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Tax row hangs over Uganda upstream

With a new exploration licensing round planned, Tullow Oil's tax row with the government may dampen upstream investors' appetite for Uganda, writes Ian Lewis

OIL-RICH Uganda's plans to hold a new bidding round later this year, four years after it suspended licensing, is sure to attract considerable interest. But a protracted tax dispute involving Tullow Oil – the main player in the country's oil sector – and the government must be resolved amicably to reassure potential investors.

When the government suspended licensing in 2007 to amend oil-sector regulations, exploration prospects looked promising, but were still at a relatively early stage. Since then, Tullow and others have discovered more than 1bn barrels of oil around Lake Albert, in the Ugandan stretch of east Africa's Rift Valley, with Tullow estimating a further 1.5bn barrels could be found in its blocks alone.

That should ensure a good response from investors to any fresh licensing round, which would cover some of the five exploration blocks yet to be licensed on the west side of the Albertine Rift, close to Uganda's border with Democratic Republic of Congo. The government has indicated for some time that it wanted to resume exploration licensing in 2011. Confirmation came from prime minister Apollo Nsibambi at the East Africa Petroleum Conference (EAPC), held in the Ugandan capital Kampala in February.

The government says 10,000 square km of relinquished acreage in high-potential areas will be put up for relicensing, alongside the yet-to-be licensed blocks. It says latest estimates indicate that the Albertine basin contains at least 2.5bn barrels of oil and that less than 20% of the potential areas have been drilled.

The new round is likely to be different from the last. Then, Uganda was still very much a frontier play and licences were awarded more or less on a first-come, first-served basis. This time, following oil discoveries on three of the existing five licensed blocks and with much higher interest likely as a result, the government says there will be competitive bidding – probably under the auspices of a new national oil authority being created to regulate the sector and a new national oil company to hold state assets.

Tax cloud

Exploration on the shores of Lake Albert
But if Uganda wants to maximise its returns from a fresh round, it must convince potential investors that its long-running tax dispute with Tullow does not signal future uncertainty. The spat concerns Tullow's purchase of Heritage Oil's stakes in two blocks early last year. Heritage, which no longer has Ugandan operations, did not pay the amount of capital-gains tax on the deal that the government claims it should have. Since then, Heritage and Tullow, both UK-listed, have been pursued to pay the outstanding bill of around $280m (PE 10/10 p34). In February, it emerged that UK foreign minister William Hague intervened in the dispute last year, hoping to find a resolution.

Tullow maintains it will not pay Heritage's bill, but has indicated it is nearing an agreement with the government over the dispute and about future oil production, saying at the end of January that talks were "progressing well".

There are also indications from the government that talks are continuing. Energy minister Simon D'Ujang told reporters in late January that he was seeking clarification from Tullow over its field-development plans and on the resolution of the tax issue. The energy ministry says Tullow has submitted a request for production licences for three fields on block 2 – Mputa, Nzizi and Waraga – and that it intends to hand out its first production licence by mid-year.

Agreement one way or another on the tax bill remains crucial for Tullow: the government has refused to issue a production licence until the dispute is cleared up. That has effectively blocked Tullow's plans to sell stakes in its acreage to France's Total and China's state-owned CNOOC – something it must do to garner sufficient investment to push ahead with its development plans.

While Tullow had initially planned to convert its blocks to a 50:50 venture with one other firm, pressure from the Ugandan authorities to include both Total and CNOOC in the deal forced it, in March 2010, to create a three-way project with each company owning a third.

While the promise of a stake in prime Ugandan acreage means both of Tullow's partners are prepared to wait for the go-ahead, there are signs that Total, at least, is growing a little impatient. Serge Matesco, Total's E&P director for sub-Saharan Africa, told the EAPC: "We are eager, ready and anxious to assume the role." But the French firm wants to renegotiate the terms of the exploration licence, says chief executive Christophe de Margerie, to ensure there is a "reasonable period of time" available for exploration and development.

Back to business?

Another brake on resolution of the tax dispute – and oil-sector development in general – was the run-up to the presidential and parliamentary elections held on 18 February, which resulted in a win in the presidential race for long-time incumbent Yoweri Museveni. The pace of Uganda's bureaucracy has slowed until the uncertainties of the election and post-election period, when a new government and parliament are put in place, are out of the way.

Pre-electoral disruption was evident in the wider economy, where there was a sharp year-on-year fall in planned new investment in January, when the value of new projects licensed slumped to $122m from $444m in January 2010.

All this will have fed into Tullow's January announcement that – assuming it receives the go-ahead – oil production will not begin until 2012, putting back its previous target of later this year. But 2012 would still be an ambitious starting point, given a production licence has yet to be awarded and infrastructure yet to be built. Companies will probably also face a rejigged tax regime under a new framework planned for the oil sector, possibly including a withholding tax, although details have yet to revealed.

Tullow plans to sink about $10bn into Ugandan oil projects over the next decade, having already spent $0.8bn on exploration so far. Among its planned investments are a 200,000 barrels a day (b/d) refinery and a share of the cost of a 1,300 km pipeline to deliver crude to the Kenyan port of Mombasa.

The government has also suggested building a new $2bn refinery in Uganda to serve the east African region, while Kenya Petroleum Refineries (KPRL) has suggested its refining capacity in Mombasa could be used to process some of the oil, once a pipeline is built. The 32,000 b/d refinery, which already serves Uganda, as well as Kenya, Burundi and Rwanda, plans to double capacity within five or six years.

Bimal Kumar Mukherjee, KPRL's chief executive, has described prospects for investment in Uganda's oil assets as highly positive, although the company – a venture between the Kenyan state and India-focused, UK-registered Essar Energy – has yet to specify targets.

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