Tullow Oil's majority sale of some of its Uganda assets to French firm Total E&P in a $900 million deal finally closes a chaotic chapter for the firm in the country – one that once sucked in the UK government to plead with Ugandan authorities on its behalf, and later on an apologetic letter it wrote to President Yoweri Museveni over an alleged $50 million bribe, writes Jeff Mbanga.
However, Tullow’s exit from Uganda opens up an exciting time for the firm in neighbouring Kenya, where its active exploration campaign, together with its partner Africa Oil, is set to see East Africa’s largest economy export crude oil by June this year in the country’s Early Oil Pilot Scheme.
At the end of it, Total E&P officially becomes the main oil company in Uganda, with the French firm now expected to shoulder the burden of offering direction for the country’s oil industry. With Total E&P in the driving seat, Ugandan authorities now have a more powerful company to deal with, and a financial war-chest to match.
$900 MILLION DEAL
In the transaction, Tullow Oil sold 21.5 per cent of the 33.33 per cent of its shareholding in the oil blocks of EA 1, 1A, 2 and 3A to Total E&P. Tullow will now retain just 11.76 per cent and “cease to be an operator in Uganda but will retain a presence in the country to manage its non-operated position.”
Out of the $900 million that Tullow Oil has received from Total E&P, $700 million will be the company’s contribution towards the development stage of Uganda’s oil industry, especially the construction of the crude oil pipeline. The crude oil pipeline to the Tanzanian port of Tanga is expected to cost at least $3.5 billion.
Under the new structure within Uganda’s oil upstream industry, Total E&P will hold 54.91 per cent, Chinese firm Cnooc will hold 33.33 per cent, while Tullow will retain 11.76 per cent.
This structure is, however, subject to government approval of the transaction. Uganda Revenue Authority is assessing the transaction to determine whether it attracts a capital gains tax.
In so many ways, Tullow Oil’s exit from Uganda does not come as a surprise. While Tullow Oil is mainly a junior exploration firm with one of the best track records in the region, the company does not have the financial muscle to undertake the development stage such as the kind that Uganda needs for the Lake Albert basin, which is about $9 billion before First Oil.
However, looking back at its experience in Uganda, Tullow Oil’s problems were beyond the firm being just an exploration firm. The company appeared to have numerous run-ins with Ugandan authorities, who were also ready to throw out any pretence of modesty, and break some rules, in order to make life harder for the firm.
The history of Tullow’s confrontation with government is long and represents a troubled time for Uganda’s oil industry. Tullow’s troubles started late 2009 when Italian officials representing the oil firm, Eni, flew into Uganda in a clandestine operation to take over Heritage Oil’s assets in Uganda.
At the time, Heritage Oil partnered Tullow Oil in an equal shareholding of the oil blocks in the Lake Albert basin. Heritage, a wildcat firm that survived a lot more on speculation than investments, had struck a giant well at the Kingfisher, which holds more than 500 million barrels of oil.
The company, looking to end its exploration campaign in Uganda after striking its holy grail of a well, went on a shopping spree for whoever wanted to buy its interests in Uganda. Italian oil firm Eni came calling.
Eni, according to our sources, came in with an open cheque book. The company was ready to pay its way through whatever stumbling block there was in its path to acquiring Heritage Oil’s assets.
By December 2009, Eni and Heritage announced that they had reached a formal agreement on a deal, worth about $1 billion, pending government approval. Some top officials within Uganda’s government, who had played a part in seeing the deal through, waited with abated breath on a formal regulatory approval of the deal.
But Tullow Oil, with top deal-maker Elly Karuhanga as its chairman, had other ideas. In January 2010, Tullow Oil contested the deal, and preempted its right to be the first to acquire Heritage’s assets, as the two had agreed.
Ugandan officials were caught in a fix. Karuhanga worked the phones between Tullow’s top bosses in London and among his Kampala associates. His argument was that any attempt by Uganda to deny Tullow Oil its rights would portray the country as acting in bad faith, and ultimately scare away other investors that had an eye on Uganda.
Ugandan authorities buckled but only did so under one condition: Tullow would not be allowed to be the only player in Uganda’s upstream industry; it had to get another partner. At the same time, Ugandan authorities also slapped a capital gains tax on the Heritage sale, which at the time, was fuzzy within the country’s tax laws.
Uganda made it clear that it would only sanction Heritage’s $1.4 billion sale of its assets to Tullow Oil if the tax money of $434 million was paid up. Uganda, and most especially President Museveni, needed that money.
In early 2010, Museveni had already kicked off a spending spree ahead of the 2011 elections. He was plotting to raid Bank of Uganda’s reserves to buy fighter jets from Russia in a deal that was more than $700 million. Getting the tax money from Heritage became a presidential order without debate or question.
Museveni needed that money to replenish Bank of Uganda’s reserves, and also finance a ballooning public expenditure bill at a time when a lot of the money had been splashed on the electorate. Tullow Oil had its own dilemma to deal with; it had a deadline under which it had to pay for Heritage’s assets regardless of whether Heritage had met government’s conditions.
In April 2010, Tullow Oil paid Heritage its entire amount. Heritage grabbed the money and left without paying the full capital gains tax. The company only deposited $121 million with the Uganda Revenue Authority, which is a mandatory 30 per cent that a company must deposit before heading for a lawsuit.
Heritage noted that the transaction was not liable for tax, and in any case it had paid tax in its new jurisdiction of Mauritius, which shares a double taxation treaty with Uganda.
Museveni was angry. He felt his officials had let him down. He directed his officials to recover that money at all costs. Tullow Oil was accused of letting Heritage leave without paying the full tax. Around July 2010, the Uganda Revenue Authority issued an agency notice to Tullow Oil and demanded $313 million from it on behalf of Heritage Oil.
