Tullow Oil colluded with Uganda to extract tax from its former exploration partner Heritage Oil in pursuit of its own commercial gain, Heritage plans to prove in London’s High Court this week.
The case centres on over $400 million of capital gains tax demands made by the east African country’s government for a 2010 deal where Heritage sold its oil licences there to Tullow for $1.45 billion.
Tullow says it had no choice but to pay the tax on Heritage’s behalf, and brought the case against the smaller company to recover its money. Heritage says Tullow helped Uganda formulate the tax claim, which it disputes, in order to keep the government sweet, and claims it is owed payment instead.
The legal battle shines a light on the highly politicised and risky nature of doing business at new resource frontiers. It also tests the tightrope governments walk between securing a fair share of the bounty and scaring off investment.
The money involved is enough to buy almost half of loss-making Heritage, and would fund several months of exploration drilling for Tullow. It is equivalent to over three years of economic growth for Uganda at the current rate of 0.7 percent on annual gross domestic product of about $17 billion.
“From early in 2010, Tullow was engaged in discussions of a questionable nature with Ugandan government officials,” Heritage’s lawyer Khawar Qureshi told the court of Mr Justice Burton in his opening statement on Tuesday.
“The collusion took several forms. It was continuous and extensive”, he said, “…and all behind the back of Heritage”.
Tullow’s lawyer David Wolfson on Tuesday called the Heritage position alleging collusion “creative, but incorrect” and said his case would hinge on showing that advice on Ugandan law that Tullow should pay up was “honestly held”.
Heritage, whose chief executive Tony Buckingham once provided mercenary fighters in Africa when he was a partner in the military contracting firm Executive Outcomes, is pursuing a separate legal dispute with the Ugandan government.
Heritage argues that no tax is due on the transaction, which brought an end to its operations there.
Tullow, which has grown rapidly in recent years and carved a niche as an African oil exploration specialist, has big ambitions in Uganda and has opened it up to some of the top players of the international oil industry.
When the original $1.45 billion asset sale was concluded, and with Heritage’s agreement in the aftermath of the $405 million tax demand, Tullow paid the Ugandan Revenue Authority (URA) $121.5 million, in compliance with Ugandan tax rules which require a one-third payment before any challenge can be mounted. It put the outstanding $283.5 million of the tax demand into an escrow account pending the outcome of Heritage’s challenge, and paid what was left, $1.045 billion, to Heritage.
Then, in 2011, Tullow complied with another URA demand for a further $313.5 million payment, an amount which included the balance of the original tax demand, plus an extra $30 million which the URA had added to the bill.
The second payment was made a fortnight before the signing of a deal that brought top international oil company Total and Chinese national oil group CNOOC into partnership with Tullow in Uganda.
The Total-CNOOC transaction netted Tullow $2.9 billion in a farm-down arrangement sanctioned by the government. Heritage claims Tullow was motivated to pay the $313 million by its ambitions in the country, and by the desire to help this deal go through.
Tullow says it had no choice but to pay the second tax demand sum, and having now paid out a total of $1.718 billion for an asset that was initially priced at $1.45 billion, it is suing Heritage for breach of contract for not paying back the difference.
Wolfson noted that the second tax demand, made on March 15 2011, was due by early April, and attached to a monthly interest rate of 2 percent until it was paid.
Wolfson plans to bring a number of witnesses including Graham Martin, Tullow’s general counsel and an executive director of the company, Richard Inch, Tullow’s head of tax, and Peter Kabatsi, managing partner of Tullow’s Ugandan lawyers, Kampala Associated Advocates.
Kabatsi is also the former solicitor general of Uganda and serves as a panel member of the International Criminal Court.
Heritage’s main witness in the trial, which the judge said could run for the next two weeks, will be Paul Atherton, Heritage’s finance director.