Monday January 23 2012

Tullow Oil agreement hits snag over clause favouring Tullow


A key agreement that will see Tullow Oil sell part of its stake in Uganda’s oil sector has been hit by fresh delays. Tullow Oil wants to sell its stake of oil assets for $2.9 billion (Shs7.3 trillion) to France’s Total and Chinese group, CNOOC.

During a meeting of NRM lawmakers in Kyankwanzi at the weekend, President Museveni said the British Oil firm has declined to sign a farm down deal.

Mr Museveni is said to have told the MPs that Tullow had apparently refused to sign the agreement, insisting on a stabilisation clause in the deal maintained to guard against any changes in policy.

Tullow’s Spokesperson Jimmy Kiberu told Daily Monitor yesterday that although they were not privy to discussions during the NRM meeting, they are hopeful that the deal will go through soon.

“The transactions are in very advanced stages and most of the technical hurdles have been crossed. We and our partners remain hopeful that it’s only a matter of time for this to be concluded,” Mr Kiberu said.

President Museveni was speaking during negotiations opposed to clause 33 that establishes the stabilisation clause. Tullow also wanted to construct a pipeline up to Mombasa to process the crude oil.

However, according to a source that attended the meeting, the President explained to the MPs that Tullow wants government to build a processing plant where the company would produce 30,000 barrels of oil per day, despite the earlier agreed 120,000 to 250,000 barrels and “the rest of the oil would go through the pipeline to be processed from outside.” The deal was to be signed last week.

President rejects
Mr Museveni reportedly objected to Tullow’s demands and was overwhelmingly backed by the legislators. “They (Tullow) are demanding that we restore that stabilisation clause which we removed. We said in the meeting that we cannot agree to their terms and we resolved that they should go away,” said the source.

Last year, Tullow announced plans to sell to Cnooc and Total some of its shares retaining the remaining third of the equity itself. The venture lies in the Lake Albert basin on the border with the Democratic Republic of Congo. Tullow has all long been waiting to sign the agreement, bringing on board new partners.

Government reportedly wrote to the three oil companies demanding that they drop the stabilisation clause that shields exploration companies from changes in taxation policy and political chaos making it hard for companies to raise capital in case of any risks.

For instance if Uganda develops new and improved regulations that increase the costs of the oil companies, the government must cover such costs.
Stabilisation clauses also insure an investor from future changes in both fiscal terms and even legislation. To an investor, such changes constitute political risks.

Parliament last year passed resolutions on the oil sector, slapping a suspension on execution of any fresh contracts by the Executive until necessary laws have been passed.

The MPs argued that Tullow does not have any legal contract and that the memorandum of understanding signed with government is illegal and should not be a basis for entering into new contracts.

The President, however, objected to the resolution saying the matter would affect the $2.9 billion deal. Meanwhile, the MPs’ retreat ended on Saturday with a number of resolutions passed in the education sector, media and corruption among others.

Instilling discipline
Lwemiyaga County MP Theodore Ssekikubo was also committed to the NRM party disciplinary committee on grounds of allegedly leaking information to the media regarding his comments on the restoration of term limits.

Kyamuswa County MP Tim Lwanga is said to have tabled recordings to have Ssekikubo disciplined. NRM Caucus officials are expected to address the media today.