Tullow finally sells its Ugandan assets

Kampala, Uganda | RONALD MUSOKE | French oil super major, Total, will take over Tullow’s assets in Uganda’s Lake Albert Development project including the stake in the East Africa Crude Oil Pipeline following the recent conclusion of a sale and purchase agreement with the British oil firm.

According to a statement released by Total on April 23, the overall consideration paid by Total to Tullow is US $575 million, with an initial payment of US $500 million at closing (of the deal) while US $75 million will be paid when the partners finally take the final investment decision to launch the project.

The transaction is, however, subject to the approval of Tullow’s shareholders, to routine regulatory and government approvals and to CNOOC’s right to exercise pre-emption on 50% of the transaction.

“We are pleased to announce that a new agreement has been reached with Tullow to acquire their entire interests in the Lake Albert development project for less than US$2/bbl in line with our strategy of acquiring long-term resources at low cost, and that we have an agreement with the Uganda government on the fiscal framework,” Patrick Pouyanné, Total Chairman and CEO said in a statement seen by The Independent.

“This acquisition will enable us, together with our partner CNOOC, to now move the project forward toward FID, driving costs down to deliver a robust long-term project.”

Under the terms of the deal, Total will acquire all of Tullow’s existing 33.3334% stake in each of the Lake Albert project licenses EA1, EA1A, EA2 and EA3A and the proposed East African Crude Oil Pipeline (EACOP) System.

Tullow is currently the operator of Block 2 while Total Uganda operates Block 1 and Block 1A. CNOOC Uganda Limited (CNOOC) is the operator of Block 3A.

In a related statement posted on Tullow’s website, the British wildcatter which still retains exploration interests in many other African countries including Kenya said it was “pleased to announce that it has agreed the sale of its assets in Uganda to Total for US$575 million in cash plus post first oil contingent payments with an effective date of 1 January 2020.”

“Tullow and Total E&P Uganda B.V. (Total Uganda) have signed a Sale and Purchase Agreement (SPA), with an effective date of 1 January 2020 (the Effective Date), in which Tullow has agreed to transfer its entire interests in Blocks 1, 1A, 2 and 3A in Uganda and the proposed East African Crude Oil Pipeline (EACOP) System (the Uganda Interests) to Total Uganda for cash consideration of US$575 million (the Cash Consideration) plus potential contingent payments after first oil (the Transaction).”

“Tullow and Total have had supportive discussions with the Government of Uganda and the URA in recent weeks, including to agree the principles of the tax treatment of the Transaction.  This includes the position on Ugandan tax on capital gains, which is to be remitted by Total Uganda on behalf of Tullow Uganda, and which is expected to be US$14.6 million in respect of the Cash Consideration.”

Tullow Uganda and Total Uganda now intend to sign a binding tax agreement with the Ugandan government and the Uganda Revenue Authority that reflects these principles which will enable the transaction to be complete.

In August last year, Tullow Oil Plc announced the collapse of a US $ 900 million farm down to its local partners Total E&P Uganda and China National Offshore Oil Corporation (CNOOC) following a two year deadlock.

In January, 2017, Tullow had 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.

Tullow was expected to receive US$ 200 million 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 in deferred consideration was meant to fund Tullow’s share of the development and pipeline costs.

However, a month later, CNOOC Uganda exercised its pre-emption rights to acquire 50% of the interests being transferred to Total. In September, 2017 Tullow then notified government about the farm down to Total and CNOOC. But then the government slapped Tullow with us$ 167 million in Capital Gains Tax.

Tullow disagreed with the assessment arguing that it was not liable to pay this tax because it was transferring shares to another investor for re-investment in the project. The Uganda Revenue Authority and the government technocrats insisted on Tullow paying Capital Gains Tax. A stalemate over the transaction then ensued stalling Uganda’s oil development project.

Going forward, Tullow said in a statement that the firm hopes the transaction will remove all future capital expenditure associated with the Lake Albert Development Project whilst retaining exposure via contingent consideration linked to production and the oil price through the contingent cash payments described above.

Dorothy Thompson, Tullow’s chief executive officer said: “Tullow has been a pioneering explorer in Uganda over many years and we are very proud of the role we have played in the founding and development of Uganda’s oil industry. We wish all Ugandans and our joint venture partners well as they take this important project forward.

“This deal is important for Tullow and forms the first step of our programme of portfolio management. It represents an excellent start towards our previously announced target of raising in excess of US$1 billion to strengthen the balance sheet and secure a more conservative capital structure.”