference to contractual stabilisation clause protection invoked by Heritage together with the breach of other contractual obligations.”

The tribunal gave Heritage 28 days to present its defence over the other matter of its “contractual claims against the Ugandan Government”.

However, all this seems fire-fighting, given the implications such news would have on its shares that fell to as low as 156p.

To reassure its share holders, Heritage oil noted that its balance, the US$404 million is still intact.

“The $283.4 million placed in escrow in July 2010 by Heritage in relation to any potential Ugandan tax liability remains in escrow in London held by Standard Chartered Bank,” the press release adds, “Additionally, in July 2010, Heritage deposited $121.5 million with the Ugandan Government and so substantially all of the cash has been reserved and does not impact on the Company’s current cash position. As such Heritage’s position remains unchanged.”

Experts have said US$ 404 million is enough to boost Herigate Oil that is reportedly making losses. That amount of money can finance exploration of about six oil wells.

Tullow is also pursuing Heritage Oil over the US$313m paid to URA in a March 2011 deal where it was designated as an agent for the deal between Heritage and Tullow.

Under the terms of agreements, Tullow is allowed to re-coup such payments from Heritage. Heritage, which previously said Tullow had made a “political payment to Uganda’, insists that Tullow’s claim of breach of contract over Heritage’s refusal to reimburse it for the US$313m payment is baseless.

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