Tullow Oil is facing the worst end to the year 2011 with a suit observers say has the potential to not only make them lose their oil e and production interests in Uganda but also their current assets.

This follows a petition by a city lawyer filed in the High Court seeking an injunction against the government signing or approving any oil licenses and agreements.

Hamada Mulumba, the chief petitioner against oil operations

The chief petitioner, lawyer Hamada Mulumba wants court to restrain the Attorney General, Heritage Oil and Gas Limited and Tullow Oil Uganda from “undertaking any further dealings including but not limited to exploration, production, selling, assigning, transferring any interest in exploration Area 3A (EA-3A) kingfisher (Kajubirizi) of the Albertine Graben.” Tullow which co-owns 3A with Heritage bought the later interests at 1.5billion US dollars in 2010. The company which now owns almost 100% of all the oil wells so far identified is planning to farm out 33% of its stake of France’s Total and another 33% to China’s CNOOC. The government is yet but expected to approve the sale by end of January 2012.

Tullow bought and is about to sell hot air

But Mulumba through Bwambale , Musede and Co. Advocates states that 50% of the stake Tullow Bought from Heritage Oil was had already reverted to the government. Mulumba wants a declaration that Kingfisher discovery ceased to form part of the petroleum exploration area for Heritage and Tullow when Heritage failed to ask for a production license for block 3A after the exploration lincense had expired beyond the renewable eight years provided by the law.

Key issues of contention in Uganda’s oil sector

1. The government is not ready to undertake oil production (more preparation and laws needed)
2. All Heritage Oil and gas assets sold to Tullow were null and void as the former’s license on Block #A (Kingfisher exploration had ended) and as per 19 (1) (b) of the Act they reverted the government.
3. The Memorandum of understanding signed between Tullow and Uganda government to normalize the license issue is null and void as it is inconsistent with the Petroleum Exploration and Production Act 1993
4. Licenses for the oil blocks should be made in accordance with the Public Procurement and Disposal of Public Assets Authority Act (open bidding).
5. The Court cases between Tullow oil and Heritage Oil and gas, as well as between the Uganda Revenue Authority (on behalf of the Uganda Government) and Heritage Oil and Gas –are warning signs of how uncertain it is that Ugandans will benefit from the oil sector.
6. The recent corruption allegations that top ministers have received hefty bribes from oil companies to give the companies favourble deals have further increased worries on the running of the oil sector and increased concerns that Ugandans might not benefit from the oil resource.
7. The increasing insistence by the government to keep oil production sharing agreements secret raises issues at what the government is hiding, how much has been given away and whether oil companies and not taking advantage of the country.
8. The confidentiality (secrecy) clauses in the Production sharing agreements no longer apply since the license with the companies with which the agreements were signed have since expired. According to section 59 of the Production Sharing agreement, the confidentiality clauses cease to exist when the license ceases to exist. It is for this very reason Ultimate media decided to publish the oil agreements.

Although Heritage had made a significant find in the kingfisher oil well and logged the oil well for future production as per their report to the Commissioner for Petroleum (as required by the law), on 19^th  February 2008, the company did not apply for the production license within a month as required by the law.

Map shoil Albertine Graben oil fields in Uganda

According to documents accessed by Ultimate Media, Heritage returned four months late in July 2010 to apply for the said license, which was not given. It should be remembered that by this time, Heritage had already negotiated the sale of its assets and only came for the license after it became an issue with the government it were to approve the sale. Moreover, Heritage had a bad history of abandoning licenses as witnessed in the execution of their first license of Block 1 which they neglected after two years of operation.

It still beats normal understanding why Heritage did not apply for the production license and why Tullow didn’t push Heritage to do the same for the current and stake they were about to purchase from heritage. We are currently investigating allegations that top oil companies do not mind about Uganda legal provision as they are sure of bulldozing or enticing the government officials to do what they (oil companies want at any time).

That Tullow which was more than interested in  purchasing their stake in the block went ahead and offered to pay the capital gains tax that Heritage had refused to give to the government of Uganda is another kick in the back the UK Stock Exchange registered company made. But this was only on condition that the government will issue the said production license because without the license, Tullow would have bought ‘hot air” or bwooya bya nswa as termed in Luganda.

Tullow flew in from London and met government officials led by President Yoweri Museveni and then Energy Minister Hilary Onek in Gulu and signed an MoU that the government will issue the license so long as Uganda gets the $440 capital gains tax from the Heritage sale.

However, the petitioner contends that the MoU between the government and Tullow cannot stand since the Law provides that any agreement other agreement or license that is inconsistent with the act is null and void. “The exploration licenses had clearly expired. The holder knowingly didn’t apply for the production license. The law says these areas revert back to the government. This means that the government can only issue a license for this block under fresh terms,” says Kitara Nyakatura, a self proclaimed expert on oil dealings in Uganda.

