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Tullow trouble

By Haggai Matsiko

Tullow, CNOOC and Total get $2.9 bn oil deal amidst allegation of corruption

What could prompt Tullow, CNOOC and, Total to disregard a raft of cases in international courts, a court injunction at home and a resolution of parliament and sign a deal with Uganda? Money. Possibly greed and corruption.

In the case of the Irish oil firm and the Ugandan government; US$ 2.9 billion and US$472 million for each respectively from the new deal.

The deal was signed when Tullow is already under investigation by parliament for allegedly bribing three ministers; Prime Minister Amama Mbabazi, Foreign Affairs Minister Sam Kutesa, and former Energy minister Hilary Onek in order to win oil deals.

President Yoweri Museveni has previously also had to defend himself publicly against allegations that he took bribes from oil deals. The American ambassador made the allegations in a leaked Wikileaks cable.


Instead of allowing the probe to proceed and clear them, if they are innocent, the accused allegedly by proxy of one Severino Twinobusingye, sought a court injunction to block it on a technicality. They claim the parliamentary probe is unconstitutional. The Constitutional Court halted the Adhoc Committee inquiry.

At the height of the debate of the Tullow bribery allegations, parliament resolved that the government halts all oil transactions.

But Energy Minister Irene Muloni while addressing journalists about the new deal on Feb.3 said cabinet had resolved that the parliament’s “resolutions were not binding but advisory”.

“These resolutions have been discussed by the executive in cabinet at great length and His Excellence the President wrote to the Honourable Speaker of Parliament in regard to the resolutions,” she notes in a statement, “the ministry has subsequently been cleared to conclude these transactions.”

What Muloni did not say is that the question of whether Parliamentary resolutions are “advisory or binding” is what is before the Constitutional Court.

Muloni also did not say that even MPs from the ruling NRM party opposed the signing of the news deal with Tullow at their retreat in Kyankwazi. Some MPs at the retreat told The Independent that Muloni  lobbied them to endorse the transaction but they turned down her request insisting that the minister first tables the proposed laws before the transaction is done.

Angry parliament

Under the new deal, Tullow signed Production Sharing Agreements (PSAs) for three oil exploration licences—Exploration Area EA-1, Kanywataba and the Kingfisher’s that it had lost over a tax dispute.

The PSA signings paved way for Tullow to complete its farm-down to Total and CNOOC valued at US$2.9 billion.

Observers see the latest deal in a sector shrouded in secrecy, without a legal framework, and hanging on the whims and decisions of one man, President Yoweri Museveni, as harbinger of doom in the country’s nascent oil sector.

The new transaction has kicked off a row between the legislature and the cabinet worsening a situation that is already explosive. The MPs who have previously accused the cabinet of undermining their scrutiny role have decried the new PSAs and interpreted the new signings as contempt of parliament.

They say they are going to censure the Energy minister Muloni, over the new PSAs and take the government to court unless it recalls the agreements.

“This is contempt of parliament, we received the news with great consternation and we will challenge the agreements in courts of law,” Gerald Karuhanga the Youth MP Western who tabled the bribery allegations against Tullow in parliament told The Independent, the night the fresh PSAs with Tullow were announced.

“But I pity Tullow; you disregard the legislature, judiciary and go ahead to sign fresh contracts, where will you go when things go wrong?

“Governments come, government’s go, so signing oil contracts contrary to the interests of Ugandans is suicidal as these contracts can be nullified anytime,” Karuhunga said.

Another youthful MP, Vincent Kyamadidi, who represents Rwampara also said that the decision to sign fresh PSAs makes the executives intentions questionable. “Why rush into signing new agreements after a court injunction that nothing about oil be discussed until a petition has been disposed of?”

Legal experts have also weighed in. According to Nicholas Opiyo, top Kampala advocate the government’s decision to sign fresh contracts in face of resistance, a court injunction and refusal to wait for the parliament’s recommendations foretells ill-motive.

He says that the MPs can challenge the agreements and have them nullified.

Tullow’s court cases

If a new case is filed, it will bring to five the number of cases involving Tullow oil in Uganda—which is not a good signal to international investors for both Tullow and Uganda.

The government is currently involved in court dispute with Tullow over Capital Gains Tax arising from its US$1.4 billion acquisition of Heritage’s assets.

Heritage escaped with its loot after the sale and refused to meet its tax obligation arguing that such a tax was not provided for in Ugandan agreements.

Tullow has said that it agreed to pay the US$313.4 million owed to the government on behalf of Heritage as a “recoverable security payment” to continue with its operations. It insists it is not paying Heritage’s taxes.

Locally, the dispute on Capital Gains Tax was resolved in the government favour, but it still has had to foot billions of dollars in legal fees to be represented before a London tribunal over the same issue.

In case it loses, it the government will have to repay Tullow the  money that the company deposited in Bank of Uganda.

Since such a ruling sets a precedent, Uganda may also lose tax revenue emerging from other deals amongst companies.  Already, Tullow is disputing the government’s proposed US$472 million tax from the farm-down to CNOOC and Total.

Tullow agreed to deposit US$121million as it waits for local arbitration over the government’s demand for US$472 million in capital gains tax from its farm-down.

Critics say similar concerns were raised before Heritage fled the country without paying tax. There is no guarantee that Tullow will not bolt after getting its US$2.9 billion from CNOOC and Total.

