UGANDA: TULLOW SEES CORRUPTION IN OIL SALE

S E C R E T SECTION 01 OF 02 KAMPALA 001401

SIPDIS

E.O. 12958: DECL: 2019/12/17
TAGS: PREL EPET ECON EIND PGOV KCOR UG
SUBJECT: UGANDA: TULLOW SEES CORRUPTION IN OIL SALE

REF: KAMPALA 1356

CLASSIFIED BY: Donald Cordell, Economic Officer, State; REASON:
1.4(B),(D)


1. (C) Summary: Tullow Oil claims senior Ugandan government
officials were "compensated" to support the sale of a partner/rival
firm's exploration and production rights to Italian oil company ENI
(ref. A). Tullow Vice President for Africa Tim O'Hanlon identified
Security Minister and National Resistance Movement (NRM) Secretary
General Amama Mbabazi and Energy and Mineral Development Minister
Hilary Onek as Ugandan officials who benefited from the sale of
production rights by Heritage Oil and Gas to ENI. He requested
U.S. assistance in ensuring the open and transparent sale of oil
assets. If Tullow's allegations are true - and we believe they are
- then this is a critical moment for Uganda's nascent oil sector.
The Heritage-ENI sale will likely derail any potential partnership
between Tullow and Exxon Mobil and have profound consequences for
transparency and openness in the future management of the industry.
End Summary.



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Seeking Partners

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2. (U) On 14 December, Tim O'Hanlon, Tullow Oil's Regional Vice
President for Africa met with Ambassador Lanier to discuss recent
developments in oil exploration in Uganda (see ref. A for
background). O'Hanlon explained that the $10+ billion required to
produce, refine, and export oil from Uganda far exceeds the
financial capacity of Tullow and other mid-sized exploration
companies currently working in Uganda. Tullow is therefore
considering selling a portion of its Uganda holdings to a larger
international oil partner, and has unofficially "short listed"
three major companies as potential partners - including Exxon
Mobil, Total (France),and the Chinese National Offshore Oil
Company (CNOOC). After Tullow concludes its process of selecting a
partner, likely in January or February 2010, Tullow will present
the "bids" to the Uganda government and work with Ugandan officials
to gain approval of the much larger oil partner.



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An Oily Business

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3. (S) In contrast, O'Hanlon said the recent effort by Heritage Oil
and Gas to sell its oil exploration and production license to ENI
was apparently a corrupt back door deal. O'Hanlon observed that
since news of the ENI sale broke, even Ministers unrelated to oil
(such as Minister of State for Fisheries Fred Mukisa) have issued
public statements supporting ENI. O'Hanlon alleged that Security
Minister Mbabazi and Energy Minister Onek received payments from
Heritage and/or ENI in exchange for their support. O'Hanlon
referred to Minister Mbabazi, who facilitated an August 2009
meeting between ENI and Tullow, as ENI's "patron" in Uganda, and
said ENI created a shell company in London - TKL Holdings - through
frontmen Mark Christian and Moses Seruje - to funnel money to
Mbabazi. O'Hanlon also noted what he described as Onek's recent
unsolicited "grandstanding" before Parliament in support of ENI,
and similar statements of support during a recent Indo-African
energy conference in New Dehli. Onek made impossible claims at the
Indo-African conference regarding ENI's ability to export 100,000 -
200,000 barrels per day within two years. Comment: These
statements of support by Onek appear completely inappropriate
given that the deal is still technically pending. End comment.




4. (C) O'Hanlon said ENI's Uganda deal is part of a wider effort,
facilitated by Heritage, to gain control of all oil fields on both
sides of Lake Albert. In addition to its exploration blocks in
Uganda, Tullow claims to have exploration rights on the Congolese
side of Lake Albert. O'Hanlon said Tullow's exploration efforts on
the DRC side of Lake Albert are hampered by Tullow's refusal to pay
off key Congolese officials, including President Laurent Kabila.
O'Hanlon added that Heritage recently offered to help Tullow "take

KAMPALA 00001401 002 OF 002


care" of problems on the Congolese side in order to begin
exploration. Tullow refused, according to O'Hanlon.




5. (C) O'Hanlon concluded by asking the U.S. to help bring these
corruption allegations to light and raise concerns - perhaps in
concert with the British High Commissioner or other development
partners - over how the Heritage-ENI sale has transpired. O'Hanlon
confirmed that Tullow has the contractual right to prevent the
Heritage-ENI sale by exercising its contractual "right of first
refusal" as a 50% partner in both of Heritage's exploration blocks
and will exercise that right. He said Tullow is confident that one
of the potential major oil partners (preferably Exxon Mobil) will
be able to assist Tullow in financing the approximately $1.5
billion needed to foil the GOU supported ENI deal by purchasing
Heritage's Ugandan holdings. An Exxon Mobil executive confirmed to
EconOff on December 16 that Exxon Mobil has a strong interest in
Uganda but is still evaluating available data before making an
offer. Because an eventual Tullow-Exxon deal will require Ugandan
government approval, the GOU could still prevent Tullow from
raising the funds needed in order to buy out Heritage (so it could
then sell those shares to Exxon Mobil) and thereby deny Tullow the
means to effectively block ENI's entrance into the Ugandan oil
market.



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Comment: Inaction Sets Bad Precedent

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6. (C) This is a critical moment for the future of Uganda's oil
industry. The Heritage-ENI deal could prevent a multi-billion
dollar deal for Exxon Mobil by drastically diminishing both the
size and value of Tullow's Ugandan holdings. Allegations that
Minister Mbabazi, who has already been implicated in other
government corruption scandals, solicited and/or accepted payment
in exchange for government support will, if true, have serious
adverse effects on the economic activity of U.S. businesses in
Uganda and U.S. Mission goals regarding accountability, good
governance, and economic development. After discussions with Exxon
Mobil to confirm Tullow's story, we intend to approach the British
High Commissioner and the Irish Ambassador about drafting a joint
letter to President Museveni expressing concern about these very
troubling signs of high-level corruption in Uganda's oil sector,
and advocating for the open and transparent sale of oil assets and
management of future oil revenues. Depending on the outcome of
this major deal, we believe it could be time to consider tougher
action - to include visa revocation - for senior officials like
Mbabazi who are consistently linked to corruption scandals
impacting the international activity of U.S. businesses, U.S.
foreign assistance goals, and the stability of democratic
institutions.
LANIER