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UGANDA: Museveni’s oil production date pushed to 2025

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BAD OIL DEAL – Museveni fight with oil firms threatens major project


Kampala, Uganda (INDEPENDENT UG) – | President Yoweri Museveni’s dream of Uganda getting first oil by 2020 has been hit by a double blow from two international oil companies; Total E&P Uganda and Tullow Oil Uganda.


Museveni is battling the two companies on two fronts; with Total over the fate of the US$3.35 billion oil pipeline and with Tullow over Capital Gains Tax (CGT) which Tullow does not allegedly – once again- want to pay.

The two disputes mean that the date of first oil production is once again pushed farther; this time from 2020 to 2025, according to insider estimates.

By that time Museveni will be 81 years old, with an election looming in 2026, and no clear guarantee that he will preside over the first production of Uganda’s oil.

Is that what the oil companies, and their shareholders and backers in western capitals want?

Museveni has gained few friends among the oil companies because of his insistence that Uganda builds an oil refinery in order to benefit from the by-products of the oil production. He has also insisted on a tough Capital Gains Tax regime. Equally significantly, corruption and lethargic decision-making by his government have slowed progress on oil projects.

On the other side, the oil companies want a faster clear cut produce-and-export crude approach, and might opt to wait out Museveni – and deal with his successor.

“Tullow is out and Total is hard-lining because it has the financial muscle to wait out Museveni,” one source familiar with the disputes told The Independent.

According to some observers, this could explain the endless disputes and deadline delays.

In the latest case, deals worth $ 20 billion are at stake. The issues are so critical that Museveni and his teams of oil sector technocrats have been holding frantic meetings with executives from oil companies to try and find a way out over the past few weeks.

The most pressing deal is the $ 3.35 billion East African Crude Pipeline Project (EACOP). This has an impact on the fate of the $ 4billion refinery.

But the other big issue is the $ 900 million Tullow Oil farmout to CNOOC and Total. Oil field projects or upstream projects worth over $ 10 billion are also facing some challenges.

Pipeline dispute

The dispute over the pipeline is clear. The oil companies want more oil for the pipeline. They say this is the only way it can make financial sense. But Museveni wants to retain some oil for his pet project; the oil refinery. This project is so important to him that, according to sources, Museveni is prepared to kill the pipeline to save the refinery.

The dispute revolves around the volume of oil Uganda has, which is not that much. Uganda currently has slightly over a billion barrels of recoverable oil. Of this, it is estimated to produce between 230,000 and 250,000 barrels per day of oil. Government wants to put 60,000 barrels of this to go into a planned refinery. This leaves 170,000 barrels for the pipeline for export by oil companies.

President Museveni and his counterpart John Pombe Magufuli launching the EACOP as officials and oil executives witness last year.

But according to insiders, the oil companies say this is too small and does not make financial sense given at they are investing $3.35 billion in the pipeline. As a result, the oil companies are pushing for more oil to be pumped through the pipeline.

They are arguing higher volumes to exploit economies of scale; as higher volumes will reduce the cost of moving the oil through the pipeline and potentially lower the tariff. Initially, the oil companies had proposed a tariff of about $ 12.2 per barrel.

This figure was arrived at before the companies carried out the Front End Engineering Designs (FEED) whose results came out last December. Now the tariff is estimated to hit even $18.

Already some Ugandan officials say the oil companies used the $12.2 figure as a technique to lock the government into the deal well knowing that they would later renegotiate the figure. It is, therefore, unclear what they will be asking when production starts; possibly seven years from now.

Total’s hardline position has infuriated government officials and is attracting some equally extreme responses.

One of the extreme positions by government is that the pipeline should be abandoned all together. This position is informed by a sense that the oil companies want to kill the refinery—Museveni’s pet project.

The more moderate position is that the oil companies should consider building a smaller pipeline and as a result carry less oil and also use the available new technologies to keep the cost of the pipeline low.

But, having carried out studies for a bigger pipeline, the oil companies are not keen on reducing its size. Also, the oil companies favour a bigger pipeline because it means shipping out as much oil as possible in a short period of time and as such makes it easy for them to recover their investment fast enough.

From the oil companies’ perspective, this is a less risky alternative compared to supplying a refinery. They say many oil refineries around the world are loss making and Uganda, which continues to be a risky business environment, is unlikely to be an exception.

Because of all this, there is currently a stalemate over the project—with officials working around the clock to reach a compromise.

