Mr. Inch stated that there was no letter saying that Tullow was buying the Heritage interests specifically to sell. The intention was not expressed in any board resolution. However Mr. Inch said that was the common understanding of the senior management team. He said that Blocks 1 and 3A were sold by Tullow to CNOOC and Total at a loss of US$ 175,577,251. He stated that there were additional payments that were made to Heritage and they could not pass them to the buyers. They incurred an economic cost of US$ 100 million contingent and guarantee fees to the bank which cost around US$ 46 million. He stated that Tullow sold 66.67% of its interests at US$ 2.9 billion but 50% of that were interests that formerly belonged to Heritage. They sold Heritage interests at US$ 1.45 billion at a loss. He said the answer would have been different for tax computation if they had considered the asset as undivided. He said the loss arose because Tullow expensed it with the cost of the asset acquired in accordance with international accounting standards. Legally Tullow sold Heritage interest first.
He testified that there was a difference between the first disposal by Heritage and the second disposal by Tullow in respect of computing the cost base and deductions. The distinction is that for an initial disposal, the cost base of the asset is the amount paid, to which is added incidental costs of the acquisition and in the case of a subsequent disposal the cost base is the first seller’s gain. The respondent called two witnesses. The first witness was Mr. Ernest Tumwine Rubondo, the Commissioner Department of Petroleum Exploration and Production in the Ministry of Energy and Mineral Development in the GOU. Mr. Ernest Rubondo gave a lengthy history of petroleum explorations in Uganda which he stated dates back as far as 1910, when oil seeps were reported. Oil explorations started but ended around 1940 as a result of the onset of the Second World War. In the 1980s efforts on oil exploration were restarted. A successful survey was done which identified 3 large deposit centres in the Graben.
To cut a long story short, in January 1997, the GOU licensed Heritage to explore oil in EA3A. In November 1997, the GOU signed an agreement with Hardman for EA2 which the latter surrendered in 1999 because oil prices had gone low. Heritage was joined by Energy Africa in 2000. In 2002, Heritage and Energy Africa drilled Turaco 1 where they encountered oil shoals. The companies also drilled Turaco 2 and 3 where they encountered hydro carbons in 2004. In 2004, Heritage and Energy Africa actually surrendered Area 3 and reapplied for it from the GOU. In July 2004, the companies acquired another licence in the Pakwach Basin. In 2006 oil was discovered.
Mr. Rubondo testified that he was part of the GOU team that negotiated the EA1 PSA. GOU would do a due diligence on a company and if it was worth dealing with, it would send it a draft PSA. The parties would then agree on the terms. He testified that Article 23.5 was in the model PSA that was prepared in 1993. It was not negotiated by the parties. He said that the intention of GOU was that it did not want licensees to be encumbered with fees, imposts and taxes. The objective of the clause was to facilitate the licensees to bring on board partners to share risk without the need to pay fees and imposts like stamp duties and signature bonuses. He said clearly the clause was not meant to cover taxes on gains. Its purpose was to facilitate the sharing of risk and not to guide the taxation of a gain. He further testified that TUL acquired Energy Africa in 2004. TUOP acquired Hardman in 2007.
TUL had 50% interests in EA1 and EA2. TUL was together with Heritage in EA3 in a 50% each joint venture. TUL took over Heritage’s interests on 7th April 2011 after it exercised it right of pre- emption. TUL acquired the rights of Heritage to develop and produce oil. He stated that the said interests in the agreements were indivisible. On cross-examination, Mr. Rubondo reiterated his earlier position that Article 23.5 does not apply to farmdowns. He stated that the farmdown to CNOOC and Total was dependant on consent from GOU, more precisely the Ministry of Energy and Mineral Development.
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