Tullow sells its stake in Uganda’s oil project to Total

 Troubled oil firm Tullow Oil has announced the sale of its stake in Uganda’s oil project to French company Total Plc for US $ 575 million.

“Tullow and Total E&P Uganda B.V. (Total Uganda) have signed a Sale and Purchase Agreement (SPA), with an effective date of 1 January 2020 (the Effective Date), in which Tullow has agreed to transfer its entire interests in Blocks 1, 1A, 2 and 3A in Uganda and the proposed East African Crude Oil Pipeline (EACOP) System (the Uganda Interests) to Total Uganda for cash consideration of US$575 million (the Cash Consideration) plus potential contingent payments after first oil (the Transaction),” the company announced in a press statement.

Tullow is currently the operator of the 230,000 barrel per day Block 2 project whereas Total Uganda is currently operator of Block 1 and Block 1A and CNOOC Uganda Limited (CNOOC) operates Block 3A.

The Irish company announced that the cash consideration in the deal with Total consists of US$500 million payable at completion and US$75 million payable following the final investment decision of the Lake Albert Development Project.

“Additional cash consideration may be received by Tullow in the form of contingent payments which will be payable on upstream revenues from the Lake Albert Development Project, depending on the average annual Brent price once production commences.”

Troubled Tullow Oil’s plan to sell its stake in the Ugandan oil project had stalled and called off due to a tax dispute with Ugandan authorities that saw Uganda Revenue Authority assess the tax at $300 million over all of Tullow’s assets valued at $900million.

The London-listed firm disagreed with the same leading to prolonged negotiations over the same.

On Thursday, the company announced that negotiations had been concluded leading to the latest development.

“Tullow and Total have had supportive 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,” the company said.

“Tullow Uganda and Total Uganda now 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.”

The company also noted that 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.”

 Summary 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 – see below) 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.