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How State saved Tullow deal with tax holiday, new licences

By Macharia Kamau | September 10th 2020

The government appears to have made major concessions for Tullow Oil and its joint venture partners, which may have led the oil companies to withdraw notices stopping work back in May. 

Tullow yesterday said it had received tax holidays and an extension on its exploration licences.

The firm and its partners had issued force majeure (unforeseeable circumstances that prevent someone from fulfilling a contract) notices in May, citing Covid-19 restrictions among the factors that made it difficult to deliver on their obligations as set out in the oil production-sharing contracts.

The companies also cited recent tax changes that they said adversely impacted the project. 

This resulted in a three-month stoppage of works at Lokichar in Turkana County. However, the companies withdrew the notices last month. 

It has now emerged that the decision could have come on the back of major concessions by the government.

Tullow yesterday said it lifted the notices following discussions with its partners and the government, in which the latter gave the companies an extension on their exploration licences to the end of 2021. Thereafter, they are expected to get production licences. 

They also got an extension on their tax holidays. The firm noted that the three-month period when little or no activities took place could affect the timelines for Kenya’s oil project, with key decisions that were expected to come later this year and move the project to its commercial phase now facing delays.

“Following productive discussions with the government, an improvement in the Covid-19 situation and assurances from the government that the tax incentives granted to the phased project will continue to apply, the force majeure notices were withdrawn in August 2020,” said Tullow while announcing its half-year results to June. 

Charles Wanguhu, the co-ordinator of the Kenya Civil Society Platform on Oil and Gas (KCSPOG), said the three-month hiatus in Tullow operations would delay the start of the commercial phase for the project. This means Kenya could at best expect to start oil exports in 2024.

This is from an earlier optimistic target of 2022, which was later revised to 2023. 

Wanguhu added that the government has made major concessions in the oil deal, and the declaration of force majeure in May could have been a strategy by the companies to get the government to yield to their demands. 

“The likely implication is a further delay on FID (final investment decision) on the project too late 2021. In reality, Kenya would then be waiting till 2024 at the earliest for first oil,” he said in a statement. 

“Overall, force majeure would appear to have been used as a strong-arm tactic by the joint venture partners to gain better terms.”

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