The ongoing deadlock between government and oil companies over payment of capital gains tax and tax waivers has yet again thrust the oil industry in turmoil, scurrying the country’s hopes of joining oil producing countries from 2023 to the earliest, in 2025, but could even take longer, according to projections.
Initially, the prospect of commercial oil production starting by end of 2023 was hinged on probability that government and oil companies would conclude the Anglo-Irish Tullow Oil Plc’s sales transaction, technically known as farm down, in time, finalise the remaining agreements on the crude oil export pipeline and close Final Investment Decision (FID) by the end of this month.
A committee set up to steer FID chaired by the Energy ministry Permanent
Secretary Robert Kasande and comprising various government officials had, until
last month, managed to thrash out several sticky issues at hand but the tax
question has now set back arrangements.
FID is an agreement on capital investments on a long-term project: when money for the project is availed and project execution commences.
First oil production, both government and oil companies say is three years from FID, which remains uncertain now.
However, government is now looking at FID by June 2020, the ongoing deadlock
notwithstanding but each time the FID date shifts, so does the oil production
Tullow, which set foot in Uganda in 2004 and has had several run-ins with government, including allegations of attempting to bribe President Museveni to forego taxes, premised its decision to farm down to raise money for reinvestment in development of oil fields and pipeline.
UK-based consultancy Wood Mackenzie in a financial analysis last week
described the botched farm-down as “a huge blow for all partners involved,
particularly Tullow” which was to receive $258m (Shs940b)—comprising cash
payment and working capital adjustment—which would have strengthened the
company’s balance sheet.
The consultancy firm detailed that the Tullow is at best broke, with its net-debt in the ranges of $2.9b (Shs10b) and gearing is still relatively high at 52 per cent.
To start oil production, projections show the oil companies have to invest a
minimum capital of $10b (Shs36 trillion); $6.7b (about Shs24 trillion in
developing the oil fields—Tilenga fields in Nwoya/Buliisa districts and
Kingfisher in Kikuube, and $3.55b (Shs13 trillion) for the export pipeline from
Hoima to Tanga in Tanzania.
After collapse of the farm down, Tullow said it was going back to the drawing table to further engagements with government and its partners—French Total E&P and China National Offshore Oil Company (Cnooc), to possibly try reach a middle ground on the polarising tax question.