Inside Tullow Oil’s tax dodging racket

On February 16, 2010, Platform Resources Inc (PRI) sold out its Production Sharing Contracts (PSCs) in Kenya’s Block 12A to Centric Energy Corporation (CEC) at the price of $3.60m (Sh288m at the rate of Sh80 per dollar to the shilling then). In a subsequent transaction, Platform offloaded another PSC, in Block 13T, to Centric Energy for $3.65 million (Sh292 million).

The Corporate taxes due on the first transaction – charged at 37.5% for foreign companies and at 18.75% for local ones – were $1.35m (Sh108m) and $675,000 (Sh54 million). The taxes due on the second transaction at the same rates would be Sh109.5m and Sh54.75m respectively.

Six months later, in August 2010, Centric  sold out its controlling interests (100 percent) in Ordinary Shares to Africa Oil Corporation at $24.75 million. Tullow Oil then bought out the Production Sharing Contracts in Blocks 12A and 13T, held by Centric, at $23.75m, accruing Corporate Taxes worth Sh1.078b.

In (2012) Turkana Drilling Consortium (K) Limited sold out its Production Sharing Contract in Block 10BB to Tullow Oil at $10m. The firm ought to have remitted Sh 415 million to government in taxes.

The International Finance Corporation, on august 18, 2015, bought 6.83 % of Africa Oil Corporation for $50m, roughly Sh5b at current exchange rates. This should have attracted Corporate Tax in the amount of Sh2.85 billion.

In a subsequent transaction, Maersk Oil BV, which had entered into a running partnership with Tullow because of its expertise in maritime transport and road haulage, acquired a 25% controlling stake through farm-in into the Production Sharing Contract of Africa Oil Corporation for $985 million.

This trail of buy-offs and acquisitions all converge at Tullow Oil Plc, which a petitioner accuses of tax evasion amounting to some $163 million (Sh16.8 billion). The basis for this claim are the transactions highlighted in this article, touching on PSCs issued between 2007 and 2017 by the ministry of Energy, and the National Environment Management Authority.

In the petition lodged with the Kenya Revenue Authority in 2017, Matra International Associates accuses and implicates Tullow Oil in an alleged multibillion-shilling tax evasion scheme that dates back 12 years ago. Matra says that this series of transactions were a clever but aggressive structure by Tullow that helped it dodge taxes, denying significant revenue to the government. The petitioner submits that, to get to where it is today, Tullow Oil has relied on corruption within the Kenyan judiciary and the ministries of Finance and Energy.

The PSC for Block 10BA was signed on January 27, 2010 by then Energy minister Kiraitu Murungi, his Permanent Secretary Patrick Nyoike and Alec Edward Robinson for Centric Energy in the presence of Julius Wako as legal counsel from Daly & Figgis Advocates. On the same day, The PSCs for Blocks 12A and 13T were also signed, with Michael Lee acting for Platform Resources, in the presence of Naherali Walji as consultant. The PSC for Block 10BB was signed in May 2007 between Murungi, Nyoike and a Mr M. Lakhani for Platform Resources Inc, in the presence of Ahmed Adan of Anjarwalla & Khana Advocates.

Since then, Tullow and Africa Oil Corporation have staged a persistent judicial coup to procure skewed court orders that controvert, breach and/or abuse rule of law. Instructively, the petitioner notes, none of the contracts in respect of Blocks 10BA, 10BB, 12A and 13T were signed by the office of the Attorney-General. 

Tullow Oil did not respond to queries by the Nairobi Business Monthly on whether it was engaged in tax evasion in respect of the allegations made. The firm, which has offices in the swanky 10-storey Westend Towers along Waiyaki Way, bills itself as having a “track record of discovering significant oil resources in East Africa.”

In January this year, the firm declared it would spend Sh7 billion in its Kenyan operations this year as it “stepped up operations for commercial production beginning 2022”. Four months later, in May, Tullow announced it was delaying its final investment decision (FID) for its Kenya project to 2020, revealing it had not yet sealed a key tax deal in Uganda, vital for the progress of its plans there.

President Uhuru flags off Kenya’s first crude oil export

Background

The claims for tax evasion are informed by and anchored on a judgment given by Justice Burton of the London High Court, which compelled Tullow Oil, enjoined by Heritage Gas & Oil of Uganda, to pay $405 million to the Uganda Revenue Authority (URA), in a case where Tullow Oil sued Heritage Oil in a claim that it was forced to pay Heritage’s $313m tax bill after Tullow acquired Heritage’s Ugandan assets. Here is an explanatory excerpt from Wikipedia:

In 2010, Tullow had paid Heritage $1.45b for its 50% share in two huge Ugandan oil fields – Blocks 1 and 3A. The Ugandan government initially demanded $405 million from Heritage in capital gains tax, and, with Heritage’s agreement, Tullow paid the Ugandan Revenue Authority URA $121.5m. This was a third of the original tax demand, as Ugandan tax rules required a one-third payment before Heritage could challenge the demand. Tullow placed the remaining $283.5m into an escrow account, pending the outcome of the challenge, which left a reduced $1.045b payment that went directly to Heritage in exchange for the assets. However, in 2011, Tullow complied with another URA demand for a further $313.5m payment, which was the balance of the original tax demand, plus an extra $30m which the URA had added to the bill.

Tullow signed a Sale and Purchase Agreement with Total and China National Offshore Oil Corporation on March 30 2011. The second payment to the URA was made on April 7 2011. The farm down to TOTAL and CNOOC was completed over 10 months later on 21 February 2012. The Total-CNOOC transaction netted Tullow $2.9b in a farm-down arrangement sanctioned by the government. Heritage claims that Tullow was motivated to pay the $313.5m by the desire to help the deal go through.

