Government calls off oil deal

Sunday July 25 2010

DISPROVED: Mr Museveni and Eng. Onek.  FILE

DISPROVED: Mr Museveni and Eng. Onek. FILE PHOTOS 

By Angelo Izama

Uganda will seek the full amount in taxes from the transfer of assets from Heritage oil after all, according to reliable sources who talked to Sunday Monitor.
This comes after reports that President Yoweri Museveni personally insisted that the taxes due to the government from the deal- the largest in Uganda’s history- be paid in full.

Reliable sources, who declined to be named because of the sensitivity of the matter, have told this newspaper that the President made his position known at a mid-week meeting he held with the head of the Uganda Revenue Authority, Ms Allen Kagina.

The Secretary to the Treasury, Mr Chris Kasaami, attended the meeting which reportedly took place at the President’s country home in Rwakitura.

Dramatic reversal
This means now that Heritage Oil which opposes the tax and is seeking arbitration over the matter will not be able to transfer its assets to Tullow Oil - a dramatic reversal of the well received conditional approval that allowed the deal to move forward just weeks ago.

In a meeting on July 6 with both Heritage and Tullow officials then, the Ministry of Energy had given partial approval for the transfer of Heritage’s assets to Tullow and a consortium of partners at a cost of over $1.5 billion. The deal had dragged on for several months partly because Heritage refused to pay the over $400 million in capital gains tax. The insistence on tax has put the entire deal on ice. The President’s feelings on the matter were put forcefully and emotively by Energy Minister Hilary Onek in a phone interview on Friday.

When asked if the President was opposed to the deal entirely, Eng Onek responded that Mr Museveni wanted the full amount due to Uganda because it was the right thing to do.


He also revealed that contrary to what had been reported earlier, the oil sharing agreements Uganda had signed with Heritage had stated that tax matters will fall under Ugandan laws.

“Arbitration only arises in the case of other disputes - not tax,” Eng. Onek said, warning that the government was ready to take “extreme measures” to ensure that it received its full pay in capital gains tax.

He also revealed for the first time what appears as government frustrations with Heritage Oil - a former military consultancy company turned oil explorer.
“We have traced their offices initially to Barbados but we have recently learned that they have moved to Mauritius. Are they a movable company? Who are we dealing with here? Thugs?” Eng. Onek asked.

The Minister said Heritage had made various attempts to avoid paying the tax.
“They have tried both back and front doors. We shall not allow them to transact until the tax is paid,” he said.

Asked whether the terms of the earlier deal - which required Heritage to deposit $121 million to URA and guarantee the rest through a bank still stood, he said: “Heritage has to pay the full amount nothing less.”

Neither Mr Kasaami nor Ms Kagina commented about the meeting. Ms Kagina said briefly that when the government is ready then the media would be informed on the issue.

“I want Ugandans to be assured that government is steadfast. The benefits of this oil are for the people of Uganda. They can’t rob us,” Eng. Onek added.

Various experts who weighed in at the beginning of the month – were surprised at the partial approval and warned that Uganda would lose to the oil company.
One of the sticking points according to Mika Minio-Paleullo of the oil governance group Platform UK is the precedent set by Uganda’s acquiescing to arbitration of the tax dispute abroad.

“Uganda’s bargaining position was weak because the [Production Sharing Agreements or PSA’s] sets out that disputes are to be resolved through corporate arbitration tribunals in Europe - which almost always rule in favour of the companies,” he said then in an Emailed response to this newspaper.

There have been noises made that the transaction is happening when the oil sector has no local legislative framework. National oil laws including one on revenue management are still in the pipeline and while amendments have been made to tax laws there are recent changes that may not affect the oil agreements government had signed with the two companies.

“[The approved deal] is a defeat of the Ugandan government [and a] sign of things to come in the Ugandan oil story. Tullow, CNOOC and Total know that they can also push for arbitration when they feel their interests threatened,” Mr Paleullo adds.
According to him the government should have “held out longer”.

What Tullow says
Tullow Corporate Affairs Manager Jimmy Kiberu yesterday said the tax issue was “purely between Heritage and the government” and that Tullow would not comment.
Some voices said the Ugandan government was indeed holding the cards until they approved the transaction albeit partially.

“Heritage and Tullow were becoming impatient and at risk of losing share value. If the government wants to defend Uganda’s interests in future, it must identify a breach in contract by the companies and then demand a restructuring of the contracts, including shifting dispute-resolution back into Uganda,” Mr Paleullo advised. Indeed before the announcement Eng. Onek had ruled out arbitration.

“We’re talking about Ugandan oil and all the issues have to be resolved here according to Ugandan laws. I’m not going to London, if Heritage wants to discuss with Tullow in London that’s up to them but not the Ugandan government,” he said then.

The on-again off-again government position may reflect a struggle on oil policy insiders say. When Sunday Monitor called the number of Mr Bryan Westwood, Heritage’s country manager, it was picked up by another officer who said he was called Kwame. He said he could not comment on any issue.