Uganda making loses on oil sales so far

But other sources in the ministry of Energy and Mineral Development intimated that there is a growing acceptance that technically, exploration area 3A reverted to the government fully on expiration of the exploration license and therefore Heritage could not have sold what it didn’t own. Ultimate Media has seen a document by another group of petitioners to the government insisting that Tullow should have bought the Heritage interests in Block 3A from the government at $750 million, and paid a $226 capital gains tax to the government over the other Heritage interest in Block1 (which Heritage owned 100%). It means instead of the government now fighting for the $440 million, the country shoukd have earned $976 billion shillings from the $1.5 billion paid to Heritage.

Oil drilling in Hoima, the centre of the Albertine Graben, Uganda's oil hub

“Tullow is aware of this and that is why they primarily rushed, agreed to pay the capital gains tax and then pushed the government to sign MoU to re-new the license on Block A. Legally, Tullow knew more than a year ago that they had no valid oil blocks in their control. Apart from the legal setbacks, this also lends credence to the allegations against the company paying bribes to some ministers to push their case through,” Kitara who is part of the backers of the Court told Ultimate Media in an exclusive interview.

According to one Tullow Oil Plc insider who spoke to us on condition of anonymity from London, Tullow was aware that in offering to pay the $440 million disputed capital gains tax, Tullow was avoiding the risk of provoking the government of Uganda to award the licenses under a new bidding process.

“The risk for Tullow (but also a bit for Uganda as a place to do business) would be if the government decides to award the license through a new bidding process.  I Cannot really imagine they would do that because they would also lose a lot of time,” the Tullow expert contends.

But he did says there are real concerns for the company given the recent “false” corruption allegations against Tullow and the fact they the ongoing farming out to China’s CNOOC and France’s Total is taking long to be approved by the government of Uganda.

For now the key concern for both CNOOC and Total as well as the targets of the Court petition -the government and Tullow Oil Uganda will be to ensure the court issues an order in their favour.

Serious risk Tullow may lose all oil interests in Uganda

Legal experts say Tullow is in an uncomfortable position given that many of its actions in the purchase of Heritage oil assets have shown panic and pushing of the law.

“They got Heritage assets after pulling that pre-emptive clause where as joint partners they had the right to be given first priority to purchase. Then they go ahead and agree to pay the government of Uganda money on behalf of Heritage which disputed that capital gains payment. Tullow has gone ahead and sued Heritage in a London Court seeking to recover the money they paid to the government. Tullow has bought another oil block in the past never involved payment of capital gains tax. This is a pattern of events the petitioners will use to show the legal gaps in Tullow’s acquisitions and the weakness in the current laws and government capacity to handle the oil sector,” said Arther Agaba, a lawyer.

But as Heritage argues in their defense, Tullow’s action can even be read beyond the legal provisions as actions of someone who wants to cover their lack of over sightedness in a crucial deal (the Heritage assets’ purchase) and especially one who wants to protect their future interests. Heritage in its defense has called Tullow’s payment of capital against tax (on which the re-licensing condition MoU is based) as a political payment to Museveni with Heritage arguing there is no particular law providing for this kind of tax. There are also allegations that Tullow is suing Heritage as cover up as the company has no interest in paying capital gains tax to Uganda when it makes the 2.9 billion sale to CNOOC and Total. “It may be true that Tullow wouldn’t mind losing that case to Heritage because they will save on the money they would pay to the government of Uganda in capital gains for the current sale if the suit was to be in Uganda’s favour. Uganda might retain the $440 from Heritage sale but fail to tap the 30% ($870million) in capital gains tax on the current Tullow sale to CNOOC and Total,” Agaba says.

In fact, Tullow bought its other interest in this block 3A from Hardman Resources in 2005 and the selling company didn’t pay any capital gains tax. Hardman itself had bought the same interest from Energy Africa in 2005 and the selling company never paid any capital gains tax. All these will be used by the petitioners as evidence that the oil sector is not being well managed by the government and the current oil companies and hence need to the injunction.

More concerns for Tullow on new licenses

As the court verdict is awaited, Tullow and all its shareholders will have to pray hard to maintain their prior stronghold in the budding Uganda oil sector. The company had managed to secure 100% of all drilled oil wells (and though required by the government) to sell to other interested partners CNOOC and Total as a way of avoiding a monopoly in the oil sector.

Although Tullow has agreed with the CNOOC and Total to sell them each 33% each of its oil stake in Uganda for a total $2.9 billion, there is worry the two companies might pull out. The other possibility is that since the companies have not yet paid Tullow, they might compete with Tullow on equal terms if licensing is ever considered under new bidding process.

