Tullow Oil Deal Faltering over Questions of Uganda’s Capital Gains Tax

August 24, 2010

Tullow Oil is still in negotiations with Uganda this month in hopes of settling the complicated Heritage Oil tax dispute which has received much media exposure recently over Heritage challenging the Uganda government’s capital gains tax.

Tullow Oil has been in talks with China National Offshore Oil Corporation (CNOOC) and the Total SA Company, as well as the Ugandan government, to reduce its investment in three oil drilling licenses.  CNOOC and Total will each have a 1/3 interest, along with Tullow, in the three licenses.  Two oil rigs are already undergoing drilling for oil exploration and appraisal in the area.  The three companies are also planning to make a proposal to Uganda to increase their drilling area.

Tullow is being asked to pay taxes on behalf of Heritage Oil because some of the assets it is selling to Total and the CNOOC were acquired from Heritage in July.

Heritage Oil and Gas Ltd created a difficult business environment with Uganda when it sold shares to its investors without using a company with a tax haven to conduct the transaction.  Although it is maintained by Heritage and Tullow that they do not owe tax to Uganda, government officials are arguing otherwise.

Back in March, CNOOC outbid Oil and Natural Gas of India to acquire Heritage’s Ugandan assets.  CNOOC, which is China’s biggest offshore oil operator, paid $2.5 billion for its 50% interest in the Heritage Assets.  India’s Oil and Natural Gas fell short with a bid of $2.1 billion.

Although Uganda’s tax code taxes capital gains tax based upon the net gain from the disposal of business assets, Heritage Oil has argued that their is a loophole in the law.  Uganda officials have been accused of not negotiating better deals on behalf of Uganda.  Additionally, the laws of Uganda don’t address this matter, and Ugandan lawyers do not have experience in oil transactions.

Representatives of Tullow Oil maintain that although Heritage Oil is potentially subject to capital gains tax, Tullow does not share any of the tax liabilities.

Heritage has been assessed a tax of $404,925,000 from the Ugandan government, yet has only paid 30%, or $121,477,500, to the Uganda Revenue Authority.

Ugandan Minister Hillary Onek asserts that Tullow did not provide his government with the correct documents concerning their proposal to buy the oil block licenses.  Onek argues that Heritage Oil only invested $150 million, with a potential profit of $1.5 billion, and thus should not be disputing their obligation to pay capital gains tax.

Other companies are rushing to do business in Uganda as well.  Chairman Peter Kingston of Tower Resources, the parent company of Neptune Oil, has also been in Uganda over the past month to meet with officials of Envoi, a company specializing in marketing, acquisitions and advisory services for the International Upstream Oil and Gas Industry Company.  Envoi is assisting Neptune Oil in searching for a partner to assist in the exploration of oil in Neptune’s licensed land in Northern Uganda.