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21 August 2007

Global Insight .

Significance Tullow and Heritage could have their oil licence

cancelled in the DRCongo as a result of alleged irregularities, according to the
Implications The two companies deny there are problems with the
production-sharing contract (PSC). The government is threatening to put the oil
blocks in a new competitive tender open to other companies.
Outlook Tullow and Heritage also own adjacent acreage in
Uganda; however, increased violence in the region has led to a deterioration of
relations between the governments of Uganda and the DRCongo, which could delay the
companies’ planned drilling campaign later in the year.

DRCongo Takes Hard Line over Albertine Graben Region

Oil exploration in DRCongo has faltered even before it has got started as a result
of the government's decision to cancel the contract of independent exploration and
production firms Tullow Oil and Canada's Heritage Oil. Last week, the country's
Hydrocarbons Minister Lambert Mende Omalanga announced that because of
irregularities in the agreement the firms’ PSC would be cancelled. Mende said that
Tullow received a letter on 25 July saying the contract that the company signed in
July 2006 did not have the signature of the minister at the time and was only
signed by Nicolas Bandingaka, a vice-minister. Mende added that the tender was
published in only one local newspaper.

The Options

One option for the companies is to renegotiate a fresh PSC for Albertine Graben
Block 2 as the DRCongo government says that Tullow and Heritage did not pay a
signature bonus for the acreage. Tim O'Hanlon, Tullow's vice-president for African
business, said in an interview with Bloomberg that the signing bonus of
US$500,000, the fee agreed for both blocks, was paid, as specified in the
contract, and said it was the DRCongo government's responsibility to ensure that
correct tender procedures were followed. In the interview, O'Hanlon said: “In my
letter to the president last week, I said Tullow was prepared to raise its signing
bonus to US$1 million”.

The acreage in question is divided into stakes with Tullow holding 48.5% in Blocks
1 and 2 in the Albertine Graben region, which covers about 6,500 sq. km, with the
remainder shared by Heritage (39.5%) and Congolese state company Cohydro (12%).
The blocks border Tullow and Heritage's interests in Uganda, where the companies
have reported better-than-expected drilling results. Tullow has already committed
itself to an early oil production scheme in Uganda and first oil is expected,
according to Ugandan President Yoweri Museveni, in 2009.

Upstream reports that DRCongo's Oil Ministry's director for petroleum projects
Joseph Pili-Pili Mawezi said a decree for Block 1 would be issued next week, but
that Block 2 would be added to vacant Blocks 3, 4, and 5 in an open competitive
tender for interested suitors. It is not known when the DRCongo government plans
on holding a licensing round.

Outlook and Implications

The likely revocation of the exploration licence is the latest twist in what is
becoming a difficult situation in DRCongo. Earlier this month, Heritage's Carl
Nefdt, a U.K. geologist, was killed on board a boat on carrying out a seismic
survey of Uganda's side of Lake Albert. It is believed that the attackers were
part of a militia group not connected to government forces. The eastern region of
Ituri in the DRCongo, which abuts Uganda, is known to be particularly dangerous,
where warlords hold huge influence as a result of the vast mineral deposits. In
response to the death, the Ugandan government announced that the army, the Uganda
People's Defence Force, will take over responsibility for the security of the
foreign oil companies based in the Lake Albert area in western Uganda.

The debacle centres on the colonial demarcation between Uganda and the DRCongo.
Lake Albert divides the two countries and this is where Tullow and Heritage have
reported the most promising drilling results, with Tullow set to drill two further
wells this year that are expected to confirm that Uganda's crude reserves could
top one billion barrels.

It is now known that Uganda has proven reserves of crude and it is a forgone
conclusion that the Albertine Graben region of DRCongo will also have reserves,
which is why Tullow and Heritage quickly negotiated a PSC with the government last
year. It is in the interests of both companies and the government to iron out the
disagreements and renew the PSC for the rapid development of the DRCongo's oil
sector as seismic work will first need to be carried out. However, because of the
restiveness of the north-eastern region of DRCongo, which the government has
little control over, the relationship between the Ugandan and DRCongo governments
could sour further. If the violence is not brought to an end in the region, then
Tullow and Heritage's drilling campaign planned for later in the year in Uganda
could be delayed.