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Uganda on the road to production after settling Tullow tax dispute

The settlement of Tullow’s tax dispute with the government paves the way for a new African oil producer

AGREEMENT between Tullow and the government on a process for resolving their tax dispute has set Uganda on course towards 200,000 barrels a day (b/d) of oil production – “and potentially much more”, Tullow says. Following the agreement, Tullow signed contracts to bring in Total and China’s state-owned CNOOC as partners for a basin-wide development of the Lake Albert area, each company having a one-third interest in each of three licences.

Total and CNOOC are each paying Tullow $1.467bn to join the development. Tullow said the agreement calls for the government to decide on operatorships, but Total said it expects to be offered Block 1, while CNOOC indicated it will be offered Block 3A, leaving Tullow with Block 2. Tullow will act as interim operator while its partners establish a presence in the country, allowing an early resumption of exploration work after it was halted during the tax dispute.

The dispute – over a $404m capital-gains charge claimed by the authorities from Heritage Oil, a former participant in two licences, which sold its interests to Tullow – is to be resolved through a tax tribunal in Uganda. Both companies will make payments into escrow accounts and Tullow will pay an additional sum to the government. Separately, Tullow is disputing a $473m capital-gains charge on its sale of interests to Total and CNOOC, but will make a partial payment before going through a resolution process in the country.

The agreement with the government also resolved the ownership of the Kingfisher field in Block 3A, which the authorities “repossessed” during the dispute. New licences are to be granted for Kingfisher and another prospect, Kanywataba, and also for the remainder of Block 3A, while the Block 1 licence will be extended to allow for the time lost in the dispute.

Tullow said two more drilling rigs are being contracted, in addition to the three already there, for further exploration work onshore and a study has been commissioned into the offshore facilities required for drilling in Lake Albert. With 39 wells drilled and a high success rate – targets are at fairly shallow depths, so drilling can be fast – the firm estimates it has found proved and probable resources of 1bn barrels, with another 1.5bn barrels likely to be found.

The development plan will deliver “at least 200,000 barrels day (b/d)” according to Tullow, while Total’s head of exploration and production, Yves-Louis Darricarrère, said “plateau production could exceed 300,000 b/d, depending on the results of the future drilling programme”. The main production centre is likely to be in the north of the basin, with a secondary centre in the south.

Still to be settled is the export route for the oil. The government has been pushing for the construction of a refinery near the oilfields, with capacity to be increased in phases to allow all crude to be processed within the country. Last year, it commissioned a study from Foster Wheeler into prospects for a facility of up to 150,000 b/d capacity, the findings of which are said to be positive.

The government has been pushing for the construction of a refinery near the oilfields, with capacity to be increased in phases to allow all crude to be processed within the country

But Total said the development “includes an export pipeline to carry the oil to the Indian Ocean to access international markets” – although the firm added that the partners will also “study and promote the construction of a domestic refinery”. Building a 1,300 km pipeline to the coast – probably at Mombasa, Kenya – will be particularly costly, because the crude is waxy and the pipeline will need to be heated. But the crude is also acidic, so building a refinery will also be a high-cost option.

If the pipeline prevails, one beneficiary will be the Mombasa refinery – the only refinery in eastern Africa. India’s Essar bought a 50% interest in the facility two years ago, with the other 50% being held by the Kenyan government, and announced an investment plan to allow its 80,000 b/d capacity to be utilised. Essar is now considering revising the plan to include an upgrade, to enable the refinery to processes Ugandan crudes.

Tullow Oil said last month that two wells were about to spud in Block 1 of the Lake Albert basin, an exploration well into the Jobi-East prospect and an exploration-appraisal well into Mpyo. The wells follow the agreement with the authorities to resolve a tax dispute.

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