Oil drilling in western Uganda

Of course Tullow’s current value in Uganda assets would be greatly affected if the court orders an injunction or agrees that their purchase of half of Heritage Oil and Gas assets was null and void prayed by the petitioners. Tullow will need to pray more since the government will not lose much if the injunction is ordered and might use some time to re-organise the ministry in charge of oil, refine its laws and policies relating to Oil and Gas exploitation and marketing. Tullow is aware there are many other players willing to jump into the oil sector which has few players today because of the moratorium on further licensing until a new law on oil exploration and production is put in place.

Petitioner wants to halt intended sell of Tullow assets to CNOOC and Total

Most of what Tullow can do might be in playing political cards than depending on legal provision which even to amateur puts them in an unfortunate position. As in the case of the MoU, Tullow might be able to pull another political MasterCard to secure their interests from the government politically. And things aren’t looking bad if this option is considered.

Although the Parliament of Uganda had earlier resolved that the government halts the signing of any oil deals until further investigations are carried out into the operations of the oil sector and especially the bribery allegations, the ruling NRM caucus recently supported the government to approve the farming out of Heritage Shares to CNOOC and Total. Uganda President Yoweri Museveni recently promised that his government will grant approval to the farm out by January 2012.

And with the Judiciary currently on holiday (for the festive season), many political manipulations are possible to delay the case or pass a law that makes the current provision none bearing. But Denis Musede, one of the petitioner’s lawyers says they have applied for a certificate of urgence from the Judiciary for the petition to be heard. “Intended sell is to take place any time before the end of January; we want a temporary injunction restraining the transaction before the hearing of the main suit,” Musede says.

The petitioner is basing on a letter by former Energy Minister Hilary Onek’s written on August 17, 2010, to prove that Tullow does not legally own Kingfisher well.

“The period within which you are supposed to have applied for a petroleum production license for the Kingfisher field expired in February 2010,” Mr Onek wrote to Tullow and Heritage. In accordance with the powers entrusted to the minister under section 19 (1) (b) of the Act, I hereby direct that the Kingfisher (Kajubirizi) Discovery Area has ceased to form part of the Petroleum Exploration Area 3A (EA-3A) under the exploration license granted to you on September 8, 2004,” the letter reads in part.

Mulumba also wants court to compel Heritage and Tullow to account “to the government for benefits accumulated ever since their illegal utilization of Exploration Area 3A and pay a statutory fine of 100 Uganda shillings for acting without a valid license.” Kitara says the government should also be compelled to undertake a though audit of the exploration activities to determine the actual rig activities that Tullow and Heritage have carried out.

“As you might be aware, oil rigs are hired on a daily basis. There have been reports that rigs have not been deployed as per approved plan with the ministry and therefore Tullow will go ahead to claim money from the government for utilization of rigs when they were not actually working. This is the main area where oil companies are likely to fleece Uganda as the government has limited capacity to monitor their expenditure which are to be recovered. Widespread corruption by government officials also makes this hard as the amounts in question are huge,” Kitara says.

Hard test for government and Oil companies

Even if the government and oil companies manage the hard task of convicting court there is a valid license to Tullow (which actually has bought all its stake from other licenses in the past four years) Mulumba wants court to declare that the government granted exploration licences to the oil firms in total disregard of the Public Procurement and Disposal of Public Assets regulations which provided for open bidding.

The Minister of Information and National Guidance Mary Karoro Okurut when contacted said the Attorney General’s Office is responsible for such legal matters, but assures that the government will respond soon to the court petition.

Cathy Adengo, the corporate communications manager of Tullow says the legal team is preparing a formal response to the court petition and to defend the company’s interests in Uganda. The company has in the past also claimed to be under the target of oil sector mafias who are not happy with its prime asset position in the Uganda oil sector.

While Tullow is a multinational company operating oil related business in different country, the stage is now set for them to show they are undertaking prudent oil deals and activities, and that they can wither any storm.

Also see our other Uganda oil related articles

Uganda government production sharing agreements with oil companies

Uganda government approves Tullow oil takeover of Heritage assets

Ugandans ponder oil benefits

Fosterwheeler final report on Uganda oil industry refinery

Parliament pins Bank of Uganda Governor for spending first oil money on buying fighter jets

Government of Uganda outlines oil production program

Parliament calls for censure of key ministers Sam Kutesa, Amama Mbabazi and Hillary Onek over oil bribery allegation

Uganda urged to invest oil revenues in income generating activities

Uganda buoyant over oil prospects as Museveni outlines key strategy

Government asked to solve land purchase conflicts in oil producing areas

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