Eric Watkins
OGJ Oil Diplomacy Editor
LOS ANGELES, Aug. 27 -- Tullow Oil PLC, which announced a 152% half-year rise in profits, said it expects “some slow down in activity” in its effort to develop assets in the Lake Albert Rift basin due to an unresolved dispute over capital gains tax (CGT) between its former partner Heritage Oil PLC and the government of Uganda.
Tullow said its net profit for this year’s first half more than doubled to $81.7 million, largely due to higher oil and natural gas prices. Revenue increased 11% to $483.9 million, while total oil and gas production fell 6% to 55,800 boe/d.
But the firm’s upbeat financial report was overshadowed by the failure of the Ugandan government to allow Tullow’s plan of development to proceed until the CGT dispute with Heritage Oil is fully resolved.
Analysts expressed concern over the effect of the impasse on Tullow’s prospects. “The situation in Uganda is a major concern,” said Dougie Youngson, an analyst at London-based Arbuthnot Securities Ltd.
“The CGT issue needs to be resolved before we are likely to see any further activity and this could have a major impact on the valuation of these assets should the situation continue for a prolonged period of time,” Youngson said in as research note.
Evolution Securities analysts also warned of the impact of a prolonged delay on Tullow's financial position. Evolution said in a research note that if the tax dispute isn't resolved by the fourth quarter, "Tullow will need additional funding from existing lenders, portfolio management, and nonessential" capital expenditure.
For its part, Tullow attempted to put the matter into perspective, with Chief Executive Aidan Heavey saying the dispute is expected to be sorted out in a “few weeks.” In it half-yearly report, Tullow also underlined that, “operationally, excellent progress has been made with a further nine successful exploration and appraisal wells drilled so far this year.”
Tullow went on to say that its exploration and appraisal campaign of “35 successful wells out of 36 have now reached a significant milestone with an estimated 1 billion bbl (P50) of oil now discovered. In addition, the yet to find resources of 1.5 billion bbl (P50) remains unchanged.”
But the tax dispute still weighed heavy, and Tullow attempted to distance itself from any responsibility in the matter.
Lake Albert Rift basin
In its half-yearly report to shareholders, Tullow said it “progressed a series of transactions” to align interests and accelerate development of the Lake Albert Rift basin, which culminated in the purchase of Heritage Oil & Gas Ltd.’s interests in Blocks 1 and 3A on July 26.
The London-listed firm also said that “the process to subsequently farm-down interests to CNOOC and Total, with each partner taking a one third interest in Blocks 1, 2, and 3A, is also well advanced.”
However, Tullow noted that the government of Uganda has “indicated that a dispute with Heritage over CGT needs to be resolved before the purchase from Heritage, and the subsequent farm-down, can be finalized.”
Tullow detailed its role in the transaction with Heritage, starting on Jan. 17 with the exercise of its right of preemption to acquire Heritage’s 50% operated interests in Blocks 1 and 3A in the Lake Albert Rift basin in Uganda.
Tullow said the transaction received conditional approval by the government of Uganda approval and the acquisition completed on July 26, when Tullow paid the consideration of $1.35 billion and a contractual settlement of $100 million.
More to the point, Tullow said that, “$1.05 billion was paid directly to Heritage, $121 million was deposited with the Ugandan Revenue Authority, and $283 million was put into Escrow pending arbitration of the CGT dispute with Heritage.”
“Whilst 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,” the firm said.
“In the very short term, it is therefore anticipated that there may be some slow down in activity,” Tullow said, while affirming that its plan for overall basin development timing remains to deliver “production in excess of 200,000 b/d by 2014-15.”
Once it receives final government approvals, Tullow said it plans to enter into transactions with CNOOC and Total to farm-down two thirds of its interests. It said that sale and purchase agreements have been finalized and the transactions are expected to complete soon after approval.
“This will result in a unified, like-minded partnership with considerable experience and financial capability to work on an accelerated basin-wide development plan that will enable Uganda to become a significant oil producing nation,” Tullow said.
The firm said it has been working on an outline of the basin-wide development plan, and anticipates that an integrated team, formed by the new partnership, will review and expand upon the work undertaken so far.
Tullow said it hopes to submit a final development plan to the government of Uganda in the first half of 2011.
Meanwhile, Uganda’s President Yoweri Museveni, apparently spurred by the recent difficulties between his government and Heritage Oil over the CGT issue, last week said no future oil or gas agreements are to be agreed to without his prior approval.
“In the case of petroleum and gas, I direct that no agreement should ever be signed without my express written approval of that arrangement,” Museveni wrote in a letter to his government’s energy minister, Hilary Onek (OGJ Online, Aug. 20, 2010).
Contact Eric Watkins at [email protected].