By Ibrahim Kasita

THE Government has not yet approved the sale of Ugandan oil fields to an Italian company, a senior energy ministry official has said.

Ernest Rubondo, the commissioner in the petroleum exploration and production department, said any transaction related to the oil discovered in the Albertine Graben is “subject to Government approval”.

Heritage Oil in a statement yesterday confirmed that it has entered into a letter of intent to sell its interest in two oil blocks to Eni Spa, an Italian company. The two blocks are owned by both Heritage Oil and Tullow Oil in a 50-50% joint venture.

“The Government is still reviewing the documentation and once the review is finished, a decision will be made,” Rubondo said.

Heritage acknowledged that the completion of the $1.5b deal was still subject to approval by a majority of its shareholders and the Ugandan Government.

The statement added that the Government of Uganda had been consulted on the proposed transaction and had indicated its support for Eni’s entrance.

According to the deal, Eni will pay $1.35 billion upfront and a further $150 million in cash or a stake in a producing oil field of a similar value within two years, provided certain conditions are met.

“Following a strategic review, we decided to enter into this letter of intent with Eni as we recognise the very large, multi-billion dollar investment which is required to develop the Albert Basin and the related infrastructure,” Heritage boss Tony Buckingham explained.

Heritage has spent about $150m on its oil and gas interest in Uganda since being awarded its first license in 1997, the company noted.

Proceeds from the sale, it added, would be used to develop Heritage’s existing assets, including non-producing fields in Kurdistan, to make acquisitions and possibly pay out a special dividend to its shareholders. However, the price was below most analysts’ valuations of the Ugandan fields. Analyst Morgan Stanley valued them at $2b.

“The discount reflects Heritage’s cash requirements to fund Kurdistan and perceptions as a forced seller,” Stanley said in a research note.

The Ugandan deal is the latest in a string of African acquisitions by Eni in recent years. The Italian company is currently present in 70 countries, among them in West and North Africa.

Eni is Italy’s largest industrial company with a market capitalisation of $138b as of July 2008. The Italian Government owns a 30% golden share in the company.

However, the firm was embroiled in a controversy involving the Russian energy firm Gazprom and Silvio Berlusconi, Italy’s premier.

Under the deal, signed in May 2005, the Russian energy giant would receive direct access to the gas distribution market in a major European country.

It had the full support of the then Russian President Vladimir Putin and Berlusconi.

But two month after the signing, the two chief executive officers announced that the deal was cancelled.

This was after the Italian parliament questioned the legitimacy of the arrangement when it became known that one-third of the shares in the trading company Central Energy Italian Gas Holding belonged to Bruno Mentasti-Grinelli, who happened to be Berlusconi’s old friend and partner. In 2009, the European Commission filed formal antitrust charges against Eni. The commission believes that Eni has conspired to keep competitors from using its gas pipelines.

Eni’s involvement in Uganda could be good news for Italian energy engineering company Saipem, which is controlled by Eni. Saipem has considerable experience in pipelines and often works closely with Eni.

Most of the oil produced in Uganda is likely to be exported to international markets, requiring the construction of a pipeline to the Kenyan coast.

As the oil under Lake Albert is waxy, the pipeline will need to be heated, making it an expensive project - a project beyond most explorers’ competence.