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Finally Tullow Oil gets Uganda clearance for US$575m asset sale to Total

By George Mangula and Agencies

Global oil driller, Tullow Oil plc announced Wednesday that it has received government approvals for the $575 million sale of its Uganda assets to Total.

The company released a statement saying the deal had also been approved by the minister of Energy and Mmineral Development Dr Mary-Gorret Kitutu.

The deal was possible after Government and the Uganda Revenue Authority executed a binding Tax Agreement that reflects the pre-agreed principles on the tax treatment of the sale of Tullow’s Ugandan assets to Total.

Total will first pay $500 million in cash on completion of the deal and  an additional $75 million when a final investment decision on the project is taken. In addition, Tullow is entitled to receive contingent payments linked to the oil price payable after production commences.

In a statement released in April, Tullow noted that the deal represented the first significant step in portfolio management towards raising in excess of $1 billion of proceeds. In the statement, Tullow also mentioned that it has been focused on delivering reliable production, lowering its cost base and managing its portfolio to reduce net debt and strengthen its balance sheet.

Tullow expects the transaction to close in the coming days.

Tullow in April agreed to sell its onshore oil fields in Uganda to Total as part of its efforts to raise $1 billion this year to reduce its $2.8 billion of debt. 

Tullow, founded in the 1980s to tap into African oil and gas, suffered a series of technical difficulties and missed production targets, leading its chief executive to step down late last year. 

Government and Total last month concluded and signed the Host Government Agreement (HGA) for the East Africa Crude Oil Pipeline (EACOP) project. The Signing of the HGA means that the oil companies represented by Total and Government have reached agreement on the commercial framework for the Lake Albert Development Project.  

It also represents significant progress towards achieving the Final Investment Decision which is expected by the end of this year. 

The proceeds from oil will be used to further develop the country’s sectors like infrastructure, education and health.

Once the final investment decision is made by the oil companies, the opportunities for investment in the country will grow exponentially and give a boost to the economy. Local companies are expected to take advantage of HGA to tap into opportunities in the oil sector. 

Tullow Oil plc (Tullow) announced in April, 2020 that it had agreed the sale of its assets in Uganda to Total for US$575 million in cash plus post first oil contingent payments with an effective date of January 1, 2020.

Tullow and Total have had discussions with the Government of Uganda and the URA in recent weeks, including to agree the principles of the tax treatment of the Transaction.  This includes the position on Ugandan tax on capital gains, which is to be remitted by Total Uganda on behalf of Tullow Uganda, and which is expected to be US$14.6 million in respect of the cash consideration.  Tullow Uganda and Total Uganda intend to sign a binding tax agreement with the Government of Uganda and the URA that reflects these principles which will enable the Transaction to complete.

CNOOC has rights of pre-emption to acquire 50% of the Uganda Interests on the same terms and conditions as Total Uganda. 

The Transaction will strengthen Tullow’s balance sheet as part of its financial strategy to move to a more conservative capital structure. Tullow’s capital expenditure in respect of the Uganda Interests between the Effective Date and completion of the Transaction will be recovered through the SPA completion adjustments. The Transaction will remove all future capital expenditure associated with the Lake Albert Development Project whilst retaining exposure via contingent consideration linked to production and the oil price through the contingent cash payments described above.

Under the UK Listing Rules, this is a Class 1 transaction and is therefore conditional on approval by Tullow’s shareholders, by a simple majority of voting rights in favour. Tullow has consulted with shareholders holding approximately 27.5 % in aggregate of Tullow’s issued share capital and is pleased to report that they have indicated their support for the Transaction. 

Dorothy Thompson, executive chair, then that; “Tullow has been a pioneering explorer in Uganda over many years and we are very proud of the role we have played in the founding and development of Uganda’s oil industry. We wish all Ugandans and our joint venture partners well as they take this important project forward. 

“This deal is important for Tullow and forms the first step of our programme of portfolio management. It represents an excellent start towards our previously announced target of raising in excess of US$1 billion to strengthen the balance sheet and secure a more conservative capital structure.

She added then that: “We have already made good progress with the Government of Uganda and the Uganda Revenue Authority in moving this Transaction forward, including by agreeing the principles on tax treatment, and we will work closely with the Government, Total and CNOOC over the coming months to reach completion as quickly as possible. We have also received strong support from our leading shareholders and look forward to receiving formal approval of this deal.” 

