Oil disputes push Museveni into concessions

Tuesday December 31 2019
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Meeting. President Museveni shakes hands with Pouyanné at a recent meeting in Kampala. PHOTO BY PPU

Total’s chief executive and chairman, Patrick Pouyanné, was in Kampala last month, the third time this year, for high level discussions with President Museveni.
The discussions sought to end the deadlock between government and joint venture partners - Anglo-Irish Tullow Oil, Total E&P and China’s CNOOC.
The previous meeting between the two assisted by their technical teams on April 29 ended without consensus.
A tentative follow-up was suggested at the end of June but neither side confirmed.
Caught between a rock and hard place, as the deadlock immediately took toll on local service providers and expected revenues into the Petroleum Fund, and also scuttled government’s commercial production plan from 2023 to the earliest in 2025, the President in October invited executives of the joint venture partners to State House and yielded ground to some issues.
He gave them one month to consider his proposals.
The one month almost elapsed with Patrick Pouyanné’s visit on November 28. If any further consensus was going to be reached, a lean team was needed so the President, sources say, invited three/four officials to the meeting.

Details still scanty
The exact details of the Museveni-Pouyanné discussions remain scanty. But once the exact details are fined tuned, it is expected the decision will be communicated publicly in the coming days, signaling, a move forward to close the Tullow farm down (sales) transaction, and conclude the remaining commercial agreements for the proposed East African Crude Oil Pipeline, leading to Final Investment Decision (FID).
Final Investment Decision is an agreement on capital investments on a long term project, when money for the project is availed and project execution commences.
This is, however, purely in the hands of the joint venture partners and while government hopes it can be taken by latest end of next year, in light of the President’s concessions as a sweetener, there is likelihood it could be extended to sometime in 2021 - more conveniently after the general elections and aftershocks.

A zero-sum game
The joint venture partners, especially Total E&P, which holds greater leverage, and government have since April sparred over five issues, including, governing law, management of jobs - with regulator Petroleum Authority of Uganda pushing for all positions to be first advertised locally before expatriates are brought in - and domiciling of the pipeline holding company, government wanted locally but the companies insisted that Uganda is neither tax neutral nor is known for project financing, until during recent concessions they both settled in UK but with local subsidiaries.
The contentious issues were, treatment of the $185m (Shs673b) probable tax deductible off the $617m (Shs2.2trillion) cost oil or exploration and appraisal costs by Tullow Oil that Total E&P and CNOOC are entitled to after acquiring the former’s stake, and lifting of the cost recovery cap under the 2017 Income Tax Amendment.
Cash strapped Tullow Oil, in 2017 announced plans to farm down or sell 21.57 per cent of its interest in each of the three exploration areas to Total E&P and CNOOC for $900m (Shs3.4trillion), and retain 11.5 per cent on non-operatorship capacity.
The transaction attracted a tax implication - Capital Gains Taxes, a tax on the profit when you sell something (for example an asset) that has increased in value - of $167m (Shs612b), according to Uganda Revenue Authority.
On the other hand, Tullow offered to pay only $85m (Shs310b) on premise that part of the money $700m was going to be reinvested in the development phase while government insisted on a sum of $167m.
The dispute over Capital Gains Taxes appeared concluded in January following the first visit by Pouyanné who, to break the impasse, offered a settlement contribution of $82m (Shs300b) split with CNOOC in exchange for Tullow’s rights and assets, including the $617m (Shs2.2trillion) cost oil.
The $617m (Shs2.2trillion) cost oil recovered over a period of 25 years, according to URA’s calculations, would be taxed up to 30 per cent or $185m (Shs673b), which the joint venture partners objected to.
So President Museveni was faced with a conundrum of either disallowing the $185m over 25 years to move forward to FID - of about $10b (Shs36 trillion) for the next development and production stages - or continue pushing for it, as the entire sector bleeds.
Secondly, the joint venture partners wanted the cap on their recoverable costs under the new Income Tax regime lifted, in line with the initial Production Sharing Agreement (PSA) regime.
The new regime also reinstated the pre-2015 position for the companies to pay income taxes at the start of oil production irrespective of their profitability.
Income taxes are ordinarily imposed on profits, so in this case the oil firms argued that such a tax is on imagined profits.

Total E&P suspended activities on the East African Crude Oil Pipeline

In September, Total E&P suspended activities on the East African Crude Oil Pipeline forcing President Museveni and his Tanzanian counterpart John Magufuli into a meeting on the sidelines of the Uganda-Tanzania Business Forum in Dar-es Salaam to chart a way forward.
The meeting came on the heels of the decision taken by French oil giant Total E&P, the lead developer on pipeline, to “decommission” both activities and staff on the project with the firm citing “uncertain business” environment in Uganda following a collapse last week of a deal for Tullow Oil Company to sell its stakes to Total and China National Offshore Oil Company.
The decommissioning was a result of the ongoing standoff between the Ugandan government and the joint venture partners among them Total E&P, Tullow CNOOC over a list of demands and considerations concerning a number of investment decisions.

While clarity on the presidential concessions and way forward are expected in the coming weeks, both the oil sector regulator – Petroleum Authority Uganda - and Uganda National Oil Company, which manages government’s commercial interests, told Daily Monitor they remain upbeat
Ali Ssekatawa, the Petroleum Authority of Uganda director for legal and corporate affairs, told Daily Monitor the moment we have clarity on those issues the project will be on a rollercoaster.
“The project is technically mature, waiting to take off. Next year’s projection is once FID is taken everything will be good to go,” he said, adding: “What is clear is any delay affects government negatively as it does to the JV partners; our partners have invested a lot, so it is our interest that we work around the clock to speed up things.”
Petroleum Authority of Uganda also revealed that all the back to back technical studies on both upstream - Tilenga Oil Fields in Nwoya and Buliisa districts and Kingfisher in Kikuube, and the 1445km pipeline from Hoima to Tanzania’s Tanga Port, have been concluded and requisite approvals have been granted or in the offing.
Likewise, Peter Muliisa, the Uganda National Oil Company head of legal and corporate affairs, revealed that the main target for next year is FID “because as you know all these projects - oil fields and pipeline - are interconnected.”
“We have developed a schedule that is extremely ambitious, and our hope is to have finished the remaining commercial agreements by April 2020,” he noted.
“Our hope is to see FID soon for both upstream and the pipeline for the $16b (Shs50 trillion) to start flowing; the input into that is to ensure all processes and agreements are concluded as soon as possible.”
Uncertain
First oil production, both government and oil companies say is three years from FID, which remains uncertain now.
Jean-Pierre Sbraire, the Total E&P chief finance officer was recently quoted by Reuters saying it was too early to say when Final Investment Decision for the Uganda operations will take shape.
To start oil production, projections show oil companies have to invest a minimum capital of $10b (Shs36 trillion), $6.7b (about Shs24 trillion) in developing the oil fields - Tilenga fields and Kingfisher and $3.55b (Shs13trillion) for the pipeline.
On the sidelines, Uganda National Oil Company also fast-tracking development of the 60,000 barrels per day refinery in Hoima - with a report of its technical designs expected to be completed by end of January and pave way for Environment Impact Social Assessment, and subsequently FID by end of 2020.
Uganda National Oil Company is also in-charge, and is currently looking for joint venture partners to develop both the Kabaale industrial park for petro-chemical and related plants, and the proposed Kampala storage terminal where refined oil products at Buloba, in Wakiso district.

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