Uganda to Repossess Rest of Oil Block 3A from Tullow

KAMPALA (Dow Jones Newswires), Sep. 8, 2010

Uganda will repossess the remainder of exploration area 3A, located around the southern tip of oil-rich Lake Albert, because the block's license has expired, a government official said Wednesday.

The move follows the Ugandan government's repossession last month of the Kingfisher oil field discovery, located within the same exploration block. The seven-year exploration license for block 3A expired Wednesday, said Fred Kalisa Kabagambe, the permanent secretary at Uganda's Ministry of Energy and Minerals.

"This is a normal procedure," Kabagambe said of the repossession. "The exploration license has expired, and all the areas that are not part of the [Kingfisher] discovery will [also] revert to government."

Another government official, who requested anonymity, said Wednesday that it's possible the government could call for international bidding for other areas within block 3A besides the Kingfisher discovery when the next round of licensing resumes later this year or early next year.

The government is considering whether to hand the Kingfisher oil field back to Tullow or to invite other bidders, without excluding Tullow from that bid process.

People familiar with the situation said, however, that Tullow remains favored to retain the Kingfisher oil field, which is expected to be among the early oil-producing fields in the country.

The repossessions step up the pressure as Uganda is locked in a dispute with Heritage Oil over taxes it says Heritage owes on the sale of Heritage's 50% stakes in Ugandan oil-exploration blocks 1 and 3A to Tullow Oil for up to $1.45 billion. The government hasn't endorsed the sale because Heritage declined to pay a 30% capital gains tax on the transaction.

Tullow has said sale and purchase agreements have been finalized with China National Offshore Oil Company (CEO) and French oil major Total for Tullow to sell them two-thirds of the Lake Albert oil license areas. The three companies plan to share the cost of developing Uganda's fledgling oil industry.

Heritage said in June it had been advised that the sale doesn't attract capital gains tax.

Following Kabagambe's statement Wednesday that the government will repossess the rest of block 3A, a Tullow spokesman said: "As we disclosed at our results last month, the government of Uganda has been clear that the only issue remaining is with Heritage and its CGT [capital gains tax] liability. Once this is resolved, we can all move forward towards the farm-down and the development plan. Negotiations are ongoing."

Heritage gave no indication Wednesday that it would back down in refusing to pay all of the taxes the government said it owes.

"There are no new developments or updates, from Heritage's perspective, to communicate with regards to the capital gains tax dispute," a Heritage spokesman said. "Apart from noting that, Heritage doesn't have any further comment."

Last month, the Ugandan government repossessed Kingfisher oil field, saying Tullow and former partner Heritage failed to apply for a production license in time. Uganda's Energy and Minerals Development Minister Hilary Onek said that the two companies should have applied for a production license for the field by February.

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