Background to and reasons for the Transaction

Completion of the Transaction will enable Tullow to realise value from the Lake Albert Development Project in Uganda, following the expiry of its previous farm-down agreement with Total and CNOOC in August 2019. Having evaluated alternatives for the project and discussed the future of the project with both of Tullow’s Joint Venture Partners and the Government of Uganda, Tullow’s Board and senior management believe the Transaction represents an attractive outcome for the Tullow group (the Group).

Summary of the terms of the Transaction

A Sale and Purchase Agreement (the SPA) with an Effective Date of 1 January 2020 has been signed in which Tullow Uganda Limited and Tullow Uganda Operations Pty Ltd. (together, Tullow Uganda) have agreed to transfer to Total Uganda for cash consideration the entirety of Tullow’s 33.3334% interests in each of the assets comprising the Lake Albert Development Project, being (i) the production sharing agreements for each of Blocks 1, 1A, 2 and 3A and the licences in Uganda and certain other contracts related thereto (the Upstream Segment) and (ii) the proposed East African Crude Oil Pipeline System (the Midstream Segment).

The SPA is based on the transfer of interests from Tullow Uganda to Total Uganda in exchange for cash at completion, deferred consideration to be paid as and when the Upstream Segment and Midstream Segment of the Lake Albert Development Project reach FID and contingent payments determined on the basis of future oil prices. The total consideration for the Transaction is structured as follows: 

  • US$575 million in cash, consisting of US$500 million on completion of the Transaction and US$75 million at FID of the Upstream and Midstream Segments.  
  • Contingent annual payments to be paid on upstream revenues from the Uganda Interests (reduced to 28.3334% following exercise by Uganda National Oil Company (UNOC) of its back-in rights calculated as follows: (i) no payment if the average annual Brent price is less than or equal to US$62 per barrel, (ii) 1.25% (net of tax) if the average annual Brent price is greater than US$62 per barrel or (iii) 2.5% (net of tax) if the average annual Brent price is greater than US$70 per barrel.
  • The reimbursement of joint venture costs incurred and paid by Tullow Uganda from the Effective Date to completion of the Transaction in respect of the Uganda Interests.

Use of proceeds and financial effects of the Transaction; gross assets and profits attributable to Uganda Interests.

Net proceeds from the Transaction will be used to reduce net debt, strengthening Tullow’s balance sheet, reducing ongoing financing costs and moving Tullow towards a more conservative capital structure.

As previously announced, the business is now targeting capital expenditure of approximately US$300 million in 2020 (down from approximately US$350 million) and decommissioning expenditure of approximately US$65 million (down from approximately US$100 million). Once the Transaction completes, capital expenditure will reduce by a further c.US$15 million for 2020 and the exit from the Lake Albert Development Project will remove all future capital expenditure associated with the Uganda Interests.

There will be no impact on the Group’s gross profit as a result of the Transaction, with there being no gross profits attributable to the Uganda Interests for the year ended 31 December 2019.  Following completion of the Transaction, the Group’s gross assets will, before receipt of cash proceeds, reduce by US$992.2 million, being the gross asset amount of the Uganda Interests as at 31 December 2019. The financial information set out in this paragraph has been extracted without material adjustment from the consolidated schedules that underlie Tullow’s audited consolidated financial statements as at and for the year ended 31 December 2019.

Tullow entered into three Ugandan exploration licences in 2004 following the acquisition of Energy Africa. 

The acreage presented Tullow with a great opportunity to explore across this vast, and relatively undrilled, onshore basin. In 2006, Tullow began to get encouraging exploration results and flow tests from some initial wells. Further significant discoveries and appraisal success led in 2009 to the basin development commercial volume threshold being exceeded. Following further success, contingent resources are now estimated to be around 1.7 billion barrels of oil.

The Group added further equity and operatorship to the licences in the Lake Albert Rift Basin when it acquired Hardman Resources in 2007. 

Development

The Lake Albert Development Project is a major development which expects to achieve around 230,000 bopd when it reaches plateau. Development Plans were approved by the Government in August 2016 to develop the first 1.2 billion barrels of oil. Uganda has agreed an export route through Tanzania to the Port of Tanga.

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