Tax Dispute Halts Tullow Drilling on 2 Uganda Blocks

LONDON (Dow Jones Newswires), Nov. 10, 2010

Tullow's exploration and appraisal drilling on two oil license blocks in Uganda has been halted by a tax dispute between the government and Heritage Oil, said Tullow's Chief Operating Officer Paul McDade Wednesday.

However, contrary to some government statements, Tullow will not pay off Heritage's disputed capital gains bill in order to get things moving again, he said. "I don't think it's appropriate for us to be paying someone else's taxes," McDade told Dow Jones Newswires.

Tullow remains in talks with the government over a memorandum of understanding that would allow it to proceed with plans to bring in Total and China National Offshore Oil Company (CEO) into the country as partners, a situation that is unchanged from a month ago.

"All efforts are being put to finding a structure which allows the government to decouple" the Heritage tax dispute from Tullow's plans to continue development of oil discoveries in three license blocks in Uganda's Lake Albert region, McDade said.

"We have not made sufficient progress to get a resolution yet," and it is unclear when a solution to the dispute will be reached, he said.

"It's frustrating for all parties because we want to move ahead, but this is a long game," McDade said. Long-term development planning, which will probably include construction of a 1,200 kilometer pipeline to Africa's east coast and a refinery in Uganda, continues in close coordination with Cnooc and Total, he said.

In July, Heritage sold its half of stakes in blocks 1 and 3A in the Lake Albert basin to Tullow for $1.45 billion. Heritage says it is not liable for a 30% capital gains tax imposed on the transaction, which prompted the government to withhold its endorsement of the deal, preventing Tullow bringing in new partners.

Tullow has already paid $1 billion to Heritage for the purchase. A third of the $405 million in disputed tax has been paid to the Ugandan authorities, and the remainder is in an independently administered escrow account.

Heritage has said it would accept the result of international arbitration over the dispute, but Uganda has previously resisted this and the two parties remain in a stalemate over the $283 million in escrow.

The Ugandan government is concerned that if it gives final approval to Tullow's transactions with Heritage, Total and Cnooc, it will make it more difficult for them to claim the capital gains tax they believe they are owed, McDade said.

Panmure Gordon analyst Peter Hitchens said Tullow should pay the $283 million for Heritage just to get things moving. That amount would not be hugely significant to a company of Tullow's size and could be worthwhile just to break the current stand off and close the deal with Total and Cnooc, he said.

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