Tullow Oil’s Congo Exploration Pact to Be Canceled (Update3)

Original post at Bloomberg.com: U.K.

Aug. 17 (Bloomberg) — Tullow Oil Plc’s exploration contract in the Democratic Republic of Congo will be canceled after the government found irregularities in the agreement, said Hydrocarbons Minister Lambert Mende. Tullow’s stock fell.

Tullow said the agreement was valid and legally binding and offered to double its signing bonus as a gesture of goodwill. The London-based company and Canadian partner, Heritage Oil Corp., have been awaiting a decree from Congo’s President Joseph Kabila to allow them to start drilling on two blocks on Lake Albert on the Ugandan border.

“Tullow received a letter from me on July 25 saying I can’t present the dossier unless we’ve addressed the irregularities in the contract,” Mende said today in an interview in the capital, Kinshasa.

Foreign investment in Congo has been growing after seven years of civil war, which left 4 million people dead, ended in 2003. The country produces 25,000 barrels of crude oil a day from fields off its coast.

Tullow fell 3.5 pence, or 0.8 percent, to 429.5 pence on the London Stock Exchange. Earlier the stock fell as much as 7.7 percent. Tullow has a market value of 709 million pounds ($1.41 billion).

The country, which holds about a 10th of the world’s copper reserves, is also reviewing mining agreements and has challenged plans by Central African Mining & Exploration Plc to take over Katanga Mining Ltd. because it will change the ownership of a copper project in which the government has a stake.

International Standards

Mende said the July 2006 contract signed by Nicolas Bandingaka, a vice-minister, was done against the will of the minister at the time. It provided for payment for only one of the two blocks and didn’t follow “international standards” for the tenders, Mende said. The tender was published in only one local newspaper, he added.

“The government reserves the right to negotiate” a contract on the second block, Mende said in a letter shown to Bloomberg News.

Bandingaka, who signed the agreement, was legally entitled to do so as the minister was absent a lot during the signing, Tim O’Hanlon, Tullow’s vice president for African business, said in an interview from London today. The signing bonus of $500,000, the fee agreed to for both blocks, was paid, as specified in the contract, he added.

Oil Contracts

Tullow also secured signatures of the then finance minister and Cohydro, the state-owned oil company, O’Hanlon said. It was Congo’s responsibility to ensure correct tender procedures were followed, he said. The same procedure was followed in the signing of all oil contracts negotiated by Congo in recent years, he added.

“In my letter to the president last week, I said Tullow was prepared to raise its signing bonus to $1 million,” O’Hanlon said.

The contract gave Tullow 48.5 percent of the Block I and II concessions on Lake Albert, which cover about 6,500 square kilometers (2,500 square miles), while Heritage has 39.5 percent and state-owned oil company Cohydro the rest. Lake Albert is on Congo’s eastern border.

Tullow owns all of one block on the Ugandan side of the lake, and has a 50 percent share in two blocks operated by Heritage. The company found crude oil in all of the seven wells it drilled there last year, including the first discovery in Uganda.

It’s too early to tell how much oil the concessions in Congo may contain, O’Hanlon said in a June interview.

To contact the reporter on this story: Franz Wild in Kinshasa via the Johannesburg bureau on abolleurs@bloomberg.net