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Tullow Oil plc (Tullow) is delighted to announce that yesterday it signed Sale and Purchase Agreements (SPAs) with CNOOC and Total in respect of the sale of a one third interest to each party of the interests Tullow holds in Exploration Areas 1, 2 and 3A in Uganda. Tullow will retain a one third interest. The terms of the transactions include a total cash consideration payable to Tullow of US$2.9 billion.

With the signing of these SPAs, a key condition of the Memorandum of Understanding (MoU) agreed between Tullow, the Government of Uganda (GoU) and the Uganda Revenue Authority (URA) on 15 March 2011, has been satisfied. The next step is for Tullow to make certain tax related payments to the GoU, on receipt of which all relevant consents become final and the other provisions of the MoU become effective.

Under the MoU, Tullow and its new Partners, CNOOC and Total, have been granted new licences over EA‑1 and an onshore area of EA‑3A and the partnership’s rights to develop the Kingfisher discovery have been confirmed. A clear plan for the resolution of tax disputes on the various asset sales has been agreed by the GoU, the URA and Tullow.

Tullow and its Partners will now reactivate the significant program of exploration and appraisal drilling and progress their development plans for the basin which they will jointly present to the Government of Uganda for approval.

COMMENTING TODAY, AIDAN HEAVEY, CHIEF EXECUTIVE, SAID:

“These agreements have secured the future of oil production in Uganda. Tullow, its partners and the Government of Uganda will now agree a development plan for the Lake Albert Rift Basin with a target of delivering production of at least 200,000 bopd and potentially much more as we continue to explore and appraise the basin. We are looking forward to working with CNOOC and Total, and continuing our strong relationship with the Government to bring the benefits of the oil to the people of Uganda.”

Analyst Conference Call

Aidan Heavey will host a conference call at 8.30 a.m. today. Please dial‑in 10 minutes before the start time. The details for accessing the call are as follows:

Participants: +44 (0)20 7806 1966

Confirmation code: 3967984


Key transaction information

Purchase of Heritage Oil interests and stamp duty

Following the signing of the SPAs and settlement of certain tax related payments, Tullow will be granted final consent by the GoU for the purchase of the 50% interests of Heritage Oil and Gas Limited (Heritage) in EA‑1 and EA‑3A. Tullow will pay Stamp Duty on the purchase from Heritage levied at 1% (US$14.5 million).

As previously announced, the consideration for the Heritage transaction was US$1.45 billion including a US$100 million contractual settlement, of which US$1.05 billion was paid to Heritage. The balance of US$404 million represents capital gains tax assessed by the Ugandan URA but disputed by Heritage. In line with Ugandan dispute resolution procedures under the Uganda Income Tax Act, US$121 million was paid to the URA and Tullow and Heritage agreed to deposit US$283 million into an escrow account in London pending resolution of the dispute through a tax tribunal in Kampala.

Settlement of Heritage tax matter

Heritage disputes the capital gains tax assessment by the URA on the sales of its interests to Tullow. Although conditional GoU approval was received for the transaction, the GoU withheld final approvals until a satisfactory resolution of the Heritage tax dispute.

The URA issued Agency Notices to Tullow under the Ugandan Income Tax Act which designates Tullow as agent of Heritage. The URA has in consequence demanded that, pending the resolution of the capital gains tax dispute between the GoU and Heritage, Tullow should make an unencumbered payment of US$313.4 million within 10 business days of signing the SPAs. The US$313.4 million is based on the potential tax associated with the US$1.35 billion purchase price of the Heritage interests and the potential tax associated with an additional contractual settlement amount of US$100 million.

Farmdown to CNOOC and Total

In respect of the farmdown of a one third interest of the interests Tullow holds in EA‑1, discoveries in EA‑2 and the Kanywataba prospect in EA‑3A, to each of CNOOC and Total, Tullow has agreed a total consideration of US$2,933,330,400 cash, split equally between CNOOC and Total, which will be received upon completion. Completion is expected within the next four to six weeks subject to the satisfaction of certain conditions.

Capital gains tax associated with Tullow’s farmdown to CNOOC and Total

The GoU has assessed that capital gains tax of US$472.7 million is due on the farmdown. This amount is disputed by Tullow. As agreed in the MoU, Tullow will pay 30% of this amount (US$141.8 million) within five business days of the sales to CNOOC and Total completing. Tullow will then follow the normal tax dispute resolution process in Uganda. The material part of the dispute between the Government and Tullow focuses on the validity of the Capital Gains Tax exemption in EA‑2.

Lake Albert Rift Basin operatorship and development

The parties have agreed that, on conclusion of the farmdown to CNOOC and Total, operatorship shall be determined by the GoU. Initially, Tullow will act as Interim Operator in all three exploration areas to ensure an efficient reactivation of the exploration and appraisal drilling programme and to allow both CNOOC and Total to establish an operating presence in Uganda. To support this drill-out, two further drilling rigs are being contracted in addition to the three already under contract.

Kingfisher production licence and the basin exploration licences

The Minister of Energy in Uganda has agreed to grant, pursuant to S.20(3) of the Petroleum (Exploration and Production) Act in Uganda and upon application by Tullow, a production licence in respect of the Kingfisher Discovery Area to the partnership. In addition, a new six month licence over the Kanywataba (previously Sunbird) prospect in EA‑3A will be awarded to Tullow, CNOOC and Total under similar licence terms to the EA‑3A licence. The remainder of the EA‑3A licence has been relinquished and the partnership has the right to apply for a new licence over this area.

Following the expiry, on 30 June 2011, of the current EA‑1 licence, the GoU have agreed to award a new twelve month licence to Tullow, CNOOC and Total on similar licence terms to the current EA‑1 licence. This allows sufficient time to drill out all the remaining prospectivity in the licence.