Eni Embroiled in Claims of Bribery in Uganda

The Italian energy company Eni is embroiled in allegations that it has offered bribes to Ugandan ministers after a leaked U.S. diplomatic cable was published on whistleblowing website WikiLeaks. The cable, dating from December 2009, details that U.S. ambassador to Uganda Jerry Lanier was informed of the alleged bribes by an executive from Anglo-Irish energy company Tullow. According to the leaked document, Tullow's vice-president for Africa Tim O'Hanlon was reported to have said that two Ugandan officials received payment from Eni to support the sale of exploration and production rights belonging to Tullow's partner firm, Heritage, to Eni. The two Ugandan officials implicated were Energy Minister Hilary Onek and Security Minister Amama Mbabazi, the ruling party's secretary-general. Lanier wrote that embassy staff believed Tullow's allegations and proposed U.S. visa revocations for these senior officials.

All the parties mentioned in the leaked cable have been vehemently denying these allegations. Onek responded by stating that the U.S. ambassador should have asked for his government's permission before submitting the cable and that Tullow does not possess any evidence for its claims. Tullow has repeatedly denied that O'Hanlon or any other executive made the allegations. In a letter to President Yoweri Museveni on Friday (10 December), O'Hanlon described the allegations as false and said that he was merely discussing similar rumours that were published across the local media with the ambassador as part of a general conversation about doing business in Uganda. Eni described the claims as damaging to its reputation, and yesterday announced its intention to sue Tullow over libellous statements.

At the time of the discussion between O'Hanlon and Lanier, Heritage was in partnership with Tullow in Blocks 1 and 3A, and was selling its 50% stakes in those blocks. Eni originally offered US$1.35 billion for Heritage's stakes, and in November 2009 Heritage entered into a letter of intent with Eni. The Italian foreign minister Franco Frattini also visited the Ugandan capital, Kampala, to lobby on Eni's behalf. Libyan leader Muammar Qadhafi is also said to have lobbied in support of Eni, given the company's strong strategic relations with the North African state. Libya lost the battle to India's Essar Group to gain control of the Mombasa refinery in neighbouring Kenya, but Libyan company Tamoil was awarded the contract to construct a pipeline from the Ugandan capital to Eldoret in Kenya. Libya has also proposed to invest US$1 billion in a proposed Ugandan refinery, something that would obviously give it a vested interest in oil production in Uganda. 

In January 2010, however, Tullow exercised its pre-emption right as Heritage's partner in the blocks and blocked the sale to Eni. Not only did Tullow manage to raise US$1.5 billion after a share placing on 27 January, but it was also willing to work within a partnership on these and its own Block 2 in co-ordination with the government, which wanted to diversify the investor mix to include a Chinese NOC, CNOOC and supermajor Total. The U.K.-based Sunday Times said that Eni was considering offering the Ugandan government US$300 million if it were to thwart the sale to Tullow. The British newspaper did not cite its sources, and the government stated that it would respect Tullow's pre-emption rights. The transaction between Heritage and Tullow was concluded in July 2010 after the government conditionally approved the sale, and Tullow's farm-out to CNOOC and Total.

This conditional approval of the sale was dependent on capital gains tax amounting to US$405 million being paid to the government. Heritage refused to pay this, however, stating that it had no legal or contractual obligations to pay capital gains tax. The government then ordered Tullow not to pay Heritage without deducting the tax arrears from the final transaction. Despite ongoing claims by both Tullow and the government that the tax dispute will be resolved in due course, the issue seems to be ongoing and uncertainty looms over full government approval to the 33% farm-out agreement between Tullow, CNOOC, and Total.

Eni has always been keen to add Uganda to its growing African portfolio. Despite losing out on the Heritage sale, Eni executives have reportedly been in telephone conversations with Museveni. Local media reported that CEO Paulo Scaroni has successfully secured a meeting with the president in which they will discuss the possibility of gaining oil blocks (see Uganda: 2 December 2010: Eni Expresses Interest in Ugandan Oil Licences).  Eni seems to be specifically interested in Block 3A, where Tullow’s licence expired earlier this year. The government has indicated that it would offer the block in an open bidding round. Eni is expected to make an offer on the block should a licensing round be set up, but it will again have to contend with Tullow for the government's favour, as the government has indicated that it would favour Tullow if it were to reapply for its expired licence.

Outlook and Implications

The allegations could not have come at a more inconvenient time for both the Ugandan government and Tullow. The matter puts Tullow in a very difficult position as it hopes for a resolution of the ongoing tax dispute, as it has to ensure that it remains on a good footing with the government before the latter's approval of the farm-out agreement to Total and CNOOC. With this in mind Tullow's response was swift, with a letter to the government in which it clarified its version of events. President Museveni is widely expected to win the 2011 presidential election, but the WikiLeaks debacle can do damage to his government's reputation both publicly and within the National Assembly, where disgruntled opposition candidates will no doubt utilise the allegations to portray the leader in an unflattering manner.