Will Uganda’s Oil Revenue Be Stranded in a Covid-hit World?

On April 23, 2020, Total E & P Uganda B.V (TEPU) announced that it had signed a Sale and Purchase Agreement with Tullow Oil PLC, through which Total shall acquire Tullow’s entire 33.334% interests in Uganda’s Lake Albert development project and the East African Crude Oil Pipeline (EACOP).

The deal nudges along a process that Uganda had hoped could bring as much as $20 billion in investment over the next five years. But it comes as the threat of global economic contraction due to the coronavirus pandemic leaves the immediate and long-term future of the oil industry uncertain, with prices just off their lowest levels in decades.

It also could offer the buyers a relatively light tax bill on the sale, analysts said, as the country faces the cost of dealing with Covid-19 and its economic effects.

Total will pay Tullow $575M (over Shs2.1 trillion), with an initial cash payment of $500M, then $75M when the partners take the Final Investment Decision (FID) to launch the project.

Under the deal, Tullow agreed to transfer its entire interest in Blocks 1, 1A, 2, and 3A in Uganda and the proposed EACOP System to TEPU. In a press release announcing the deal, Tullow said after negotiations with Uganda’s government and revenue body it expected the Capital Gains Tax (CGT) assessed on the sale to be $14.6 million, paid by Total’s Ugandan subsidiary.

A Tullow employee

Enock Twinoburyo, an economist and policy analyst, said the final tax assessment hinged on the valuation of Tullow’s share in and licenses associated with the Lake Albert project. But he pointed out that the estimated CGT assessment was a rate worse than what Uganda got in previous transactions.

“[A] 2.5% tax rate is rather too low. Bad deal here,” Twinoburyo said, arguing that the emerging shape of the deal called into question the state’s capacity to bargain.

CGT OF 3% on the sale would amount to about $2.6M (about Shs11bn) more than what is projected to be generated in the deal. Under the Ugandan government plan to provide people with six kilograms of maize flour and three kilograms of beans which are about Shs24000 (maize flour at Shs12000 and beans at Shs12000) during the pandemic, that sum could have fed about 458,333 people.

The rout in oil markets since the beginning of the year, and the spectre of a sustained global economic slump, raise doubts as to whether Uganda will fully benefit from the estimated six billion barrels of oil was discovered in the Albertine Graben in 2006.

The oil price war between Russia and Saudi Arabia in March, and the resulting combination of a supply glut and collapsed demand during lockdowns to slow the pandemic, saw Brent crude prices fall in April to their lowest level since the 1990s.

With many African oil-producing countries having budgeted for oil price of no less than $50, the continent’s oil economies are set to take a hard hit.

Total in March announced it would implement Capex cuts of $3 billion to its group-wide 2020 investments. Local representatives of China’s CNOOC, the other foreign partner to the project, did not respond to a request for comment on the transaction. The total would hold a 67% stake of the project upon completion of the deal.

The Lake Albert project had already been dogged by disputes on the tax bill associated with Tullow’s attempt to sell a smaller stake, about 22 percent. That sale, which would have amounted to about $900 million, foundered in August 2019.

The transaction was structured in two ways; $200 million (Shs722b) in cash consisting of $100m (Shs361b) on completion of the transaction and $50m (Shs180b) at both FID and first commercial oil, and another $700 million (Shs2 trillion) in deferred consideration which will be used by Tullow to fund the company’s share of the costs of the upstream development project and the associated export pipeline project.

In that transaction, URA assessed a CGT of $167m (Shs609bn) while Tullow was willing to offer $85m (Shs 310bn) which the government refused.

In this particular deal, URA had assessed CGT at a rate of 18.5%, compared to the 2.5% tax rate that would come from the new deal.

Twinoburyo said oil companies might seek to extract concessions on other elements of the Lake Albert project, such as details of production sharing agreements, and could ultimately argue for tax forgiveness in light of the turmoil in the sector.

Uganda won a judgment in 2014 in an international arbitration tribunal for more than $400 million in capital gains tax revenue against Heritage Oil over the sale of that firm’s stake in the project to Tullow.

Emails leaked in the Panama Papers data dump indicted that Heritage had sought to make use of provisions of Uganda’s dual taxation agreements – in this case, with Mauritius – to avoid CGT as that tax dispute ramped up.

A spokesperson for Uganda’s National Oil Company, Angella Ambaho Kariisa, expressed optimism that the project would proceed after the current turmoil in the oil sector abated. Ali Ssekatawwa, acting Executive Director of the Petroleum Authority of Uganda, emphasized the government was in the project for the long haul, pointing to previous oil price slumps in 2008 and 2016.

 

This story was produced by www.chimpreports.com. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation in partnership with the African Centre for Media Excellence. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.