The long-drawn-out process of Tullow Oil exiting Uganda has now entered the final chapter, after the Ugandan government and Uganda Revenue Authority (URA) together with the two companies reached a binding agreement on the taxes that should be paid.
Tullow discovered huge reserves of oil in the Lake Albert basin in western Uganda starting 2006. It had entered Uganda by acquiring the exploration interests of Energy Africa in 2004, and in 2007, it grew its fortunes when it acquired the licenses of Australian explorer, Hardman Resources in 2007.
But the development of the industry has been delayed by disagreements over legal and tax regimes. In 2010, it was not a smooth transaction when Tullow acquired the interests of Heritage Oil for $1.45 billion. The government slapped a $434 million (about Shs 1.62 trillion) capital gains tax from the transaction.
The tax is charged on the value of the transaction if the asset in question has gained value over time, but it is included in the business income tax. After a long two-year battle, involving suits in Ugandan courts and tax appeals tribunal, as well as arbitration in a London court, Uganda won the case.
By then, more than 1.7 billion barrels of oil had been discovered in the rift valley. At this same time, Heritage had deposited $121 million (Shs 451 billion) with URA as part of the tax in dispute but later refused to pay the balance when the ruling was made.
Government forced Tullow to pay the balance of $313 million (about 1.168 trillion), before allowing it to get new and bigger partners, Total of France and the Chinese group, CNOOC to join the project.
To sale two-thirds of its interests to the new partners, the government assessed a capital gains tax of $472 million (Shs 1.76 trillion) on the transaction valued at $2.9 billion (Shs 10.8 trillion). However, the tax appeals tribunal revised this amount to $407 million (Shs 1.9 trillion).
In 2017, as Uganda insisted on building a refinery on top of a crude export pipeline, Tullow Uganda’s parent company, Tullow Oil Plc started experiencing cash problems and decided to sell its entire assets in Uganda, to pay off debts worth more than $900 million (about Shs 4.4 trillion).
Tullow and the three partners found themselves at loggerheads with the state after it changed the route of the export pipeline to Tanzania’s port of Tanga, away from Lamu in Kenya. Tullow eventually decided to sell its Ugandan assets to Total, leading to another battle over taxes payable on the transaction then valued at $900 million.
Uganda assessed the tax at $300 million (Shs 1.4 trillion), which is one-third of the transaction value, but Tullow disputed this, saying the transaction was not taxable. Two years of negotiations saw the government reduce the bill to $167 million (Shs 632.5 billion), while Tullow insisted on paying $85 million (Shs 317 billion).
If the transaction had been concluded in 2019, the government would have received up to $85 million (Shs 317 billion). However, in April 2020, a new deal was reached at a revised value of $575 million (Shs 2.8 trillion) down from the initial $900 million (Shs 4.4 trillion), while the capital gains tax payable dropped to $14.6 million (Shs 54.5 billion), according to Tullow Oil Plc head of corporate affairs, George Cazenove.
After 14 years of exploring for oil in Uganda, Tullow is exiting the country which now has 6.5 billion barrels of oil confirmed and 1.7 billion recoverable, according to the government.
Tullow executive chairperson, Dorothy Thompson says the sale of assets in Africa, particularly in Uganda and Kenya is targeted at raising at least $1 billion to improve the company’s financial position.
“This is important for Tullow and forms the first step for our programme of portfolio management. It represents an excellent start towards our previously announced target of raising USD 1 billion. Tullow’s strategy to move to a more conservative capital structure,” she said.