Cnooc bids to increase oil shareholding as Tullow exits

Sunday March 19 2017
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Total and Tullow Oil officials pose with Energy minister Irene Muloni (centre) after signing Memoranda of Understanding in Kampala last month. PHOTO BY STEPHEN OTAGE

Kampala. Chinese state-owned China National Offshore Oil Corp (Cnooc) has expressed desire to expand its foothold in Uganda by acquiring half of the 21.57 shares UK’s Tullow Oil Plc recently sold to France’s Total Total E&P.
Tullow disclosed on Friday that Cnooc had “exercised its pre-emption rights under the joint operating (JV) agreements” and notified them of plans to acquire the shares “ on the same terms and conditions that were agreed between Tullow and Total two months ago – including as to the amount, structure and timing of the of the consideration payable to Tullow.”
Pre-emption of right refers to the practice of existing shareholders being given first priority by another shareholder to the right of purchase new shares issued.

The transfer of shares once approved by government, means Tullow “will cease” being an operator in the country, but will rather “retain” a small foothold to “manage its non-operated position”—maintain only equity interests.
The Anglo-Irish operator, in January, announced a deal transferring 21.57 per cent of its shares to Total in Exploration Areas 1A (EA1) at the northern end of Lake Albert (in the Murchison Falls National Park); Exploration Area 2 (EA2) to the east of Lake Albert in the Butiaba region, and Exploration Area 3 (3A)-Kingfisher, in the Albertine Graben, for a combined sum of $900m (about Shs3.2 trillion).
This arrangement, Tullow’s chief executive officer Aidan Heavey, said would allow the Lake Albert Development to move ahead swiftly, increasing the likelihood of Final Investment Decision (FID) in 2017 and first oil by end of 2020.

Some of the conditions included the transfer of license interests from Tullow to Total in exchange for cash and deferred consideration to be paid as and when the Lake Albert Development Project reaches a series of key milestones and represents a reimbursement by Total of a portion of Tullow’s past exploration and development cost. Also, Total was to pay $200 million (Shs722b) in cash, consisting $100 million (Shs361b) on completion of the transaction and $50 (Shs180b) million at both Final Investment Decision and First Oil, and then $700 million (Shs2trillion) in deferred consideration which will be used by Tullow to fund the company’s share of the costs of the upstream development project and the associated export pipeline project.

What it means
Tullow’s corporate affairs manager Abdul Kibuuka told Daily Monitor that “what was sold to Total is what Cnooc is claiming a slice of because it has a right to it under JV arrangement.”
In February 2012, Tullow, then the sole investor, sold off 66.66 per cent of its interest in the oil sector to Total and Cnooc to set up a JV arrangement in which each of the three partners held 33.3 per cent.
The latest deal, however, once approved means, both Total and Cnooc will each pay $450m (Shs1.5t) of the combined of $900m to Tullow.
Both Uganda Revenue Authority officials and Energy minister Irene Mulono were unavailable for comment on Capital Gains Taxes the deal/s could attract.

Tullow which entered Uganda in 2004, however according to those familiar to the matter, will retain its 11.76 per cent as equity and for which they will maintain a small office to ensure oversight, for example to ensure Total and Cnooc do not alter recoverable costs reports and are compliant to the laws.
But it also means Tullow will stop reporting directly to the various government agencies like National Environment Management Authority (Nema) for permits, Auditor General for reports or the regulator, the Petroleum Authority.
The company entered the then Uganda’s dreary petroleum sector after acquiring 50 per cent interests in EA1 and EA2 of Canadian oil explorer Energy Africa with the other 50 per cent belonging to Australia’s Hardman Resources and UK’s Heritage Oil and Gas Limited.
In 2007 Tullow acquired Hardman’s interests and in 2010 look over Heritage’s.

It was also hinted that once the deal is approved, both Total and Cnooc as two dominant players could reach agreement of, Cnooc now independently operating Kingfisher in the south and Total stick EA1 and EA2 in the North. Previously all the three held equal shares in each of the blocks.
The government having learned lessons from the Tullow-Heritage-Eni case, sources said only Total can object to this deal.
Tullow, since making entry about 13 years ago the company says it has spent close to $2.8b (Shs10trillion) in the first phases of the oil production cycle—exploration and appraisal.


Tullow, along with Total, last year in August were granted eight production licences climaxing the last two phases and paving way for the next phases leading to pumping of first oil—development and production—but which are very capital intensive. Earlier projections put capital expenditure at $8b (about Shs27 trillion).
The latest development now means Total and Cnooc will fast-track ongoing efforts for engineering feasibility studies that will form basis for Final Investment Decision (FID), for which Ms Muloni said last month they had given the oil companies December 31 this year as deadline.
Last month, Total and Cnooc, awarded contracts to Flour (France) working with China Petroleum Engineering and Construction Corporation (CPECC), Technip (France), and Chicago Bridge & Iron Company (US) for studying and designing (Front End Engineering Design (FEED) the Buliisa and Kingfsher fields.
FEED is the last preparatory stage that will detail technical requirements among others layout of the 36 well pads, technology required for drilling the 400 wells, and estimated costs of required infrastructure to start production.

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