UGANDA'S FAILED DEAL LEAVES TULLOW OIL COUNTING LOSSES

By Jeff Mbaga, KAMPALA Uganda

Uganda’s decision not to grant Tullow Oil an approval to sell a substantial stake of its shareholding in the country’s oil fields heavily dampened the UK firm’s 2019 balance sheet, with the company quoting a historical $1.7 billion annual loss at a time when oil prices have collapsed due to the outbreak of the coronavirus disease.

Tullow Oil was hurt by the millions of dollars it set aside to cover up for financial losses – usually known as impairment charges – and exploration write-offs it incurred in projects where it felt it was throwing good money after bad.

In an unprecedented move, Dorothy Thompson, the board chair of the company, apologized to the shareholders for the poor performance, but tried to calm their fears by promising to turn around the fortunes of the company this year.

“The board was disappointed by the operational and financial performance, and the overall executive leadership of Tullow’s business in 2019. On behalf of the board, I would like to apologise for this poor performance,” she said in the group’s financial results for 2019, released late last week.

According to the numbers, Tullow recorded a loss of $1.7 billion in 2019, compared to the $85 million profit it made the previous year. Annual revenues dropped by $200 million to $1.7 billion in 2019, while net debt reduced to $2.8 billion from the $3.1 billion a year earlier.

Thompson believes the new management that replaced the older crop that quit late last year will take the company back to the path when it was one of the most sought-after oil exploration firms in Africa. Tullow’s troubles could not have come at a worse time.

The spread of the coronavirus disease has rattled financial markets, sliced off a huge chunk of planned capital investments, further pushed back any key business decisions, and dragged down oil prices to new lows of less than $30 a barrel. With the global recession imminent, the value of oil assets is likely to slump. The virus has claimed the lives of more than 10,000 people.

Due to Tullow Oil’s poor performance, the company’s bargaining chips in the negotiations to sell some of its stake in Uganda just got smaller. Since early 2017, Tullow Oil has been looking to sell 21.5 per cent of its Uganda stake to its joint venture partners for a cash consideration of $900 million.

Together with France’s Total and China’s Cnooc, the three oil companies each own 33.3 per cent in Uganda’s oil fields. However, the treatment of the tax element became a thorny issue towards the conclusion of this transaction, with the companies and the Uganda government disagreeing on what amount of tax should be paid.

More than two and half years later, in late August 2019, the deal collapsed and the negotiations were called off. While discussions between the government and the companies over Tullow Oil’s farm-down have resumed, it is not clear when approval for the deal will be granted. That approval is expected to lead to the signing of a $3.5 billion Final Investment Decision for a crude oil pipeline.

Tullow Oil argues that the slow process to make swift decisions has cost Uganda dear. “… during the oil super-cycle, many countries in the region adopted tighter fiscal terms, deterring exploration investment and rendering otherwise investable projects unviable, especially at today’s lower oil price,” the company noted in its statement.

It added, “The decision-making process has become slower and more complex as countries have established new institutions to govern the sector and as governments have become more accountable to civil society and democratic practices have deepened. Consequently, many governments have been slow to adjust to changing market signals and many African oil jurisdictions have become uncompetitive.”

As a result, Tullow says, “Several recent licensing rounds have attracted limited industry interest and countries like Tanzania and Uganda that have sought to capture greater host country value in the midst of major developments have seen project momentum stall.”

Tullow Oil insists that it intends to reduce its presence in Uganda. “Tullow remains committed to reducing its equity in the project ahead of FID and is working constructively with the Joint Venture Partners and the government of Uganda to agree a way forward,” the company said.

However, Tullow, without offering much details, said it had knocked down the overall valuation of the Uganda project, pointing to the company fetching less than what it had earlier anticipated.

“…as part of the subsequent Business Review, Tullow has now re-assessed the entire Uganda development project which has resulted in a lower value-inuse assessment. The review resulted in the removal of four higher-risk elements of the development from the overall valuation of the project…,” Tullow Oil noted in a statement.

Still, the company intends to spend $15 million in Uganda in 2020 in capital investment – the lowest amount allocated to any of the group’s subsidiaries.

“The farm-down in Uganda to Total and Cnooc lapsed in August 2019, following the expiry of the SPA due to unacceptable tax interpretation from the government. Alternative sales process to commence in 2020,” Tullow noted.

Recently, the National Environment Management Authority awarded Chinese firm, Cnooc, a certificate for meeting their criteria for the Kingfisher oil development project. Also, land has been acquired for the upstream projects.