TULLOW OIL – BETWEEN A ROCK AND A HARD PLACE
Imagine a scenario, where a major oil company purchases the assets of another, pays close to 1.5 billion US Dollars for this purchase and only then finds out that their transaction has failed to gain the mandatory regulatory approvals. Impossible you may think but true enough for Tullow Oil of Uganda.
Last year first indication arose for close observers, that Heritage Oil Uganda was considering heaving off their Ugandan oil wells and oil concessions, and it did indeed not take long before ENI of Italy came forward and offered to purchase Heritage’s interests for said 1.5 billion US Dollars.
ENI being still a state majority owned company in Italy, had all the backing of the Italian government including a ministerial visit to Uganda, during which a future investment volume of at least 12 billion US Dollars over and above the existing infrastructure was proffered to their Ugandan counterparts.
When the formally notice of intent to sell the assets was issued by Heritage, just ahead of the Christmas season last year, Tullow was scrambling to secure funding to make good of a public ‘promise’ to invoke their first right of refusal over the sale, contractually agreed in a previous partnership memorandum between Heritage and Tullow. Indeed, when decision day dawned, and inspite of the holiday season, they appeared to have secured those funds and formally responded by invoking their buyout clause.
Governmental sources in Uganda at the time were blowing both hot and cold over the deal, with some claiming that their approval would not be granted for Tullow to become THE main player in the oil industry in Uganda and ENI would be given the nod, while others claimed that as it was a contractual right of Tullow to invoke a buyout, this would be granted.
The timeline attached to this article will outline in what sequence events did take place, but meanwhile, government has used its powers to approve, or else decline approvals, to exert pressure over a tax claim made against Heritage stemming from the sale of the assets.
Why Heritage did not opt to just sell their shares in the Ugandan subsidiary to Tullow, which would have been a tax free transaction, and instead opted to sell only the assets – and here the disputes arise from – they claim to have advice that there is no precedence for tax claims and have referred the dispute with the Uganda Revenue Authority to the enshrined arbitration, taking place under their agreement with GoU in LONDON.
That in turn did not go down well with some circles in government, not a surprise considering elections are around the corner in Uganda, and demands were made privately and publicly to have Heritage delivery over 400 million US Dollars of their sales proceeds to the taxman.
In line with dispute resolution over taxes, Heritage deposited the required percentage into an escrow account in Uganda, subject to release to the URA in case the arbitration goes their way, but the balance of those claims is kept in an escrow account in the UK, where Tullow had paid the purchase price.
It is clear that the termination of a key oil exploration license by government, held by Tullow, is while probably correct in law is more of a technical matter, but the threat has upped the ante now with government insisting that neither would the license be restored nor the circumstances discussed unless the full ‘claimed’ tax obligation by Heritage has been paid.
Tullow now has a stark choice, having paid for the Heritage assets in full but now finding themselves unable to take possession or carry out work on the wells and fields. They either pay the tax burden as an ‘extra’ or risk losing another major permit on the 07th of September, when the next cut off period comes calling, effectively putting their entire assets and investments in Uganda at risk.
Heritage has quietly let it be known that as it was them who invoked the arbitration process – agreed under the Production Sharing Agreement or in short PSA – they are happy to wait for a ruling by the international arbitrators which they will fully respect. They have also let it be known that Tullow, should they wish to pay the taxes claimed for by URA but not recognized by Heritage, they would be free to do so but should not expect to get any money already paid for the assets back. One source close to Heritage Uganda in fact did point to the ENI offer, which had given indication that they may pay the 1.5 billion US Dollars to Heritage and pay any tax dues in addition, but when the government in Kampala rejected their offer and gave Tullow provisional approval for the take over and purchase this entire package was subsequently withdrawn. The same source was also clear in blaming Tullow for being naive and ill advised by their legal teams and paying without having the full and irrevocable approval of government in place. All subsequent deals Tullow had lined up with the Chinese National Oil Corporation and Total of France are now on ice until the matter is finally resolved one way or another and as more deadlines for the lapse of permits and concessions are looming now, where government can withhold consent of renewal, Tullow will indeed be between a rock and a very hard place to either pay up the extra 400+ million US Dollars or else have their management and board face the wrath of shareholders, who saw over half a billion UK Pounds wiped off the share values on a single day last week at the London Stock Exchange, where Tullow is quoted.
