How URA-Tullow tax row could affect oil, gas production in Africa
Drilling for oil in western Uganda. Tullow Oil Company was been ordered to pay $407 million to the Uganda Revenue Authority. File
What you need to know:
According to industry insiders, a court award in favour of the taxman could affect whether and when Tullow, CNOOC and Total E&P proceed with the $8 billion investment required to develop Uganda’s oil resources to the production stage, and also set a precedent for future deals on the continent.
The bone of contention is the validity of the capital gains tax exemption originally granted by the minister to Hardman Oil for EA2, which Tullow insists it only inherited when it bought Hardman’s assets.
Regulatory uncertainties and delays in passing laws are top constraints to the development of the oil and gas sectors in many African countries, says PricewaterhouseCoopers.
In its 2014 report titled: On The Brink of a Boom: Africa Oil & Gas Review, which highlights current developments in Africa’s oil and gas industry, PwC also singles out corruption, poor physical infrastructure/supply chain, access to funding, lack of skilled resources and taxation requirements as key constraints.
It notes that, with the exception of corruption, these constraints rank among the top 10 factors most likely to impact on the ability of businesses to operate successfully in the next three years.
This is the dilemma that Uganda finds itself in, with regard to a $407 million tax dispute between Tullow Oil and Uganda Revenue Authority. The courts have ruled in favour of URA, putting the future of the country’s oil industry at risk.
At the centre of it is the Public Finance Bill, which provides guidelines on petroleum revenue management, but which has been in the works for more than two years now.
According to industry insiders, the court award could affect whether and when Tullow, CNOOC and Total E&P proceed with the $8 billion investment required to develop Uganda’s oil resources to the production stage. They say that Kampala cannot finance the development phase without entering into partnerships with international oil companies who have both the expertise and funds.
Top concerns
The PwC report, which ranks safety, health, environment and quality among the top concerns for companies investing in the oil and gas sectors, notes that the onus is on governments to ensure that they continue or begin to provide acceptable regulatory environments with attractive fiscal systems in order to attract the investment needed to develop the industry in Africa.
“These constraints present extra pressure on companies to rethink and re-evaluate their core business focus and model in order to hold out for the long haul, maintain flexibility and the agility necessary to succeed in an environment that offers diverse and numerous challenges,” notes the report released on July 23, in Johannesburg, South-Africa.
On July 16, the Tax Appeals Tribunal (TAT) in Kampala ruled against Tullow on the tax exemption contained in the Production Sharing Agreement for Exploration Area 2 (EA2 PSA), approved by a former minister of Energy and Minerals Development, saying he had no legal authority to grant such an exemption. Consequently, the tribunal ordered Tullow to pay $407 million to URA in capital gains tax relating to the partial sale of stakes in oil fields in the country two years ago.
Tullow sold 66.67 per cent of its interests in Exploration Areas 1, 2, and 3A to China National Offshore Oil Corporation (CNOOC) and France’s Total E&P for $2.93 billion in 2012. In order to qualify to legally launch an appeal at the TAT, Tullow had previously paid $142 million, or 30 per cent, of the total amount in dispute on capital gains tax on the sale of interests it had inherited from Heritage and Energy Africa.
The bone of contention is the validity of the capital gains tax exemption originally granted by the minister to Hardman Oil for EA2, which Tullow insists it only inherited when it bought Hardman’s assets.
URA argued that in law, Tullow’s capital gains tax exemption should have been granted by the Minister of Finance, not the Minister of Energy. But Tullow was of the view that the exemption had been signed by the government of Uganda, which was now breaching its own PSA.
In its ruling, the Tribunal upheld URA’s position. It also rendered invalid under Uganda’s tax laws Article 23.5 of the EA2 PSA on which Tullow had premised its entitlement to CGT exemption.
“You cannot blame Tullow for signing a contract offered by a minister of government and the Attorney General who is the chief government legal advisor. If the government cannot hold its ministers responsible, who is Tullow, or any investor for that matter to go to?” asked Emmanuel N Mugarura, who heads the Association of Uganda Oil & Gas Suppliers.
Government’s failure?
According to him, the government failed in its duty because it bears responsibility to harmonise its laws and operations.
“To think that Tullow or anybody else should be the one to do the job of government officials is wrong. We have ministers and technocrats whom we pay well to do that. It is asking too much of the investors to do the work of technocrats,” Mr Mugarura added.
But Angelo Izama, an Open Society Institute fellow currently working on a book on the emerging political history of oil exploration and production in Uganda, said Tullow acted recklessly in Uganda.
“You just have to read the ruling in the case with Heritage to see the degree of recklessness. For example, the loss of block 3A is because they hadn’t filed renewal. They had secured an MoU with the government,” Mr Izama told The EastAfrican.
Meanwhile, Tullow has appealed to the Uganda High Court as well as a neutral international arbitration forum in London, the International Centre for the Settlement of Investment Disputes (ICSID). There is a possibility that Tullow could win its appeal especially at the ICSID where, to date, 13 similar cases have been ruled in favour of companies.
A Tullow victory
A victory for Tullow, however, is likely to further hurt its relations with the government, which insider sources describe as strained. The sources said the first major cracks appeared in 2010, when Tullow exercised its pre-emption rights and purchased the entire assets of Heritage Oil, its partner, to the government’s disappointment, which apparently wanted ENI, a large Italian oil company, to join the industry.
“Tullow made the mistake of marshalling political support from their host country to the extent that the government, when Tullow wanted to farm-down to other companies, insisted on what I can call a global mix. They decided they weren’t going to have Western companies alone,” Izama explained.
“So they said ‘We will have Tullow here, a Western company Total and a Chinese company there’ because they didn’t want to be under the hold of one or similar companies. That policy resulted from the experience Tullow put Uganda through by getting political support from one of Uganda’s main donors, Britain, to pursue their commercial interests.”
Uganda, according to Mr Izama, has moved on from Tullow for more pragmatic reasons. Upwards of $10 billion is needed in investments before the country can produce its first oil. Tullow is a $6-7 billion company compared with CNOOC and Total whose value is up to $100 billion.
Given its value, Tullow is not in a position to raise the requisite investment capital or even commit it for the long-term, and exiting Uganda, therefore, appears increasingly a question of when than if.
