Bid target Cove Energy said it was seeking clarity from Mozambique on a possible levy related to the sale of the British gas explorer, raising the prospect of a tax battle and potential delay to the $1.8bn (€1.36m) deal.
Irish company Cove, which owns a stake in an enormous gas discovery off the Mozambique coast and put itself up for sale in January, is facing uncertainty over tax issues after Mozambique said it wanted to introduce capital gains tax on the sale of the company.
Yesterday, shares in Cove fell as much as 10.8% to 201.5p, below the 220p-per-share, or $1.8bn, offer planned by Thai state oil firm PPT and oil major Shell’s 195p proposed bid.
“It potentially could delay, derail the whole process in a worst-case scenario. There’s plenty of industry appetite for this asset, I’ve no doubt that it’ll get sold to someone or other, but it’s just at what level and when will it happen given these uncertainties,” said Mirabaud Securities analyst Tim Hurst-Brown.
Cove, at the centre of a bidding war after approaches from Shell and PTT, and with an Indian consortium considering joining the fray, said in a statement yesterday the sale process was ongoing and added that the company was seeking clarity on the possibility of a tax charge which might be levied by Mozambique.
In a similar transaction in an African country with newly discovered hydrocarbon deposits in 2010, British firm Heritage Oil sold its stakes in oil fields in Uganda for $1.45bn to Tullow Oil. Uganda then levied $404m in capital gains tax on the deal, a charge disputed by Heritage, which argued that there was no tax due. The dispute delayed completion of the deal and an arbitration process in London between Uganda and Heritage is ongoing.
“Although impossible to determine the full effect until a headline figure is known, with the parallels to Heritage Oil’s 2010 Ugandan asset disposal we regard this as a potentially significant development in a [thus far] fairy-tale story,” said the analyst.
Some oil and gas firms have tax stabilisation clauses written into their agreements with the host country which prohibit governments later applying new taxes.
A spokesman for Cove declined to comment on whether the firm’s production sharing contract included such a clause. If it does, however, the company could take the Maputo government to international arbitration if it sought to levy a new capital gains tax.
Minerals minister Esperanca Bias on Thursday said the government of the south eastern African country wants to introduce a capital gains tax on the sale to benefit from a transaction linked to its own resources. The country has in recent years become a target for resource-hungry investors due to its vast reserves of coking coal and gas off its shores.