All these issues have not been resolved.

Yet there is another court case in which at the close of 2011, city lawyer Hamada Mulumba sought a High Court injunction against the government signing or approving any oil licenses and agreements.

The government and Tullow claim that a lot of time has been lost in disputes and that since Tullow met all the government conditions, there is no need to waste more time but to embark on development of the oil resources.

But critics like Karuhanga insist the latest development in the sector spells doom.

“We don’t want to end up like Nigeria, Venezuela and all those countries that have suffered the oil curse, we need to first iron out issues, we need a streamlined sector, short of which the agreements will be nullified,” he said.

Enter CNOOC, Total

Under the new deal Tullow regained Kingfisher—estimated to hold about 300 million of Uganda’s estimated two billion barrels of oil in the Albertine Rift after meeting the government’s condition of depositing the US$434.9 million part of which arises from the buying of Heritage’s asses at US$1.4 billion and the rest, a percentage from Tullow’s pending farm-down to China’s CNOOC and France’s Total.

The government tasked the company to first deposit US$ 472 million as Capital Gains Tax—a figure Tullow disputed opting to deposit just $141million and seek local arbitration.

The deposit, though partial has paid off. The company is now free to sell 66 percent in a US $2.9 farm-down deal to CNOOC and Total. CNOOC and Total will take 33% each of Tullows assets.

The farm-down means cash for the company to invest in its projects like in South America. Tullow also operates in at least 15 African countries but it is in Uganda that it owns the biggest prospects—100 percent in Exploration Areas 1, 2 and 3A plus the two recent licencies.

After the farm down it will remain with 33 percent and billions of dollars in cash— joy for its shareholders that have been impatient over delay of returns on the investment in Uganda to smile all the way to the bank.

According to Bloomberg, Tullow Oil’s share price on the London Stock Exchange rose by 1.5% after the signing of new PSAs.

Already, Tullow has hired renowned investment firms Barclays Capital and Morgan Stanley as lead brokers to look out for investment opportunities with the billions from the farm-down rolling in.

Aiden Heavy, Chief Executive Officer of Tullow could not hide his joy. “Today’s signing is a vital step towards development of the Lake Albert Rift Basin and the oil and gas industry in Uganda and East Africa,” he said in a statement. “I look forward to working with the government of Uganda and CNOOC and Total as we progress this world class asset.”

However, this step might not be good for Uganda’s nascent oil sector.

MPs have petitioned the Constitutional Court against its decision to halt the operations of the parliament’s Adhoc Committee investigating the oil sector stopped.

The committee had been established as part of the nine resolutions reached unanimously by the House following a two-day heated debate that ended on Oct.11 and which the bribery allegations against Tullow were made.

At the height of the debate of the Tullow bribery allegations, parliament resolved that the government halts all oil transactions, expunges all stablisation and confidentiality clauses in agreements, and investigates top ministers alleged to have taken bribes from Tullow Oil.

The MPs, as part of the resolutions, also wanted the ministers in question, Mbabazi, Kutesa, and Onek, to step aside.

Kutesa stepped-aside to give way for investigations and another corruption case he is implicated in. But with the backing of President Museveni, Mbabazi and Onek defied the parliament’s resolution. Mbabazi went ahead to have the adhoc committee challenged.

President Museveni has ordered Mbabazi to have his petition withdrawn saying that it defies the concept of separation of powers but Mbabazi insists that legally, this is not possible.

Theodore Sekikubo, the MP who tabled the motion that resulted into this inquiry in the oil sector says that although the NRM party caucus in which he belongs discussed the oil issues and resolved to move forward, it is not the duty of the caucus but the whole parliament to clear such business.

The MPs now want Energy Minister, Muloni censured for superintending over these fresh transactions. The MPs while resolving to halt all oil deals cited an inadequate legal frame work.

But Muloni while addressing journalists about the new deal on Feb.3 said cabinet had resolved that the oil transactions would go on under the current legal framework as the government worked on a more adequate one.

She added that the oil companies had agreed to revisit the stabilisation clause that commits government to meet any costs incurred by the companies arising from new legislation.

President Museveni had at a recent ruling NRM party retreat told MPs that he had refused to approve the farm-down because the companies had refused to expunge the clause.

Currently Uganda operates under the Petroleum Act 2000 that several critics find insufficient to regulate the sector. In 2010, a new law, the Petroleum (Exploration, Development, Production, and Value Addition) Bill 2010 was tabled before parliament. It is gathering dust on the shelves despite local and international pressure to pass it into law. The government is known to pass laws that it favours very quickly. It appears to favour lawlessness in the oil sector.

MPs are angry that with inadequate legislation and the secrecy surrounding Uganda’s oil PSAs, Ugandans are the losers.

According Platform, a London-based advocacy group, after recouping its costs, Tullow could end up with oil profits as high as 30-35 percent according draft PSAs it had seen. This is too high compared with the normal 12-14 percent, Platform says.

The fresh PSAs came with a signature bonus of US$200,000 and US$300,000 for the Kanywataba Prospect and Exploration Area 1 in addition to a discovery bonus of US$2 million.

But according to a 2010 report by Global Witness, lack of transparency in the sector has meant that over US$ 500, 000 in signature bonuses from oil companies cannot be traced on any government of Uganda accounts.

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