Uganda Asks Tullow to Trim Proposed Share of Oil Assets

KAMPALA (Dow Jones), May 28, 2010

The Ugandan government has asked U.K.-based Tullow Oil PLC to reduce the size of its proposed share in three of the country's oil blocks in order to diversify ownership of Uganda's oil resources, the ministry of energy and minerals development said Wednesday.

Tullow is awaiting final Ugandan government approval for its $1.5 billion purchase of a 50% stake in blocks 1 and 3A in Lake Albert, currently owned by Heritage Oil PLC. Tullow has previously said that if successful in the acquisition -- which would grant it full ownership of the three blocks -- it would sell on, or "farm out," half of the total assets to a third party.

However, the government's latest request would see Tullow's total share reduced to around 33% from the 50% currently proposed. Tullow owns the remaining shares in the two blocks, and 100% of the third block.

In a ministerial presentation to parliament's natural resources committee Wednesday, Kalisa Kabagambe, the permanent secretary of the ministry, said that government had asked Tullow Oil to let China National Offshore Oil Company (CEO), or Cnooc, and France-based Total SA operate a block each in the Lake Albert basin.

Tullow has selected Cnooc and Total as its preferred partners in developing the three blocks, where around 1 billion barrels of oil have been discovered.

"In recognizing the need to avoid a monopoly, Tullow has presented their plan to partner with both Total and Cnooc. However, government has asked Tullow to reconsider its proposal of operating two out of three exploration areas and instead let each partner operate an exploration area," he said.

The two areas earmarked by Tullow equate to 50% of the three blocks' total assets, according to a person familiar with the process.

In a statement, Tullow said that detailed discussions with government were progressing well and no final decision had been reached.

A Total spokesman confirmed that the French company is in talks with Tullow but declined to comment on the latest developments. Cnooc declined to comment.

The Ugandan government is still vetting the development plans presented by Total and Cnooc, after which a final decision will be made on Tullow's acquisition of the Heritage stake. According to people familiar with the situation, the whole process is likely to completed by the end of March.

Kabagambe further said that the Ugandan government would levy a capital gains tax of around $300 million to $400 million on the sale of Heritage's stakes in blocks 1 and 3A.

Last week, the Uganda Revenue Authority said that a 30% capital gains tax would be levied on the sale of Heritage's assets. Heritage declined to comment.

The government expects to earn a higher capital gains tax from the Tullow farm-out, Kabagambe said without providing the details of the tax applications.

However, a person familiar with the discussions told Dow Jones Newswires that the capital gains tax position is currently unclear because no price for the farm-out has been set. It is possible that Tullow could offset some of these tax liabilities against its expenditures in the country, the person added.

According to Kabagambe, the farm in and farm down transactions are extremely beneficial to the country since they raise the country's profile and provide the required large capital investments for the oil and sector.

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