UPDATE: Tullow clears tax hurdle, sells partial interest in Uganda assets to CNOOC, Total

(Updates the position of Heritage Oil & Gas regarding the tax dispute starting with the fourth paragraph.)

$2.9 billion agreement signed for one-third interests in exploration areas 1, 2 and 3

By Oil & Gas Financial Journal staff 

Independent oil company Tullow Oil PLC has signed agreements with CNOOC Ltd. (NYSE: CEO, SEHK: 0883) and Total SA to sell one third interests in certain exploration areas 1, 2, and 3A in Uganda. The terms of the transactions include a total cash consideration payable to Tullow of US $2.9 billion.

France’s TOTAL will acquire a one third interest in EA 1, 2 and 3A, as will China’s CNOOC. The deal, expected to be completed in the first half of 2011, is subject to closing adjustments including government and regulatory approvals in the Republic of Uganda and the People’s Republic of China.

One condition, stemming from a tax dispute involving Heritage Oil & Gas, has reportedly been resolved. A statement by Tullow says the company has agreed to make certain tax related payment to the Government of Uganda, reported by The Wall Street Journal to include an initial payment of $142 million within five business days of the sale to begin to satisfy a $473 million capital gains tax the Ugandan government says is due following the sale. 

Heritage, however, believes the monies paid should be returned. 

A Fox-Davies Capital research note dated March 31 highlighted Heritage’s position that the US$121 million paid to the Uganda Revenue Authority and US$283 million deposited into an escrow account at Standard Chartered Bank in London, based on comprehensive advice from tax experts in Uganda, the United Kingdom and North America, should be returned as the sale of Heritage's Ugandan interests to Tullow is not taxable in Uganda.

Heritage is currently reviewing its options to resolve the tax dispute and hopes to reclaim the nearly $404 million deposited.

Early last year, London-based Tullow Oil's paid an estimated $1.35 billion to acquire Heritage’s 50% interest in Blocks 1 and 3A in Uganda.

Over the past six years, Tullow and Heritage have invested over US$700 million in the Lake Albert Rift basin in drilling 27 wells to prove up over 700 million barrels of oil and identify over 1.5 billion barrels of potential yet to be explored.

With the new partners’ help, Tullow hopes the Ugandan government will approve a development plan for the area targeting 200,000 barrels a day by 2015, the construction of a refinery and pipeline. The plan is estimated to cost near $10 billion.

Upon completion of the two transactions, CNOOC, Tullow, and TOTAL will each hold a one third interest in the areas. Operatorship will be determined by the government of Uganda. It has been proposed that CNOOC, Tullow, and TOTAL will each assume operatorship in relation to the interests in EA 3A, 2 and 1, respectively, after a transitional period during which Tullow will act as an interim operator in the areas.

Yang Hua, CNOOC CEO stated, “The transaction signifies another milestone for CNOOC Limited to grow its overseas business by entering into Lake Albert Rift Basin, one of the key frontier basins in East Africa.”

Li Fanrong, CNOOC president said, “The project is expected to become one of the largest oil and gas developments onshore Africa in recent years. The transaction will help us establish our second major production province in Africa following Nigeria, and contribute to our long term growth as we proceed with intensive exploration and development programs with our partners in the next 3-5 years.”

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