In August 2010, the license over the Kingfisher well – the key asset that informed Tullow’s decision to buy Heritage Oil’s assets – expired and government declined to renew it. The license was reverted back to government. Government made it clear it would not hand the license back to Tullow unless all the taxes on the Heritage deal were paid.
And as a matter of emphasis, nothing would go on within Uganda’s oil industry until the tax dispute is resolved. Tullow desperately contacted Uganda’s former colonial masters, the UK government, seeking help over its troubles.
William Hague, the former UK foreign secretary, and Henry Bellingham, then the UK’s minister for Africa, intervened and wrote emails to Kampala seeking audience to resolve Tullow’s troubles in Uganda. The Uganda government declined their requests as Tullow’s problems created a quiet diplomatic row.
By that time, top Ugandan authorities within the ministry of Energy and Mineral Development this reporter spoke with off the record, were sure Tullow Oil would leave the country.
“They don’t have the money to be here for a long time,” one official said as the dispute between the company and the government hit plateau.
In December 2010, WikiLeaks, a trough of leaked intelligence briefs, created more problems. WikiLeaks noted that Tim O’Hanlon, Tullow’s vice president for African Business, had said that at least two ministers had taken bribes from a rival company, which was then thought to be Eni. The allegations would form a basis of a Parliamentary inquest into the matter, and a call for a halt to oil activities in the country.
Facing a lot of pressure, in March 2011, Tullow Oil paid the Uganda government $313 million on behalf of Heritage. Tullow then decided to sue Heritage for that amount. Tullow had met one condition that Uganda government had demanded. It needed to meet the other condition – to bring new partners in the country. Tullow had by the time started holding negotiations with France’s Total and China’s Cnooc.
Things were looking positive and for a brief period Tullow looked like it was mending fences with Kampala. And then something happened in September 2011. WikiLeaks released its second cable, which, this time, noted that a top Tullow Oil official in Kampala, Andy Demetriou, said that President Yoweri Museveni had received a $50 million bribe from a rival company for exploration rights.
That company, again, was thought to be Eni. Aidan Heavey, the chief executive officer of Tullow Oil, wrote a letter to Museveni and apologized. Demetriou was also forced to meet Museveni and offer his apology in person.
The simmering tension between Tullow Oil and Uganda hit fever pitch, sparked even further when, in October 2011, former Western Youth Member of Parliament Gerald Karuhanga tabled documents purporting to show payments that Tullow Oil had made to different Ugandan ministers. The payments, it was thought at the time, were meant to stave off the financial onslaught from Eni.
The members of Parliament called for the three ministers accused of taking bribes from Tullow – Hilary Onek, Sam Kutesa and Amama Mbabazi – to step down. The debate was, however, nipped in the bud after Severino Twinobusingye, a lawyer, rushed to court to stop the process of getting Mbabazi to step down.
CALM BEFORE THE STORM
In February 2012, Tullow Oil completed the sale of two thirds of its assets to Total E&P and Cnooc. Government duly handed the Kingfisher license back to Tullow Oil. Tullow Oil also appointed Jimmy Mugerwa as the general manager for Uganda in July 2012, replacing Eion Mekie as the company tried to warm up to the Ugandan public.
In bringing in new partners in Uganda, Tullow Oil faced a new challenging prospect – how to swim with the sharks or get eaten up. With less cash reserves, Tullow Oil was bound to play second best to its new partners, especially Total E&P. The partnership meant that Tullow Oil did not have the finances to commit to the development stage as much as the two partners could.
But still, Tullow was going to make a gamble. The company was recording modest success in the Lokichar basin in neighbouring Kenya. With three companies agreeing that a crude export pipeline would be built to an East African coast, Tullow was convinced that such a pipeline would snake through or close to its areas in northern Kenya. Such a pipeline would greatly enhance Tullow Oil’s assets in East Africa.
However, things did not go according to plan. The Al Shabab was running riot in northern Kenya, posing a security risk to whatever infrastructure that was planned. The oil discoveries that Tullow Oil was making were not as huge as those in Uganda.
Sometime in 2013, Tullow Oil had to stop operations in Kenya as local communities demonstrated against being denied employment opportunities. Total E&P decided to explore another route through the quieter Tanzania.
Tullow Oil officials lobbied Uganda government officials hard, and as a show of how committed they were to the country, they decided to take part in the competitive bidding round for oil blocks.
However, Total E&P blocked Tullow’s attempts with strong proposals of its own. For Uganda’s government, it was an easy decision on who to listen to, regardless of the cordial relationship that Kenya’s President Uhuru Kenyatta and Museveni enjoyed.
Uganda chose Total E&P’s proposal to route the pipeline through Tanzania. This ultimately broke Tullow’s back. It also stopped its plans of acquiring exploration licenses in Uganda.
A number of tenders to prepare Kenya for its first export of crude oil by June 2017 are being issued. Tullow Oil is expected to concentrate on its Kenyan prospects.
East Africa’s largest economy, in what it terms as an Early Oil Pilot Scheme, looks to move crude oil in trucks from the Lokichar basin in the northern region of Turkana to the south eastern port of Mombasa, more than 400km away.
Kenya Petroleum Refineries Limited in Mombasa – where the oil will be stored and then exported from – is busy refurbishing its facilities, with the company recently calling for bids for civil works.
In Uganda, Total E&P officials are now expected to start the crude oil pipeline project with a clearer plan. The plan is to move Uganda to first oil by 2020 at the earliest. Doing that requires huge and swift investment, which Tullow Oil, the one company whose exploration prowess threw Uganda into international limelight, could not have been able to pull off.
This story is a product of The Watchdog, a centre for investigative journalism at The Observer newspaper.