Is Uganda a liability for Tullow Oil?

Neymar was the poster boy for Brazil in the World Cup. He was all over billboards and adverts during the World Cup. When he got injured, Brazil crumbled. They conceded a record seven goals. Tullow similarly has been the poster company for oil discoveries in Uganda. Tullow risked its dollars. The company, in a statement says they have spent close to US$2.8bn in Uganda in the last 10years.

Over the last one year, we cumulatively could be looking at confirmed unrecoverable liabilities of US$182m. The ruling by the Tax Appeals Tribunal ideally would place the liabilities of the company at between US$450m and US$500m.

Tullow abandoned drilling for oil on Lake Albert – the Ngassa discoveries. This area stretched almost close to the Democratic Republic of Congo on Lake Albert. Flashback to 2009, Angus McCoss, the Exploration Director at Tullow said Ngassahad the “potential to be the largest in the basin.”  He also described it as a “significant oilfield.” 

Fast-forward to 2014, in February, Tullow told its investors that they were abandoning the Ngassa discoveries. Investors were told that “Ngassa has been written off due to offshore appraisal and development being currently uneconomic.” Abandoning this discovery area cost Tullow about US$67m. This means that all the money Tullow spent on appraisal and exploration for these discoveries is a loss. It is not recoverable if oil production starts.

There was more to come: More bad news for the Irish company. In the half year operational update released in early July 2014, Tullow admitted it was forgoing US$115m duefrom CNOOC and Total. In 2012, Tullow sold 66.6% of its assets to the two companies at US$2.9bn. About US$300m of this was placed in a reserve account and would be paid to Tullow as soon as it had shown evidence of some promised "deliverables."

Tullow said this $115m loss was due to delayed project approvals and failure to secure license extensions. The delayed project approvals could not be revealed, as the company tows the confidentiality line. From my understanding though, “delayed project approvals” means the eight production licenses Tullow applied for as far back as 2012. 

Tullow applied for Production Licenses for Mputa, Nzizi, Kigogole, Nsoga, Ngara, Ngege, Kasamene and Wahrindi. A production license is like owning land with its title. Before you secure that land title, you cannot construct on the land or even use it as security for a bank loan. Similarly, a production license is what companies use to secure financing for eventual commercial production of oil. There is potential investment of about US$10bn to US$22bn ifproduction licenses are approved. Now, the three companies are equal partners in the licensed areas. Tullow was given the task to make some key deliverables, but it hasn’t. It has paid the price.

The final nail in the coffin or the cherry on the cake, depending on how you view this, was the ruling by the Tax Appeals Tribunal that Tullow pays US$407m to Uganda Revenue Authority (URA). This is the income tax [Capital Gains Tax] accrued from the 2012 sale of its assets to Total and CNOOC for US$2.9bn. Tullow disputes this valuation, noting that it is entitled to an exemption as per the highly guarded and confidential Production Sharing Agreements (PSAs) signed with government. Tullow paid US$143m as income tax before it went to the Tax Appeals Tribunal. 

 It insists this is actual tax to be incurred. The ruling and order by The Tribunal to pay the remaining US$264m will not be reflected on their accounts because the company is not going to pay that money. It will be challenging the ruling in both local and international courts.  This could drag on for years. 

Tullow with all these "challenges" though, has made money. Tullow said it has spent US$2.8bn in Uganda for the last 10years. But the company also sold a stake to CNOOC and Total at US$2.9bn. This is even before the first drop of oil. However such developments on delayed projects, tax obligations and write-offs bring back the same old question, Is Tullow here to stay? The best answer is, “it will be understandable if they exit.”

Tullow officials have sent mixed signals on their plans for Uganda. In February, Paul McDade the Chief Operating Officer Tullow, told the Wall Street Journal that Kenya was “more supportive” and that first oil was more of “national priority.” McDade’s comments were scathing.  He further said “Kenya will be easier to develop and the government is very enthusiastic for us to get underway with that development and get first oil as soon as possible.” 

These statements do contradict what David Onyango, the deputy spokesperson of Tullow Uganda told the Daily Monitor back in November 2013. He said, “No consideration has been given to any scenario or option other than a long term partnership with Uganda that delivers shared prosperity and benefits for the country and the company.”

The Ugandan government though remains unscathed. They have turned out to be tough negotiators. At the back of their minds the belief is that with the current oil finds, Tullow can leave and there will be other companies clamoring to takeover. They also consider Tullow's mixed signals on an exit is playing politics and trying to pile pressure on government to issue those licences. 

Interestingly, after the ruling by The Tribunal on taxation issues, Aiden Heavy the CEO Tullow Oil Plc hints at resolving this dispute by negotiating with government. 

"Tullow believes that the TAT has erred in law and Tullow will challenge the EA2 assessment through the Ugandan courts and international arbitration but hopes that further direct negotiation with the Government can resolve this matter." 

