Ugandan Govt Repossesses Kingfisher Oil Field

KAMPALA (Dow Jones Newswires), Aug. 27, 2010

The Ugandan government has repossessed the Kingfisher oil field in exploration area 3A of the Lake Albert basin after the field's exploration license expired, Energy and Minerals Development Minister Hilary Onek said Friday.

Tullow and Heritage, former joint partners in the field, "were supposed to apply for a production license, which they did not," Onek told Dow Jones Newswires.

Onek said he had written last week to Tullow, saying the company had been required to apply for a production license for the oil field by February.

Following news of the field's repossession Friday, Tullow's shares at 0945 GMT were trading 4.6% lower at 1201 pence. Heritage Oil's shares were up 2.1% at 311 pence.

The repossession is mainly due to a protracted tax dispute between the government and Heritage, the former operator of block 3A, people familiar with the situation said.

Last month, Tullow announced that it had completed the purchase of Heritage's 50% stakes in blocks 1 and 3A for up to $1.45 billion. The Ugandan government hasn't endorsed the deal, however, after Heritage declined to pay a 30% capital gains tax on the transaction.

A Tullow spokesman told Dow Jones Newswires Friday: "As disclosed at our results on Wednesday, the government of Uganda has been clear that the only issue remaining is with Heritage and their capital gains tax liability. Once this issue is resolved, we can all move forward towards the farm-down and the development plan. Negotiations are ongoing, but Tullow is confident that the government of Uganda will respect Tullow's legal rights."

With close to a billion barrels of recordable oil reserves in three exploration areas, Tullow says it believes Uganda can produce at least 200,000 barrels of oil a day by 2016, provided the right development plan is adopted.

Subject to final government approval, Tullow plans to enter deals with China National Offshore Oil Company (CEO) and France's Total to farm out two-thirds of its interests, as previously agreed.

However, a Ugandan government official close to the matter said separately that Tullow is free to apply for the production license but that other interested parties could also apply.

"Tullow can still apply for the production license," he said.

Kingfisher was one of the first fields found to have commercial oil reserves in the Lake Albert basin, in 2004.

Uganda says Heritage owes it $405 million in capital gains tax on the sale of Heritage's 50% stakes in blocks 1 and 3A to Tullow, but Heritage says it believes--based on advice it received from tax experts--the disposal isn't taxable.

The company intends to pay any lawfully imposed tax, Heritage said Friday. It has paid roughly a third of the money Uganda claims is due and set the remainder aside in an escrow account. Heritage said possible solutions to the dispute include a guarantee or letter of credit from a bank to provide security for the remainder of the amount.

Following the Tullow deal, Heritage has $700 million in cash and is actively looking for new acquisitions, Heritage said Friday as it posted its first-half 2010 earnings results.

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