Tullow Oil plc has announced that it has been informed that its farm-down to Total and CNOOC will terminate at the end of today, 29 August 2019, following the expiry of the Sale and Purchase Agreements (SPAs).
In a statement, Tullow said it has been unable to secure a further extension of the SPAs with its Joint Venture Partners, despite previous extensions to the SPAs having been agreed by all parties.
This will delay the overdue commercialization of Uganda’s Oil.
“Tullow has worked tirelessly over the last two and a half years to complete this farm down which was structured to re-invest the proceeds in Uganda. Whilst this is a very attractive low-cost development project, we remain committed to reducing our operated equity stake,” said Tullow CEO Paul McDade.
“It is disappointing to report this news at a time when we are making so much progress elsewhere towards the growth of the Group with our recent oil discovery in Guyana and the first export of oil from Kenya.”
Tullow said the termination of this transaction is a result of being unable to agree all aspects of the tax treatment of the transaction with the government of Uganda which was a condition to completing the SPAs.
“While Tullow’s capital gains tax position had been agreed as per the Group’s disclosure in its 2018 Full Year Results, the Ugandan Revenue Authority and the Joint Venture Partners could not agree on the availability of tax relief for the consideration to be paid by Total and CNOOC as buyers.”
Tullow said in the statement that they will now initiate a new sales process to reduce its 33.33% Operated stake in the Lake Albert project which has over 1.5 billion barrels of discovered recoverable resources and is expected to produce over 230,000 bopd at peak production.
The Joint Venture Partners had been targeting a Final Investment Decision for the Uganda development by the end of 2019, but the termination of this transaction is likely to lead to further delay.
In January 2017 Tullow signed a purchase agreement with Total, agreeing to transfer 21.57% of its 33.33% interests in Exploration Areas 1, 1A and 2 in the Lake Albert Development project at $900 million (Shs3.2 trillion).
Tullow was expected to receive $200 million (Shs720 billion) in cash—consisting of $100 million on completion of the transaction and $50 million at both Final Investment Decision and first oil. The balance of $700 million (Shs2.5 trillion) in deferred consideration will fund Tullow’s share of the development and pipeline costs.
In February 2017, CNOOC Uganda exercised its pre-emption rights to acquire 50% of the interests being transferred to Total.
Tullow in September 2017 notified the government about the farm-down to Total and CNOOC. The government agreed to the farm-down but slapped on Tullow a $167m( (Shs600b) capital gains tax, leading to the new tax dispute.
Tullow said it was not liable to capital gains tax because it was transferring shares to another investor for reinvestment in the project. Uganda Revenue Authority and government technocrats insist that Tullow must pay the capital gains tax.