The fallout however does not stop there as yet, as Ugandans in general will be disappointed that the ambitious production start and construction of a mini refinery and gas or heavy fuel oil driven 100 MW power station will now delay a lot longer, while these disputes boil on.
(Time lines of this saga as ascertained by this correspondent in recent weeks:
[HO – Heritage Oil]
October 2009 Tullow announces the want to sell a portion of their assets in order to develop the Oil fields in Uganda including construction of a refinery.
Tullow starts generating a huge volume of positive press reports that overstate the value of the block 2 which they want to sell a portion of. Included in these reports are discoveries by Heritage Oil which is their partner and the operator of blocks 1 and 3A.
Tullow stock rises based on the stories and the Tullow stock value on the LSE essentially becomes inflated
Tullow opens up a data room and invites 10 companies to make bids including Exxon mobile, Total and ENI
November 2009 Tullow announces a sale of some of their assets will take place in Jan 2010
End of November ENI announces on its website they entered the Tullow data room. However for whatever reason based on what they discover ENI makes a surprise bid for Heritage’s assets instead of Tullow’s.
Tullow states that ENI never entered its data room. The ENI CEO refutes this. At this stage no major oil company has made a bid for block 2 which Tullow wanted to sell initially.
December Uganda government sources bless the ENI - Heritage deal and announces that Tullow will not be allowed to stand in the way of the deal
Mid December Tullow vows to stop the ENI Heritage deal
Government backtracks issues statement through the State minister Lokaris. The line cabinet minister Onek is silent and refuses to comment
January 2010 the Italian Foreign Minister visits Uganda and promises his governments support for the Oil sector including construction of a refinery.
January 2010 Tullow drop plans to sell its assets in Uganda – announcement made by the Aiden Heavey
ENI CEO Scaroni announces they have a 14 billion dollar development plan with financing ready for Uganda.
January 2010 Tullow pre-empts the ENI Heritage deal on the 17th January basically they are forced to do so. They stand to lose on the 1.1 billion investment made by buying Hardman – which incidentally did not attract any tax claims from URA – which appears to be a less attractive than previously thought.
February Heritage and Tullow announce Sale of Heritage to Tullow will take place in the first quarter of the year
April – June Taxation becomes a big issue Government insists Heritage should pay capital gains on the transaction. Discussions between HO and government take place but the case drags on for several months
July 2010 6 month pre-emption deadline about to expire.
July 2010 Heritage threatens to withdraw from the SPA and sends a letter to that effect to GOU.
Government asks for and is granted a one week extension
HO officials return for talks, Government insists tax must be paid and declines Heritage offer of a 30% deposit and arbitration in the UK as per the PSA.
Heritage officials fly out of the country
Tullow panics and opens up direct talks with Heritage to break the deadlock. Based on the talks Tullow agrees to pay Heritage US$1.05 billion directly, US$121 million was deposited in a special account with the Ugandan Revenue Authority and US$283 million was put into escrow account pending arbitration of the Capital Gains Tax dispute with Heritage. An extra 100 million is paid based on the agreement Heritage had brokered with ENI which was to give them a Oil field of a value equivalent to 150 million US in their deal.
Tullow pays this money in the belief that Government will be put under pressure to give unconditional approval for the takeover of the Oil assets.
Tullow announces the takeover of Heritage Uganda
The Minister signs a conditional consent for the takeover
The President subsequently announces the deal is null and void until the tax is paid and he takes over all negotiations related to the oil industry in Uganda directly.
August 2010 Tullow officials including Aiden Heavey fly into Uganda for talks to resolve the issues
President insists the taxes must be paid otherwise the deal is off
A letter is sent by government to Tullow indicating the appraisal license for block 3 will not be renewed or extended and the Government plans to take back ownership of this block.
Government tells Tullow to stop drilling activities in block one after completion of the next appraisal well till transactional and tax issues are resolved.
Facts and Milestones
Tullow shareholders risk losing big time on the investments in Uganda, after the company has already fully paid for an asset they do not yet have possession of.
Tullow exposure in Uganda has now reached 3.1 billion dollars. 1.1 billion for the Hardman Oil buyout, 500 million for the exploration of block 2 and 1.45 billion for the Heritage buy out
Block 3A concessions and permits expire on the 7th September
Block 1 concession and permits expire next year
End of time line description – compiled according to available data, information and valid to the best of this correspondent’s knowledge at the time of going to press)