The only positive around the pipeline-refinery issue, according to insiders is that the government is now exploring some new technologies that can be exploited to keep the cost of exporting the oil low.

Uganda’s challenge is that the oil is heavy, waxy and quick to solidify at room temperature.

To export it, the pipeline has to be heated and kept at above 50 degrees Celsius for the crude to flow from Hoima in mid-western Uganda to Tanga port in Dar es Salaam.

This explains why the 1143 km long pipeline—the world’s longest electrically heated pipeline—was planned to have 48 independent power generation stations, 23 trace heating stations, and six pumping stations. That could now change if some of the chemical interventions are used, according to informed sources.

The view is that some chemicals can be mixed in the crude to make it lighter and thus easy to transport without heating the pipeline to the levels earlier projected.

Total E&P neither denied nor confirmed these issues. In response to our questions on the disagreement over the pipeline, Ahlem FRIGA-NOY, the company’s Corporate Affairs Manager only said that both the companies and government “are committed to ensuring that the commercialization of the Ugandan oil resources is conducted in the most viable manner”. On government’s push to get the companies to reduce the cost of the pipeline, she noted that the pipeline design studies have been completed in accordance to the technical requirements of the project.

The tax dispute

The case of the Capital Gains tax is less clear. And it is partly coloured by previous CGT disputes between the government and Tullow.

The current tax dispute is being impacted by what happened when URA in 2012 levied a $473 million CGT bill on Tullow Oil’s initial sale of concession to CNOOC and Total for $ 2.9 billion.

President Museveni with CNOOC officials at State House last year

Tullow opposed the $473 million assessment and appealed against it before the Tax Appeals Tribunal. Not satisfied with local arbitration, the Irish company took the matter to the U.S. for international arbitration. Finally, the company paid but lesser than URA’s initial bill.

This time, it appears, Tullow has come up with a different tax avoidance strategy, which officials are referring to as a “tax engineering scheme”. It all has to do with how Tullow structured the deal allegedly to avoid paying some taxes, according to critics.

Although Tullow’s deal is worth $900 million, it has structured it so that it only gets $200 million in cash; that is, $100 million on completion of the transaction and $50 million at the point of the Final Investment Decision (FID) and $50 million production of first oil.

The remaining $700 million is supposed to be deferred and used by Tullow to fund the company’s share of the costs of further exploration and the export pipeline project.

URA is insisting that Tullow pays CGT on the entire deal. But it is also making different calculations. Although CGT is 30 percent of the gain made after investing and would be $270 million on the $900 million deal, The Independent understands that URA is demanding only slightly over $160 million. But insiders say Tullow is opposed to this.

Apart from the size of the tax, insider say, URA is opposed to Tullow structuring the deal with Total and CNOOC in such a way that CNOOC and Total E&P should be in position to recover the costs incurred by Tullow, insiders say. These recoverable costs can wipe out any claims URA might make on Tullow.

Already, insiders say, the final recoverable cost for the Production Sharing Agreements (PSAs) between oil companies and government between 2001 and 2011 shows the total recoverable sum stands at $935 million out of the $1 billion claimed by the companies.

These disputes appear to have halted key processes necessary for; especially the oil companies to decide on when to start investing in the requisite oil infrastructure.

Initially officials indicated that the companies would reach the Final Investment Decision (FID)—or a decision to start making these investments towards the end of this year or early next year.

But now, The Independent understands that it might take another one and a half or two years for the companies to reach this decision.

Given that after FID, companies need another three years to complete the infrastructure like the $3.35 billion, the implication is that Uganda could see first oil in 2025 as opposed to the target of 2020 that government had set for the oil companies.

To explain why it might take all this time, a source close to these processes told The Independent, that the government and the companies have at least fourteen agreements to sign before the companies can reach FID.

These agreements include; the Host Government Agreements, Shareholders’ Agreements, Financing Agreements and Transportation Agreement between Shippers of oil from Tanga port to the international market, among others.

The tax disagreement is the latest in a series of challenges this deal has faced since 2016 when Tullow first announced plans to farm-out.

Initially, Tullow announced it would selling 21.57 percent of its assets to Total E&P. Months later, CNOOC exercised its pre-emption rights and jumped it to acquire 50 percent of these assets.

When the deal was about to be concluded, another huddle emerged—this time over who would operate the assets previously under Tullow. Total E&P had already designed these assets under its Tilenga project.

