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Government repossess leased oil well
Publish Date: Aug 26, 2010
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By Ibrahim Kasita

UGANDA has repossessed an oil field in Hoima after exploration company Tullow Oil failed to meet the Government’s terms.

Accordingly, the Kingfisher (Kajubirizi) discovery area has ceased to form part of the petroleum exploration area Tullow had been licensed to manage in 2004, energy and mineral development minister Hillary Onek said yesterday.
The area was technically referred to as 3A(EA-3A).

Block 3A and Block 1 were jointly operated by Heritage and Tullow. However, Heritage sold its interest to Tullow.

In a letter, Onek said Tullow’s licence had expired.

Under the law, Tullow should have applied for a production licence within two years of discovering the oil, which it did not. “The period within which you are supposed to have applied for a petroleum production licence for the Kingfisher (Kajubirizi) field expired in February 2010,” he told Tullow managers.

The development means that Uganda can license another player since it does not recognise Tullow’s transaction with Heritage. Accordingly, Tullow risks losing $1.45b, which it paid Heritage for the asset.

Athough Heritage and Tullow discovered the oil in 2008, none of them applied for a production licence.

“There was either lack of interest in the block or the operators were not willing to provide Government with plans for oil production,” said an expert in the oil industry.

Tullow alluded to a delay towards production in the affected field.

“The Government has indicated that they will not grant an appraisal licence extension until the tax matter is resolved,” the firm said in its bi-annual report to shareholders on Wednesday.

The Government had required Heritage to pay tax on the income they got from the sale of the field, which they did not do. Now the Governent wants the tax paid by Tullow who took the asset.

“In the short term, it is, therefore, anticipated that there may be some slow down in activity.

"While effective ownership of the assets has been transferred to Tullow, the Government wishes to resolve the tax dispute prior to granting final approval to proceed,” Tullow added.

In an apparent contradiction, the firm also said: “The Government of Uganda has, however, indicated that a dispute with Heritage over capital gains tax needs to be resolved before the purchase from Heritage…”

The Government insists Heritage must pay all the taxes due to the transaction amounting to $404,925,000.

Heritage is not willing to pay and has referred the matter to the London Court of Arbitration.

The fate of Tullow’s $1.45b it paid to Heritage is not clear.

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