Tullow woes spell doom for Turkana oil fields prospects

British oil and gas explorer Tullow Oil has been hit by a fresh wave of setbacks—threatening to impact the final investment decision (FID) to put oil from the Turkana fields, with Kenya banking on commercial output by 2023.

The firm, which is battling weak investor sentiment that saw its shares plunge by 70 per cent wiping €1.7 billion (Sh190 billion) off the company’s value, came amid concerns of a crippling debt situation.

Amid an acute dip in production, the explorer’s net debt of $2.8 billion (Sh282 billion) is limiting cash flow and ability to repay.

When Tullow’s shares collapsed, its market capitalisation stood at slightly £560 million (Sh73 billion) for a company that was once valued at £14 billion (Sh1.8 trillion).

Daily production

In a setback that could constrict the firm further, Tullow revealed that drilling in its Carapa-1 well off Guyana’s coast in South America struck less oil than it projected, raising concerns on the firm’s projections.

According to the Financial Times, the firm’s production will be almost a third lower than forecast as recently as the start of this year, averaging just 70,000 barrels of oil per day (b/d) from 2020, down from closer to 100,000 b/d previously.

Investors were hoping that vast oil deposit finds, especially in Guyana, would assuage investors’ fears who are now berating it for failing to live up to its billing.

The UK firm will need a lot of cash for the Kenyan oil fields and Uganda’s Turkana and Lake Albert rift basin oil fields, which are far from production.

Delays in reaching an FID in Kenya are also troubling the firm amid talks of a possible goal shift. In an advance half year financial statement released in June last year, the firm said significant progress had been made that year.

“Despite this progress, the partners and the Kenyan government are reviewing the most likely timeline for FID which Tullow now expects in 2020,” said Tullow.

But things are taking a drastic turn for the firm in what slows the wheels of a bid for commercial oil output.

This comes even as oil traders are placing bids for some 500,000 barrels of crude oil from the Turkana reserves ahead of the second shipment slated for February 2020.

The expected shipment will be double the first one of 240,000 barrels sold last August under the government’s early oil pilot scheme (EOPS) which fetched Sh1.2 billion.

Despite woes at Tullow, the Ministry of Energy has assured that the country’s oil production will go on as planned despite the aforementioned concerns.

It appeared that Tullow board’s move to edge out chief executive Paul McDade and his head of exploration Angus McCoss proved to be its kryptonite.

But Petroleum Principle Secretary Andrew Kamau told Business Hub on phone that Kenyan operations were intact.

“Tullow has been having many of these challenges. We expect that they will affect Ghana but not Kenya,” he said.

Financial Times says Tullow needs to find ways to pay down its medium-term debt − it is not in immediate danger but has a convertible bond of $300 (Sh30 billion) maturing in 2021 and $650 million (65 billion) of bonds maturing in 2022.

It also has more than $1 billion (Sh102 billion) in borrowing capacity tied to a reserve-based lending facility, but that will start to reduce in size next year under its terms.

The increased shipment volume of oil Kenya is part of the government’s bid to test the market for the commodity which will prove strategic in shoring up the local economy’s fortunes.

This year, Kenya will be keen to prove to the global oil industry that it is serious about going commercial in three years with multi-billion shilling investment planned for the sector.

Joint venture

And on FID, Kenya had in June signed the heads of terms agreement with Tullow, Total and Africa Oil – the joint venture partners (JVP) involved in development of the Turkana oilfields, laying out the obligations of each party and investments required for commercial production.

As part of the financing deal, the exchequer will fork out 20 per cent of the Sh206 billion needed for the development of upstream oil deposits in South Lokichar Basin in Turkana.

Treasury, therefore hopes to mobilise about Sh50 billion through the initial public offering giving, Kenyans a chance to buy shares, with JVPs shelling out the remaining Sh150 billion.

The government had acquired a 20 per cent shareholding on the upstream infrastructure by diluting the current shareholders based on its backing rights.

Separately, the government and the partners will raid international commercial banks and the Export Credit Agencies (ECAs) for Sh113 billion in project financing for midstream activities.

This will include laying the 824 kilometre Lokichar Lamu crude oil pipeline (LLCOP) which will be completed in 36 months before production commences in 2023.