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Lake Albert trio stick to plan despite deal failure

Aim is to step around collapse in shareholding restructuring talks and continue with oil project in Uganda

Total and its two partners in the Lake Albert oil development in Uganda are intent on sanctioning the project despite a deal worth $900 million to alter the trio’s respective shareholdings falling apart late last week.

The sale and purchase agreement (SPA) would have seen the French major and Chinese state player CNOOC International raising their stakes in a clutch of Ugandan blocks to 44.1% from 33% by each taking an equal share from current fellow one-third stakeholder Tullow Oil.

Anglo-Irish independent Tullow was looking to farm down to 11.8% and, while it had reached an agreement in principle with Uganda’s government on the capital gains tax associated with the transaction, the three partners were unable able to agree with the Kampala administration on the availability of tax relief for the amount to be paid by Total and CNOOC.

Confirming the termination, Uganda’s Ministry of Energy & Mineral Development said Tullow had originally “sough transfer of its interest without payment of any capital gains tax... and also on condition that certain tax deductions, not ordinarily transferable to the buyers, be transferred to the buyers”.

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It added that the government’s position is that “tax should be paid in line with the laws of Uganda”, as with tax relief.

The hold-up in finalising the SPA has been one factor in the partners pushing back the expected final investment decision date on numerous occasions.

However, securing land for the upstream portion of the Tilenga and Kingfisher schemes and the lack of inter-governmental agreement between Uganda and Tanzania on the pipeline to run to Tanga on Tanzania’s coast have also held back any sanction.

If the transaction had gone ahead as planned it would have seen Total operate Tilenga, while CNOOC International would operate the much smaller Kingfisher asset.

Arnaud Breuillac, Total’s president for exploration and production, said: “Despite the termination of this agreement, Total together with its partners... 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.”

The most recent target given by project leader Total for sanction was the second half of this year.

The company has not officially revised this target despite Tullow saying in its announcement that “the termination of this transaction is likely to lead to further delay” in sanction.

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Ilkin Karimli, an analyst at German investment bank Berenberg, said in a note following the termination: “We have adjusted our numbers, delaying first oil in Uganda to 2027.”

Tullow chief executive Paul McDade told Upstream in June that first oil is expected between three and three-and-a-half years after project sanction.

Uganda’s government has been aiming as recently as May this year for first oil in 2022.

The Ugandan ministry statement added: “Government will continue to work with the [partners] to ensure [a final investment decision] is at the earliest and in a manner that safeguards the country’s interests and sovereignty, while delivering a healthy return on investment for the licencees.”

Both Total and Tullow pointedly mentioned that previous extensions to the deadline for closing the SPA had been granted but were not on this occasion, with the deals officially expiring at the end of play on 29 August.

“A stable and suitable legal and fiscal framework remains a critical requirement for investors,” Breuillac added.

Tullow will now look at alternative means to farming down below 33%. However, all the partners still retain pre-emption rights over any stake the other partners may wish to sell.

“Whilst this is a very attractive low-cost development project, we remain committed to reducing our operated equity stake,” McDade said.

The project — encompassing both Tilenga and Kingfisher — has more than 1.5 billion barrels of discovered recoverable resources and is expected to produce more than 230,000 barrels per day at peak.

Berenberg’s Karimli said the announcements of the termination “may be a negotiation tactic in the partners’ discussions with the government”.

“At times of resource abundance, we would expect governments to compete for an incremental investment in oil and gas projects. As such, we think the partners have an upper hand in these negotiations, especially when the point of contention is the cost pool,” he added.

While Berenberg said the termination was no surprise, analysts at BMO Capital Markets commented: “Whilst frustrations around the project were clear, the termination of the SPA and inevitable further delay to the project was an unlikely scenario, in our view, given the parties involved.”

Tullow had intimated earlier this year that it was considering all options with regards to its assets in Uganda, including a country exit or a farm-down to parties other than the current partners.

“What we have never wanted to happen is for this farm-down deal to become the critical path to a final investment decsion,” McDade said in late June.

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