Uganda Cabinet Divided Over Heritage Eni Deal

The Ugandan cabinet is divided over whether to back Italy-based Eni Spa's (E) proposed $1.5 billion takeover of U.K.-listed Heritage Oil PLC's (HOIL.LN) two Ugandan exploration blocks, or allow pre-emption of the sale by London-listed Tullow Oil PLC (TLW.LN), people familiar with the matter have told Dow Jones Newswires.

The permanent secretary at the Ministry of Energy and Minerals has advised Uganda's President Yoweri Museveni against the deal, according to a recent security briefing to the president seen by Dow Jones Newswires. The report raised concerns over security and economic implications of the deal.

The permanent secretary did not return calls Monday. A spokeswoman from Eni declined to comment on the security report.

However, other senior Ugandan cabinet ministers have been promoting the Eni deal in government circles since September last year, the briefing said. They argue that Uganda needs large oil companies like Eni to help exploit Uganda's oil reserves.

Government officials also say that allowing Tullow to pre-empt the Heritage-Eni deal would give it 100% ownership of all the three blocks where commercial oil reserves have been confirmed, creating a monopoly that is not good for the country.

Tullow's senior executive in Uganda, Brian Glover, has said that, if Tullow does exercise its contractual rights to pre-empt Eni, it does not intend to retain 100% ownership and would offer the blocks in ongoing partnership talks with other major oil companies.

Tullow Oil said Monday that is also considering cross-listing some of its shares on the Ugandan stock exchange in April, allowing Ugandans to acquire a stake in their oil assets.

Tullow has until January 17 to exercise its pre-emption rights. Ernest Rubondo, the head of Uganda's petroleum Production and Exploration department, said the government will review details of the deal once companies submit all the paperwork this week.

Heritage and Tullow have had a long run of exploration success in Uganda's Lake Albert region, discovering over a billion barrels of oil so far, with the potential for much more to come.

Heritage and Tullow have equal shares in block 1 and 3A in the Lake Albert region, while Tullow has 100% of block 2. Heritage agreed in December to sell its stakes in blocks 1 and 3A to Eni.

A Tullow official in Uganda told Dow Jones Newswires last month that Tullow is "determined" to exercise its pre-emptive rights over the deal, although the company has not formally declared its intention to do so.

Despite the conflicting signals from the government, a person familiar with Tullow's plans said Museveni is fully aware of Tullow's intentions and that the company is confident that the Ugandan government will not stand in the way of its pre-emption rights. Tullow plans to have all the paperwork necessary to exercise those rights "finalized and ready to go" by the middle of this week, the person added.

Tullow is involved in separate talks to sell part of its stake in three oil blocks in Uganda's Lake Albert region to larger oil companies with expertise in pipeline and refinery infrastructure necessary to develop the resources.

ExxonMobil Corp. (XOM), Total SA (TOT) and an unnamed Chinese company are the most likely potential partners, the person familiar with Tullow's plans said.

Tullow originally planned to accept final bids in the farm-down process earlier this month, but the deadline has been extended a week or two beyond the January 17 pre-emption deadline for acquiring Heritage's stake, the person said.

-By Nicholas Bariyo and James Herron, Dow Jones Newswires; +256 75-262 4615; bariyonic@yahoo.co.uk

(Benoit Faucon in London contributed to this item)

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