The Chinese were opposed because this gave Total E&P more control. Yet already, the Chinese company protested, Total E&P was controlling the pipeline project and had also offered to take out a stake in the refinery. In effect, this meant that the French giant would control upstream, midstream and downstream.

The issue was too big that Total S.A’s Vice President for Africa, Guy Maurice and another top official flew into Kampala mid-November 2017 to meet President Museveni.

Maurice’s delegation, which camped in Kampala for about half a week, met the president but left unhappy. It was the second time Maurice was coming into a town in a few months.

His meeting followed another by CNOOC’s Vice-President Xu Keqiang from China, who together with the Chinese ambassador, met Museveni and raised concerns over Total E&P’s growing dominance.

President Museveni with Total E&P officials at his country home last year

CNOOC flew in Xu Keqiang after a major fall out over the pipeline. Apparently, apart from disagreements over the implementation and financing of the pipeline, CNOOC was incensed that while in Tanzania to launch the pipeline works, Total officials made sure that they denied the Chinese access to the president.

This appeared to worsen already existing tensions. CNOOC now wanted one of the blocks—block2—which was initially being operated by Tullow and which stood to go to Total following the farm down.

Because Total E&P had already done work on the project, President Museveni intervened on their behalf and offered the Chinese a new block for exploration. It is this block that CNOOC recently entered a Memorandum of Understanding (MoU) to explore with the Uganda National Oil Company (UNOC).

As a result, tensions between the oil companies sort of reduced and Tullow’s farm out deal was only awaiting tax treatment and finally approval.

But the tax dispute now stands a major huddle for the deal.

Heading to international courts?

Up until now all appeared on course after Museveni decided that Uganda’s oil should go through Tanzania putting an end to a fight in which Tullow and CNOOC pushed to have the oil go through Kenya. With this decision, Total E&P, which had been pushing for the Tanzanian route, had a green light to now negotiate the nitty-gritties of the deal.

Indeed, early last year, Museveni and the Tanzanian counterpart signed the Heads of State agreement concretising the Hoima-Tanga route. And a week later Energy minister Irene Muloni and Tanzania’s minister for Constitutional and Legal Affairs, John Palamagamba Kabudi, signed the Intergovernmental Agreement (IGA) binding the two countries on the EACOP.

With the IGA out of the way, the players were now negotiating the Host Government Agreements, which would pave way for the Shareholders’ Agreements, which would define the terms for EACOP Company known as Pipe Co. These terms would then pave way for negotiations on financing terms that would be agreed under the Financing Agreement.

However, the disagreements struck as the officials were in the process of negotiating the Host Government Agreements.

It is not clear whether the latest disagreement will also end up in international arbitration. If that happens, the uncompleted transaction could further delay oil production.

In order to skip such a huddle, in the past government has forced oil companies to first pay the whole or part of the tax in order to approve deals and allow for critical processes to continue as arbitration goes on.

Indeed, government forced Tullow to pay part of the tax demanded from Heritage Oil. Tullow had acquired Heritage assets in a $ 1.45 billion deal. When Heritage declined to pay CGT off it, government forced Tullow Oil to first pay the tax and collect it from Heritage. As a result, Tullow sued Heritage in an international tribunal.

Heritage also took Uganda for international arbitration. Both Uganda and Tullow defeated Heritage. As a result, Uganda got its full share of CGT on the $1.45 billion deal and Tullow also recovered the money it had paid to government on Heritage’s behalf.

It is not yet clear how both government and the company plan to resolve the latest impasse. It is in the interest of both parties to resolve the dispute amicably and clear way for oil production.

Once this transaction is completed, Tullow said it would cease to be an operator in Uganda but would retain a presence in the country.

Tullow’s Chief Executive, Aidan Heavey, on Jan.9 2016 said that the deal would increase the likelihood of FID this year and ‘First Oil’ by the end of 2020. Government had asked the companies to focus on the 2020 deadline. But these disputes can only mean further delays.

By press time, Tullow Oil, URA and the oil sector regulator, Petroleum Authority Uganda (PAU) had not responded to our requests for comments on these issues.

Still without delving in details, Total E&P’s FRIGA-NOY, told The Independent in an email response that the finalization of the Tullow farm-out deal is subject to government approval adding that discussions are ongoing to achieve this goal.

“We continue to work towards achieving the Final Investment Decision as soon as possible,” the Total E&P Corporate Affairs Manager added.

—— AUTO – GENERATED; Published (Halifax Canada Time AST) on: August 11, 2019 at 12:00PM

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