With Kenya already in the league of Oil Exporting Countries, Uganda is struggling with tax disputes despite being the first country to discover oil in 2006 amongst the East African Community Member states.
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Will Uganda ever see its first oil?

With Kenya already in the league of Oil Exporting Countries, Uganda is still struggling with tax disputes despite being the first country to discover oil in 2006 amongst the East African Community Member states.

Kenya this week became the first East African country to export oil to an international market when President Uhuru Kenyatta, at the Coastal City of Mombasa, flagged off 200,000 barrels of crude oil destined for Malaysia in the far east.

This meant nothing but to wholesomely confirm Kenya as the latest member of the Organization of the Petroleum Exporting Countries popularly known as OPEC.

Kenya’s commercially viable oil deposits were discovered in 2012 by British Firm Tullow and its joint venture partners. These were six years later after Uganda had discovered theirs in 2006 by Australian oil exploration company Hardman Resources in the Albertan Graben.

Uganda’s first oil deposits were seen in June 2006, when the three oil fields of Weraga 1, Weraga 2 and Mputa showed signs of starched oil deposits.

However, 13 years on, Ugandans have never seen a single oil drop. Promises are that probably after 2022, Uganda will deliver its first oil export.

“The amount of tax to be paid by oil companies and the amount of recoverable costs to be claimed by oil investors are some of the issues holding back the Final Investment Decisions for Uganda,” Energy Minister Irene Muloni said in Kampala recently.

It is true that Uganda’s government and oil companies have failed to reach a consensus on key issues which could potentially create more delays for the Final Investment Decision (FID). The delay is a setback to the planned construction of the pipeline and the refinery.

The contentious issues for which the two sides have failed to reach an understanding include recoverable costs and uncertainty over some taxes, according to sources close to the ongoing negotiations.

Recoverable costs refer to all expenditures made in carrying out petroleum operations. These are claimed by the oil companies and the government is expected to pay them when oil starts flowing.

However, Finance Minister Matia Kasaija said this month that Total E&P, China National Offshore Oil Company (CNOOC), and the Ugandan government were yet to agree on the amount of tax the two companies are to pay from their purchase of Tullow Uganda interests in the oil sector although they all agree that a capital gains tax is applicable.

Total E&P and CNOOC bought Tullow Oil’s Uganda interest at USD 900 million (3.4 trillion Shillings), the money that is thought to have paid much of what Tullow had spent in Uganda.

The government, however, notes that oil companies should not count this money as expenses, which could lower their income tax when Uganda finally starts drilling the hydrocarbons.

Total E&P terminates its Agreement with Tullow

The shocking news that came out of Paris this week was an announcement that Total E& P, which had bought Tullow Oil’s Uganda interest at $900million had terminated the purchase agreement.

In a press statement sent to different media houses in Uganda, the Paris based company said, “On January 9, 2017, Total and Tullow entered into a Sale and Purchase Agreement (SPA) whereby Total would acquire 21.57% out of Tullow’s 33.33% interest in the Lake Albert licenses.

“CNOOC exercised its right to pre-empt 50% of the transaction. As a result, Total and CNOOC would have each increased their interest to 44.1% while Tullow would have kept 11.8%.

“Since 2017, all parties have been actively progressing the SPA. However, despite diligent discussions with the authorities, no agreement on the fiscal treatment of the transaction has been reached.

“The deadline for closing the transaction has been extended several times, clearly demonstrating the endeavours of the parties to find an agreement. The final deadline will be reached at the end of today, August 29, 2019, and as such, the Acquisition Agreement will be automatically terminated.

“Despite the termination of this agreement, Total together with its partners CNOOC and Tullow will continue to focus all its efforts on progressing the development of the Lake Albert oil resources.

“The project is technically mature and we are committed to continuing to work with the Government of Uganda to address the key outstanding issues required to reach an investment decision.

A stable and suitable legal and fiscal framework remains a critical requirement for investors”, declared Arnaud Breuillac, President Exploration & Production of Total.

The statement added that Total’s interest will, therefore, remain at 33.3% on blocks EA1, EA2 and EA3 prior to the 15% national company back-in, Total being operator of the block EA1 which contains the largest part of the reserves.

“Total keeps the right to pre-empt any future transactions, in case any party divests part or all of its interest,” said Breuillac.

Kenya already in the market

President Kenyatta, who flagged off the export from the port of Mombasa said Kenya has now joined the league of oil-exporting nations.

The maiden export was bought by Chemchina, a Chinese company, at the cost of Sh1.2 billion for export to Malaysia.

“The first export of crude oil by our nation, therefore marks, a special moment in our history as a people and as a country,” he said, waving a Kenyan flag aboard a tanker at the Indian Ocean port of Mombasa that will be carrying the oil to Asia.

Kenyatta said the first attempts at finding oil in Kenya date back to 1937 but it was not until 2012 that a commercially-viable deposit was located.

This field was discovered in the South Lokichar Basin in Turkana, in Kenya’s far north, by British firm Tullow and its joint venture partners. The company estimates the field holds 560 million barrels of oil.

Uganda’s Finance Minister Matia Kasaija weighs in

The Finance Minister Matia Kasaija had hoped that by Tullow selling its interests, the recoverable costs of its investments in the sector were factored in the price and that the buyers don’t have to bill the government again for those costs.

The tax that was assessed off the transaction was $ 167 million (600 billion Shillings), which at first remained a strong point of contention.

However, the companies had agreed to pay it. But with the government now saying they can’t include expenses on the transaction as costs, oil firms are disagreeing.

This is again causing more delays that are likely to push further the final investment decisions, which the country had hoped that they would come by the beginning of 2020.