Oil tax row bad for sector growth

Dec 17, 2010

UGANDA’s progress in exploiting the oil and gas deposits has dragged due to the capital gain tax dispute over the Lake Albert rift assets.The tax row started when Heritage Oil, sold its interest in blocks 1 and 3A to another UK exploration firm, Tullow Oil at $1.45b.

By Ibrahim Kasita

UGANDA’s progress in exploiting the oil and gas deposits has dragged due to the capital gain tax dispute over the Lake Albert rift assets.The tax row started when Heritage Oil, sold its interest in blocks 1 and 3A to another UK exploration firm, Tullow Oil at $1.45b.

The deal was subjected to the Government’s approval and payment of $404m as capital gain tax.

However, the two oil firms went ahead to conduct the transaction disregarding the conditions.

Having offloaded its stakes in the Lake Albert fields, Heritage declared it would not be paying a $404m capital gains tax due on the deal.

Tony Buckingham, the Heritage boss, then cleared his men out of Uganda with military precision.

Incensed, the Government seized a field now owned by Tullow – the Kingfisher discovery area – vowing to keep it until the tax bill is settled.

“The Government insists that tax must be paid at 30%,” Simon D’Ujanga, the energy state minister, said.

“We will not accept less. These taxes are due,” the minister pointed out.

Naturally, it’s more complicated than that.

Tullow did the deal aware of the tax dispute, while Heritage paid $283m into an escrow account and $121m to the Uganda Revenue Authority – a staging post between escrow and the Ugandan exchequer.

Not only is the Kingfisher exploration licence now up in the air – but the dispute is stopping Tullow from selling out 33% stakes in its field (Block 2) to France’s Total and China’s CNOOC.

“For the avoidance of doubt, this transaction approval shall not become effective unless Heritage has paid the taxes or demonstrated to the satisfaction of the Government of Uganda that the said taxes shall be paid immediately upon demand,” Hilary Onek, the energy minister, explained.

“The actions of Heritage and Tullow do not fulfill the terms of the conditional consent spelt out and, therefore, the consent has not become effective.”

Oil and gas operations are moving into the development and production stages, which require the necessary risk capital, access to project finance and long-term investments

Oil production, including the construction of a refinery expected to churn out roughly 150,000 barrels per day, cannot begin until the Heritage deal is complete.

But new investors, especially the Italian giants, ENI, have come out to express interest in developing the nascent oil and gas industry.

The Rome-based firm has expressed a desire to be given an opportunity to participate in the development of exploration areas 1, 2, and 3A.

It has promised to pay the tax and all other costs incurred in the course of exploring for the crude oil as well as realign to Uganda’s position of early oil and gas production.

Uganda wants to license several oil firms to avoid a monopoly.

The firms must also support the Government’s development strategies, including early commercialisation of the oil resources, value-addition and training of Ugandans in oil-related activities and processing.

This calls for a strong operating experience in refining and pipeline development, which, experts say, Eni has developed over the years.

Uganda has confirmed significant oil reserves in the Lake Albert Basin.

It is estimated that the basin has 2.5 billion barrels of commercially-viable crude oil.

Oil production at the peak will be around 200,000 to 300,000 barrels of oil per day.

At the current prices of about $72 per barrel, Uganda could earn about $2.5b in oil revenues alone in a year that could equal the current government revenues.

Already, the country is in the process of soliciting investors to build a refinery.









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