After more than a year of delay, U.K.-based explorer Tullow Oil appears to have finally resolved a politically contentious tax dispute that was holding up its plans to develop of around 1 billion barrels of oil discovered in Uganda.
After more than a year of delay, U.K.-based explorer Tullow Oil appears
to have finally resolved a politically contentious tax dispute that was holding
up its plans to develop of around 1 billion barrels of oil discovered in
Uganda
.
Tullow should now be able to proceed with the sale of a portion of its
Uganda
oil
licenses to
France
's
Total and the China National Offshore Oil Company, or Cnooc, which have the
size and experience necessary to help Tullow bring the discoveries in the
remote
Lake Albert
region of the landlocked east African country to
market.
It's been a struggle to get to this point. After a long run of exploration
success spanning several years, things started to go wrong for Tullow about a
year ago, after it agreed to buy out its partner in two Ugandan oil licenses,
Heritage Oil, for $1.4 billion. Heritage subsequently got into a fight with the
Ugandan government over whether it should pay capital gains tax on the sale
price. That spat remains unresolved today, with both Heritage and the
government laying claim to $283 million of unpaid tax sitting in an escrow
account.
Tullow was caught in the middle of this fight and suffered most as a result. Firstly,
its deal with Total and Cnooc was put on ice. Then the Ugandan government
withdrew two
Lake Albert
licenses containing
significant oil discoveries from the company, which accounted for half the
assets they had just bought from Heritage.
Reports that the government was considering selling these licenses on to other
companies compounded investors' worries--Tullow had just lost licenses on the
side of
Lake Albert
that lies in
Congo
in a
similar way. Those licenses have now been returned to Tullow.
This is clearly good news for Tullow, whose shares have underperformed recently
due to fears that the dispute would unravel its considerable achievements in
Uganda
. It
also shows that the company's approach of marking out a clear public position,
and quietly and consistently defending it, can work in a region where many
assume the only way to get things done is to pay backhanders to corrupt
officials.
It's also good news for
Uganda
,
whose aid-dependent economy badly needs the revenue a domestic oil industry
could bring.
However, the devil may be in the detail. Some reports quoting government
officials suggest that Tullow has made a big concession to unblock the Ugandan
deal--effectively paying off the disputed $283 million of Heritage's capital
gains tax itself.
Its not clear that these reports are correct--Tullow officials have repeatedly
ruled out paying off Heritage's outstanding tax. The company's investors may
find out one way or another on Wednesday, when Tullow announces its 2010
results.
Let's hope for everyone's sake that Tullow has stuck to its principled
position. It would set an unfortunate precedent for anyone seeking oil in
Uganda
, and
other previously unexplored parts of
Africa
,
whereby companies who cash in early get the rewards, and those who stick around
to see a project through to completion are penalized.
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