The company agreed to pay $167m in capital gains tax to the Uganda Revenue Authority, clearing a hurdle that government had erected as a condition for consent to its exit plans. Initially, URA had assessed the tax at $300m over all of Tullow’s assets valued at $900m, with the oil firm disagreeing that the entire transaction was taxable. Negotiations followed thereafter over the amount, which finally came down to $167m.

In 2011, three senior Ugandan politicians appeared before the country’s high court on corruption charges, in a scandal that also saw Tullow accused in Parliament of bribing Foreign minister Sam Kutesa, junior Labour minister Mwesigwa Rukutana and Chief Whip John Nasasira; they all resigned.

The case came in the wake of allegations that Kutesa, as well as then Prime Minister, Amama Mbabazi, and Internal Affairs minister Hilary Onek had received millions of dollars in bribes from Tullow in exchange for concessions in the East African nation’s oil fields.

According to the Ugandan Parliament, between June 1 and July 16, 2010, Tullow paid up to $100m to “expert” bureaucrats, among them the three ministers. In documents tabled before the House, it was alleged that Tullow’s former country manager, Brian Glover, wired the money from the company’s accounts with Bank of Valetta in Malta.

Tullow denied the allegations as “outrageous and defamatory”.

In 2015 allegations also emerged that the oil firm made advances to bribe British Prime Minister David Cameron £50,000 pounds sterling, and £10,000 pounds each to two cabinet ministers, William Hague and Michael Gove, to “lobby President Museveni to ignore the tax not paid to URA.” Museveni reportedly rejected the deal.

In documents tabled before the House, it was alleged that Tullow’s former country manager, Brian Glover, wired the money from the company’s accounts with Bank of Valetta in Malta.

To make inroads into the Ugandan oil scene, Tullow Oil Plc had acquired the Lake Albert Crude Oil Wealth from Heritage Energy, which had discovered the crude oil fields. When it failed to remit £405 million to the URA in Capital Gains Tax, it sparked of a standoff that would eventually see the oil conglomerate exit the Ugandan market. The ensuing quarrel is also the primary reason its exploration at Lake Albert has stalled. 

When the matter came up before Justice Joseph Barton of the London High Court, he ordered Tullow–Heritage to pay $405m to Uganda Revenue Authority for the deal with Heritage. 

Perhaps reminiscent of its strategic exit from the Ugandan market, media reported in February last year that Tullow intended to relinquish its status as operator of the Turkana project to another little-known UK firm, Delonex Energy.

According to the East African newspaper, early this year, Tullow completed plans to formally cease active operations in Uganda, after agreeing to a payment plan for taxes on its farm-down to Total E&P.

Kenya

Although details of the Tullow Oil Plc-Africa Oil Corporation Capital Gains Tax liabilities vis-a-vis The Tax Evasion Dossier were filed with KRA in 2017, no response or action has been taken to date. 

During the sale and transfer of 505 controlling interests held by Africa Oil Corporation effected in November 2010, Tullow paid $23.750 million to Africa Oil Corporation to increase its capital from $3b to $4.5b.

Per the terms of the Ministry of Energy under The Petroleum( Exploration & Production) Act Cap 308 it is mandatory that any company wanting to engage under the Act must demonstrate financial and technical capacity to operate before entering into any Production. According to an insider, Africa Oil Corporation sold its Production Sharing Contracts to Tullow Oil Plc because it lacked the financial and technical capacities to fulfil the terms of the PSC it had executed with the ministry of Energy.   

Curiously, in the aftermath of a Chemical analysis Report from Kenya Petroleum Refineries Limited in 2010, Interstate Petroleum Company Limited was denied a Production Exploration Licenses it had applied on the basis that it had failed to demonstrate it wielded the capacity, financially and technologically, to undertake and deliver the results demanded and expected under The Act.

According to documents seen by the Nairobi Business Monthly in regard to tax evasion by Tullow Oil Plc, Africa Oil Corporation and others, Kenya Revenue Authority is owed Sh16.3b in the conservative in corporate taxes arising from the transactions on production sharing contracts beginning 2010.

Last month, Kenya’s first consignment of 200,000 barrels of crude oil left for Malaysia, flagged off by President Uhuru Kenyatta. The consignment belongs to Chinese buyer, ChemChina UK Ltd, the oil-trading arm of ChemChina (China National Chemical Corporation) Petrochemical, which is engaged in crude oil trading, storage and procurement for ChemChina’s refinery companies.

But, as reported by the Daily Nation, even as the shipment made its way to Malaysia, leaders were calling for equitable sharing of oil proceeds, bringing to the fore the burning question of how revenue will be shared amongst the different players involved. It is not clear how much the country will benefit as there is no public production sharing contract stipulating how the Sh1.2 billion – or subsequent revenue from future shipments – will be shared between the Kenyan government and the Joint Venture Partners.

The 2019 Petroleum Act provides for profit-sharing between the national government (75%), county government (20%) and the local community (5%), but the amount to be shared will only be known after the cumulative cost of the Early Oil Pilot Scheme (EOPS) is known and a formula agreed on how the cost will be recovered. 

Even as this is worked out, the ratio of revenue sharing between government and Tullow Oil, stands at 60:40, until the company recovers its operational expenses. It is this Government share that is further broken down into 75% for all Kenyans through the National Government, 20% to the county government and5% will go to the local community.