Disposal of the interests in Blocks 1 and 3A
Heritage had remarkable operational success in Uganda as a result of technical excellence and first mover advantage. In 1997, Heritage became the first oil and gas company in almost 60 years to undertake exploration in Uganda after being awarded a licence in the Albert Basin in western Uganda.
On 18 December 2009, Heritage announced that it and its wholly owned subsidiary Heritage Oil & Gas Limited ("HOGL"), had entered into a Sale and Purchase Agreement ("SPA"), with ENI International B.V. ("Eni") for the sale of HOGL's 50% interests in Blocks 1 and 3A in Uganda (the "Ugandan Assets"). On 17 January 2010, Tullow Uganda Limited ("Tullow") exercised its rights of pre-emption. The transaction was overwhelmingly approved by Heritage shareholders at the General Meeting on 25 January 2010.
On 27 July 2010, Heritage announced that HOGL had completed the disposal of the Ugandan Assets. Tullow paid cash of $1.45 billion, including $100 million from a contractual settlement, of which Heritage received and retained $1.045 billion.
The Uganda Revenue Authority ("URA") contends that income tax is due on the capital gain arising on the disposal and it raised assessments of $404,925,000 prior to completion of the disposal. Heritage's position, based on comprehensive advice from leading legal and tax experts in Uganda, the United Kingdom and North America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets.
On closing, Heritage deposited $121,477,500 with the URA, representing 30% of the disputed tax assessment of $404,925,000. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an agreement between HOGL, Tullow and Standard Chartered Bank pending resolution between the Ugandan Government and HOGL of the tax dispute.
In August 2010, the URA issued a further income tax assessment of $30 million representing 30% of the additional contractual settlement amount of $100 million. HOGL has challenged the Ugandan tax assessments on the disposal of HOGL's entire interest in the Ugandan Assets.
In November 2011 and December 2011, the Tax Appeals Tribunal in Uganda dismissed HOGL's applications in relation to the two assessments amounting to $434,925,000. In December 2011 and January 2012, HOGL commenced appeals to the Ugandan High Court in relation to the rulings from the Tax Appeals Tribunal. The rulings from the Tax Appeals Tribunal in Uganda are part of a domestic process and are not final and determinative. HOGL has appealed the rulings, which it believes are fatally flawed in many respects, through the Ugandan court system commencing with the High Court and subsequently the Court of Appeal and Supreme Court if necessary.
As a result of the actions of the tax authorities in Uganda, HOGL and its advisers consider that it was compelled to take part in a Ugandan domestic process before a Tax Appeals Tribunal, notwithstanding HOGL's belief that arbitration, which is ongoing in London and detailed below, is the correct forum to settle such disputes, in view of the existence of valid and binding arbitration provisions in its PSAs with the Ugandan Government.
In May 2011, HOGL commenced international arbitration proceedings in London against the Ugandan Government. HOGL is seeking a decision requiring, among other things, the return or release of approximately $405 million, plus interest, in aggregate currently on deposit with the URA or in escrow with Standard Chartered Bank in London. Accordingly, the arbitration proceedings concern HOGL's claims that the Ugandan Government wrongfully or unreasonably withheld consent to the sale by HOGL of the rights under the PSAs for the Ugandan Assets, including by making this consent conditional upon the payment of a sum alleged to be a tax liability of HOGL. The arbitration proceedings are being held in London in accordance with the provisions of the PSAs in relation to the Ugandan Assets.
On 15 April 2011, Heritage and its wholly owned subsidiary HOGL received Particulars of Claim filed in the High Court of Justice in England by Tullow seeking $313,447,500 for alleged breach of contract as a result of HOGL's and Heritage's refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL believe that the claim has no basis and are in the process of vigorously and robustly defending it. Heritage and HOGL have filed their Defence and Counterclaim against Tullow seeking instead the release to HOGL of the $283,447,000 plus interest currently being held in escrow with Standard Chartered Bank in London.
Although disputes of this nature are inherently uncertain, the Directors believe that the monies on deposit and held in escrow will ultimately be recovered by Heritage.
Exploration Activity in Uganda
In 1997, Heritage became the first oil and gas company in almost 60 years to undertake exploration in Uganda after being awarded a licence in the Albert Basin of western Uganda.
In 2001, the Group farmed out 50% of the licence to Energy Africa, which was subsequently acquired by Tullow Oil plc ("Tullow").
Blocks 1 and 3A are located in the Albert Basin which straddles the border with the DRC in the western arm of the East African Rift Valley. Approximately 80% of Block 3A is covered by the south-eastern part of Lake Albert and the remainder of the block comprises the Semliki flats to the south of the lake.
