Tullow Says No Alternative to Suing Congo Over Oil

Tullow Oil Plc had no alternative to legal action after Democratic Republic of Congo canceled its claim to two oil blocks on Lake Albert, the company’s vice president said.

Tullow won a temporary injunction in a British Virgin Islands court on Sept. 21 against the development or resale of the blocks along the Ugandan border, which now belong to companies owned by Khulubuse Zuma, the nephew of South African President Jacob Zuma. Tullow has also lodged a case against Congo at the International Court of Arbitration in Paris.

Zuma’s companies, Caprikat Ltd. and Foxwhelp Ltd., both registered in the British Virgin Islands, received a presidential decree to exploit the blocks that were previously awarded, though not decreed, to Tullow.

“Since Tullow is not in the habit of buying back goods which have been stolen from us, I defy anybody to show what alternative we had to these legal actions,” Vice President Tim O’Hanlon said yesterday in an e-mailed response to questions.

Before Caprikat and Foxwhelp won the rights to oil blocks 1 and 2, block 1 was awarded to South African-based Divine Inspiration Group Ltd., or DIG, in 2008, two years after Tullow signed for both blocks. Only Zuma’s companies received the presidential decree. Tullow owns blocks on the Ugandan side of the border.

“In the eyes of Congolese law, only this last contract is legal,” Congo’s oil minister, Celestin Mbuyu, said in parliament on Oct. 8. The June 18 presidential decree effectively canceled Tullow and DIG’s rights to the blocks, he said.

Pay Back

The ordinance also made the arbitration clause in Tullow’s contract invalid, Mbuyu said. “Congo has hired lawyers to contest the competence of the chamber” at the Paris court, he said.

Mbuyu told DIG and Tullow that their contracts were canceled in letters that also explained how to seek compensation through the Ministry of Finance, he said.

Tullow is not aware of the letter, O’Hanlon said. Mbuyu said the company “systematically refused” to accept the correspondence.

DIG received the letter and is in negotiations with the government, Andrea Brown, DIG’s director, said by phone from Kinshasa today.

“We’re making progress and the government has agreed to provide not just reimbursement of payments made thus far, but compensation for our losses,” she said.

‘Nightmare Scenario’

DIG wants $4 million in reimbursement plus interest, as well as a decree for three blocks for which the company already has a production-sharing agreement. The blocks are located in Cuvette Centrale in Congo’s interior. DIG owns 50 percent of SacOil Pty Ltd., which received a decree for block 3 on Lake Albert at the same time Zuma won blocks 1 and 2.

Neither Zuma, nor his associates, responded to repeated phone calls and messages.

O’Hanlon said Tullow took legal action during a “nightmare scenario” after Congo reneged on presidential assurances that the company “would be at the heart of any solution on the DRC side of Lake Albert” because it already controlled the Ugandan side.

A pipeline will eventually ship Congo’s crude through Tullow’s Ugandan oil blocks to Mombasa, Kenya, Zuma associate Giuseppe Ciccarelli said July 28.

Mbuyu told parliament the contract process had followed Congolese law. “We are not afraid of the risk of international arbitration,” he said.

Test Case

Congo, which currently produces only 25,000 barrels of oil a day, is sending mixed signals about investment in the country, Philippe de Pontet, an analyst at Eurasia Group, said by phone from Washington.

“Tullow is the big test case,” he said. “Congo is a country that’s been producing small amounts of oil for many years but in terms of big league investment, all eyes are on Tullow and the signs right now are not very reassuring.”

A new oil law being considered by parliament may help to improve transparency in the industry, De Pontet said.

“At the same time this ongoing dispute with Tullow plays into investors’ biggest fear, which is that contracts can be violated,” he said. “Companies are particularly vulnerable because Congo’s legal framework is so weak and not independent of politics.”

To contact the reporter on this story: Michael J. Kavanagh in Kinshasa at mkavanagh9@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin in Johannesburg at asguazzin@bloomberg.net.

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