Watching The World: Uganda ups the ante

Aug. 16, 2010
The oil and gas industry rarely has a problem spotting politicians, especially when it comes to the matter of taxes.

The oil and gas industry rarely has a problem spotting politicians, especially when it comes to the matter of taxes. But in Uganda, Heritage Oil & Gas Ltd. has come up against some especially tiresome politicians and taxes.

Just a few weeks ago, reports said that Heritage had finally won the approval of Uganda's government to sell its 50% stakes in two blocks in the Lake Albert rift basin to its erstwhile partner, Tullow Oil PLC.

Indeed, late last month, reports said that Tullow, following approval by the Uganda government, completed its planned acquisition of 50% interest in Blocks 1 and 3A from Heritage for $1.35 billion, plus change.

Tullow then planned to enter into transactions with China National Offshore Oil Corp. and Total SA to farmout two thirds of its interests in Blocks 1, 2, and 3A in the Lake Albert Rift basin as part of a development plan aimed at delivering production in excess of 200,000 b/d from the basin.

Transaction incomplete

But a funny thing happened on the way to the bank.

Uganda's Minister of Energy Hilary Onek last week said he wrote to both firms that their transaction is "incomplete" until Heritage pays the full $405 million in capital gains taxes that Uganda says is owed on the transaction.

When Heritage announced the $1.45 billion sale on July 27, it also deposited $121.58 million with the government, representing 30% of the assessed tax, and the remaining $283.45 million in an escrow account pending an agreement over the simmering tax dispute.

Kampala initially said it would allow the transaction to be completed after Heritage paid the 30% deposit and put the rest in the escrow account.

Now, suddenly, the deal is undone with Onek saying he wants the taxes to be paid in full before the final approval will be granted.

Why the sudden change?

Special dividend

Well, it could have to do with the fact that shares in Heritage soared on Aug. 2 after the company announced the payment of a special 100 pence/share dividend following the sale of its assets to Tullow.

"Heritage was the pioneering oil company in Uganda, and this dividend reflects the value this sale represents for shareholders," said Heritage Chief Financial Officer Paul Atherton.

According to reports, the special dividend was the first the Jersey-based exploration company had ever paid out, but it still left the firm with a surplus of $700 million to further its exploration program.

But the politicians in Kampala had other ideas. Just days after the announcement about the special dividend, those politicians—citing the "public interest"—began to backtrack on their agreement with Heritage.

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