africa Economy FID Government Investing oil pipeline Uganda

Uganda expects $3.5B oil investment deal by January

Uganda expects the three main oil companies to sign the much-awaited final investment decision by January 2020, after it relaxed some of its positions that partly contributed to the impasse the country’s oil industry finds itself in.

According to impeccable sources, during a State House meeting on October 31 chaired by President Yoweri Museveni, government tabled to the oil companies a raft of offers, most of which were to facilitate the conclusion of the sale of Tullow Oil’s stake in Uganda to France’s Total E&P and China’s Cnooc.

At the centre of the impasse are a couple of issues. One is the Capital Gains Tax on the Tullow Oil farm down, the treatment of $617 million exploration costs that Tullow Oil incurred, and the stipulation within the Income Tax Act that places a cap on allowable deductions for Corporate Income Tax purposes.

Uganda plans to build a $3.5 billion crude oil pipeline to Southern Tanzania. This will be the longest heated underground pipeline in the world, stretching over 1,445km. But before the oil firms commit money to that project, Total E&P and Cnooc have to buy 21.5 per cent shares of Tullow Oil’s Uganda stake.

That is because Tullow Oil agreed to sell some of its stake for $900 million as part of its contribution to the capital costs during the oil development project. Tullow Oil intends to stay with only 10 per cent. Without this deal, the pipeline project cannot move ahead.

The Uganda Revenue Authority assessed a Capital Gains Tax of $167 million on the Tullow Oil farm down. Before the State House meeting, Tullow Oil had agreed to pay $85 million of this money, with Total E&P and Cnooc topping it up with $82 million. Government has instead agreed to pay the $82 million to URA.

However, if the oil firms agree to the idea of the Government paying the $82 million then Total E&P and Cnooc will not inherit the $617 million exploration costs, which they would have exploited for tax deduction purposes when Uganda starts producing oil sometime after the year 2023.

But if Tullow Oil agrees to pay the entire $167 million, then Total E&P and Cnooc will inherit the $617 million. However, these two offers are only available if Tullow Oil revives the exact terms of its farm-down deal that expired on August 29.

Before the State House meeting, the oil firms asked government to lift the cap on allowable deductions for Corporate Income Tax purposes. In a layman’s language, oil companies asked government to remove a limit as to how much costs they can recover before paying Corporate Income tax.

The government has refused this request, and wished to accelerate the time as to how much revenue it can reap from its oil. Oil companies will start paying corporate income tax even though they will still have a huge amount of costs to recover.

Our sources say that government has agreed to the oil pipeline company being incorporated in the United Kingdom, plus to international arbitration. However, it has insisted that the laws of Uganda will govern the Host Government Agreement for the pipeline.

Also, government during the meeting, agreed to waive withholding tax on the dividends that the oil companies might wish to repatriate back to their home countries. When it came to the issue of local content, the oil companies say there are a number of skills and equipment that Uganda lacks, which are needed for the construction of the pipeline.

The companies requested that some special contracts and recruitment of staff should not be advertised in the media. During the meeting, the government was not too clear on this request, but said some sort of advertisement needs to be agreed to.

Government, our sources told us, felt they had made some strong offers to the oil companies, and therefore expects them to sign a $3.5bn Final Investment Decision for the crude oil pipeline before the end of January 2020. The oil companies have a few weeks left to get back to government over these offers.

Source: The Observer

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