Government and Oil Companies signed an MOU, So what?

“A prenuptial agreement is a legally bind contract created by two people before they marry. In the prenuptial agreement the couple addresses such issues as the property bought into the marriage by each person and what the property rights of each will be should they divorce.”

Words. Sentences. Jargon. Phrases. Anecdotes. This is how we tell stories, sometimes. So last week you may have encountered phrases like: “...roadmap for the Commercialization of Petroleum Resources discovered in the country,” or “…framework for achieving a harmonized commercialization plan for the development of the discovered oil and gas resources in the country.” How did we get to all this jargon? 

Well, the oil companies operating in Uganda – at the moment – that is: Total, CNOOC and Tullow had been negotiating with government on how to develop our oil. In other words the oil companies and government had to agree on how much oil will be refined, where it will be refined, who will finance the refinery & pipeline, and other infrastructure needs. It took over a year to agree on this considering that the oil companies had been opposed to a refinery in Uganda. So finally, they agreed and signed. But so what if they signed? Does it mean oil will start flowing soon? Can companies begin production? Well, no.  

Here is what the MOU isn’t: The MOU doesn’t mean we know how much fuel – once the refinery is complete - will cost. It also has nothing to do with how much Uganda will earn in terms of oil revenues. It has nothing to do with revenue management. Obviously, it will not determine the price of oil.

It is only a roadmap. In other words, this just paves the way for Uganda to continue the process towards finally being an oil producing country. It is also an indicator that our oil is commercially viable right now. 

Remember the definition of a prenuptial agreement above? That is how I can describe the MOU between government and the oil companies.

Only one company – CNOOC – has been issued a production license. [Note that all the three oil companies are equal partners in all the licensed areas in the albertine region, but CNOOC is the main operator – the in-charge – of the area where a production license was issued - Kingfisher]. So yes, an MOU was signed, but no new production licenses were issued. Total and Tullow still have to wait. A production license is like a go ahead for companies to finally start “bringing oil out of the ground.” Notably, it takes about five years – in Uganda – from the time you’re issued a production license to finally start commercial production.

Secondly, the MOU points out the role of government and that of the oil companies. The government's priority right now is to find the majority stake investor – 60% - in the oil refinery. It is currently compensating people occupying the 29square kilometers of land in Kabale Parish, Buseruka Sub-county, Hoima District where the refinery will be located. It has also shortlisted six consortia to submit their proposals for the development of the refinery.The model and financing of the refinery will determine the cost and whether we’ll get more affordable fuel. One of the reasons government gives for its push for a refinery, is to the country of a petroleum import bill of US$1bn [2013]. 

For the oil companies, their role is to make sure oil produced goes the refinery first, before it makes to the export pipeline. The export pipeline is their business, not ours. Not quite. It is our business too but we have the option of having a stake or not in pipeline. In other-words, we do not have to sink tax-payers money in the pipeline, unlike the refinery.

A statement issued by government reads, 

“The MOU requires the oil companies to support Government in its efforts to develop the refinery including public endorsement of the project. It also requires Government to provide support to the oil companies in acquiring approvals for studies and surveys for an export pipeline and to initiate discussions with neighbouring countries in relation to cross border frameworks for the pipeline.”

Tullow’s Jimmy Mugerwa issued this “public endorsement” in a statement issued after the signing: 

“The parallel framework of a crude export pipeline and a right-sized refinery that has been agreed on in this MOU provides that market certainty.” 

Note the wording >> “right-sized refinery.” The size of the proposed refinery, 60,000 barrels per day. Expected completion year: 2018.

The third point is that the MOU signing gives the oil companies some sort of signal on whether to invest in this country or not. Again, here is another quote from Mugerwa: “…conclusion of this MOU between us and government is significant because the capital required to finance the development of the upstream production facilities, the pipeline and the refinery is in billions of dollars and the financial planning for the project requires that there is a clear market destination for Uganda’s oil production before a Final Investment Decision (FID) can be concluded.”

So, Total Uganda, CNOOC Uganda and Tullow Uganda subsidiaries can now confidently march to their parent companies and say, “hey, we’ve made progress, can we get some more money to invest in this country?” This also – silently – is some assurance to the oil companies that they will perhaps get production license considering that they’ve already signed an MOU. More investment in Uganda means, our local suppliers get to win [some] contracts. A possibility of some jobs – I’ll refrain from a particular figure – and then infrastructure development.

What I can say, the MOU was signed, and meaning government and oil companies are reading from the same script. I can also say a roadmap can take as long as possible. We still have several unanswered questions especially on project costs, whether we need both a refinery and pipeline? What have the oil companies exactly committed to? What we need to watch closely is the current Public Finance Management Bill in parliament that indicates how revenue from petroleum is going to managed.