The original Block 3 licence was awarded in 1997. Most of the exploration acreage which previously constituted Block 3 was reconfigured and re-licenced as Block 3A in 2004 for a term of six years. Block 3A is located in the southern portion of the Albert Basin and covers an area of 2,024 square kilometres. All three wells drilled since 2006 on the Kingfisher field have been successful and found hydrocarbons. Energy Africa (now owned by Tullow) farmed-in to the licence in August 2001, acquiring 50% in return for funding a seismic survey and partly funding the costs of a well.
The discovered oil in Block 3A is good quality, light (between 30o and 32o API) and sweet with a low gas-oil ratio and some associated wax. The reservoirs are highly permeable sandstones with an estimated permeability of up to 3,000 milliDarcies.
During 2007/08 Heritage acquired two seismic surveys in Block 3A; an approximately 325 square kilometres 3D programme over the Kingfisher and Pelican structures and an approximately 530 kilometres 2D infill survey on Lake Albert. These have helped to identify a number of prospects in the lake, including the large Crane prospect.
The Kingfisher Discovery
Heritage's Kingfisher-1 well in Block 3A was drilled in 2006/2007 to a total depth of 3,195 metres after sidetracking twice for geological reasons. Hydrocarbons were encountered in Tertiary-age reservoir sandstones and four intervals were tested, resulting in an overall cumulative maximum flow rate of 13,893 bopd through a one inch choke over a total net productive thickness of 54 metres.
The Kingfisher-2 appraisal well commenced drilling on 26 April 2008. This drilled to a total depth of 3,906 metres (3,197 true vertical depth). Three zones were tested and resulted in a cumulative flow rate of 14,364 bopd, almost 50% greater than the equivalent zones which were tested in Kingfisher-1.
The Kingfisher-3 well commenced drilling at the end of September 2008 and on the 11 December 2008 it was announced that the Kingfisher-3 well had encountered oil in all three reservoir intervals with a gross hydrocarbon bearing interval of 110 metres and net oil pay of up to 40 metres. It was found that the south-west part of the field is structurally higher than anticipated, thereby extending the field boundaries which will result in an upgrade to the Kingfisher field reserves.
The Kingfisher-3A well was completed in February 2009. The well intersected all three Kingfisher Upper Miocene reservoir intervals present in the Kingfisher-1A and 2 wells. An extensive coring programme was undertaken from the three reservoir intervals and initial analysis confirms high permeabilities of up to 3,000 milliDarcies. Pressure data and fluid samples confirm the three reservoir intervals to be in communication with the three intervals production tested in the Kingfisher-1A and Kingfisher-2 wells at 9,773 bopd and 14,364 bopd respectively.
Block 1 is located at the northern end of Lake Albert, and encompasses an area of 3,659 square kilometres. A seismic survey comprising approximately 670 kilometres of 2D data was completed on Block 1 in February 2008 and identified many encouraging direct hydrocarbon indicators. A successful drilling campaign which began in 2008 discovered the Warthog and Buffalo-Giraffe Fields. The Buffalo-Giraffe Field covers approximately 48 square kilometres and has an oil column of approximately 140 metres.
All wells drilled in Block 1 are relatively shallow with total depths of between 600 and 920 metres. Downhole pressure testing and sampling and the recovery of oil to surface has confirmed the presence of moveable oil in the Block 1 discoveries. Log interpretation and core analysis has confirmed excellent reservoir quality with porosities of up to 35%.
Warthog and Buffalo-Giraffe Discoveries
On 21 October 2008 Heritage announced the successful Warthog-1 discovery which had a gross hydrocarbon-bearing interval of approximately 150 metres with 46 metres of net hydrocarbon pay. Wireline logging and formation pressure measurements indicate 31 metres of net oil pay in the principal oil-bearing reservoir section, overlain by 15 metres of additional net hydrocarbon pay comprising, most probably, volatile oil, condensate and wet gas. The well was drilled to a total depth of 911 metres.
On 16 December 2008 Heritage announced the successful Buffalo-1 discovery which had a gross hydrocarbon-bearing interval of approximately 123 metres, with approximately 43 metres of net hydrocarbon pay. Wireline logging and formation pressure measurements indicate 28 metres of net oil pay in the principal oil-bearing reservoir section, overlain by 15 metres of additional net hydrocarbon pay containing gas.
On 13 January 2009, Heritage announced the successful Giraffe-1 exploration well which has unlocked the multi-billion barrel potential of Block 1. The Giraffe-1 exploration well encountered a gross oil-bearing interval of approximately 89 metres with net oil pay of approximately 38 metres. Downhole pressure testing and sampling have confirmed the presence of moveable oil that was recovered to surface and log interpretation indicates excellent reservoir quality with porosities of up to 30%.
Pressure and seismic data indicate that the Giraffe discovery is structurally connected to the Buffalo discovery creating a combined Buffalo-Giraffe complex covering approximately 48 square kilometres with an oil column of approximately 140 metres. The Buffalo-Giraffe complex may extend into the Buffalo East prospect creating one very large structure of up to 90 square kilometres.