FarmDown #TurkanaOil is now clearer?
As Kenya goes into top-gear elections fever, the oil price fighting for space around a resilient $ 50/barrel, the development prospects of the #TurkanaOil find continues to put more questions than answers. Questions are being asked about the strength of commitment the joint venture (JV) has to 2021 First Oil date and the likelihood and composition of the project partners even with an adjusted timeline final investment decision. There are the corporate risks to the 2018 final investment decision timeline and recent events sufficiently de-risk these sentiments?
The JV partners Maersk-Oil, Africa-Oil, operated by TullowOil share the interests in block 13T and 10BB to 25:25:50 respectively. After preliminary appraisal results, the blocks have about 750 M barrels with an upward potential up to 2B barrels with enhanced production. The management and financial events point to corporate risks within the JV that should be considered if the project will be developed within set timelines. The JV operator Tullow has had significant balance sheet events which point to the need for another Farmdown also in the Kenya project. Some observers contend these events should sound alarms at Kenya’s plans, tame wild political expectations on short term oil revenue, probably even check the expectations around Lamu-Lokichar crude pipeline.
Kenya found commercial deposits only in 2012, seems to assume corporate risks, when determining her strategic choices given by international oil companies. “We are also well advanced in planning the Early Oil Pilot Scheme, which will provide valuable reservoir information and build effective working relationships with the local government and community on a small-scale project, before we embark upon the major upstream and pipeline development”, Tullow says in its report. Kenya should be reading more beyond this status of events.
The commitment agreement to ‘a stand-alone crude pipeline for Kenya’ according to some observers has been pegged on an independent pipeline JV supported with contributing interests from the Field JV. According to 2016 results for Maersk Oil, there is very little financial room, the logistics company can pull to make an additional investment for the project to the level expected. Missing the agreement timelines for the pipeline should have been the wake-up call. Someone needs to show us the pipeline money? With a Trump Presidency will American investors formerly interested in this pipeline stand up beyond the shale? Let’s see how they receive Tullow’s rights issue first.
The decision to reroute the Uganda crude oil pipeline to Tanga may have been more than face value regional politics. That decision should have strengthened Kenya's will to be mindful of the given timelines. Field development is not the prerogative of the oil company in a production sharing agreement. President Museveni resolute decisions was a result of a will matured by the long wait for Uganda’s assets to came out of the ground and not necessarily regional politics. Total/Tullow/CNOOC owned the Uganda assets equally at 33.33% before Total got the offer to take up Tullow’s 21.7% interests. CNOOC has however exercised its right to the deal to take-up part of the offer, with the tacit support of Uganda Government. Uganda does not want to be in the position Kenya is even with Total. This means Total and CNOOC may have to equally share out the Tullow’s Uganda assets which secures Uganda's timelines for FID 2017 and first oil 2020. Total has shoved through because it is also paying for the Tanga crude pipeline. What is the importance of this to the Kenya #TurkanaOil play? The Kenyan JV partners have shown according to some, financial and technological risks to the 2021 first oil commitments.
According 2016 Tullow Annual Reports, expect Kenya to reach final investment decisions (FID) for the Full Field Development in Kenya in 2018. This is hinged on the experiences with ‘falling industry costs, new technology and new approaches to these fields have shown that we can produce these resources significantly below the cost levels forecast before the oil price fell’. However, by strategy, Tullow also usually commits to developing only ‘selective’ projects. Given its financial position, the changes at the board, the vulnerabilities to the oil-prices, even despite the upbeat of a global oil industry, Kenya country risks, the company’s appraisal of East Africa Assets seems less likely to be strong for a development commitment, given its experience with off-shore plays.
Kenya, would need action to raise finance for both the crude pipeline and field development costs to off-take its assets within the 2018 FID timeline. Tullow and Maersk financial muscle has some observers worried of the firmness of the JV commitments. The need for a third partner with more regional offshore experience and the financial muscle to share on the costs of both the stand - alone pipeline and field development is increasingly evident. The choice partners are very few.
‘The Tullow ‘group’s net debt at the end of 2016 was almost $5 billion’. The high debt is clearly a source of worry for the board, investors and should worry Kenyans too. This is ‘even though it was as a result of ‘the combination of continued low oil prices and the commitment to develop TEN (Ghana off-shore) which made this unavoidable.’ The company report says. This raises questions able the company’s ability to raise to the occasions of developing the higher risk on-shore Kenya project, without outside additional finance and even an off-take pipeline.
The most likely outcome would be the company is ‘now in a position where they “are beginning the process of deleveraging through free cash flow from its producing assets”, by constraining our capital investment while oil prices remain low, potentially farming down assets in West and East Africa where we have significant equity and other options available to the Group.’ This may mean Uganda was the first in a line of deleveraging process from East Africa where Tullow has significant equity. Tullow has 50% of both 10BB and 13T. Tullow delivered on Ghana with 35% equity interest. 2017 capital investment for the Africa-focused exploration and production group will fall to US$500 million from US$900 million in 2016.
Transitions in the Board
‘31 years after founding and running the Company’, Aidan Heavey is stepping down as CEO. Even though he stays for two more years as Chairman, he takes away ‘African networks’ that were effective in making Ghana happen. ‘Paul McDade, who has run our business as Chief Operating Officer for the last 12 years’, will succeed him. Weather the new CEO will work to ensure development commitments of Kenyan Assets should be an issue to watch. The company some observers see, will most likely keep to its core exploration credentials. A farm-down of at least 30% in Kenya they conclude, is will not be a surprise.
Early Oil Pilot Scheme should not distract you. What the industry needs and country needs is stronger commitments to pre-development and clear decisions on the crude pipeline route if the timelines for FID are anything to raise eyebrows. This probably is also the reason Kenya is playing the long term game with the Petroleum Exploration and Development Bill. There are no serious presentations on the commitments made by international companies to take the commercial deposit to market. There is therefore no hurry even with the bill. The potential for stranded assets are very real, if some serious even sometimes politically ego diminishing decisions are not taken and taken very fast.
Tullow Oil ‘Surprise’ Rights Issue
Motley Fool UK asked if Tullow was living on borrowed time after $790M rights Issue. Deutsche Bank was surprised but found it attractively priced at 45% discount. Proactive Investors UK said “Tullow Oil will be back in control after rights issue”. These were some of the fast but not so furious analyst’s reactions to Tullow’s rights issue just days after a rosy annual report. It brought to question several risk issues that Kenya needs to look into in #TurkanaOil both in terms of managing expectations and preparing for alternative scenerios. Daily Nation reported ‘the rights issue was to clear some debts burden and allow for further exploration in its African oil fields’. Clear the shares dropped and analysts say investors may have been worried that banks were no longer as willing to support the debt. WH Ireland said ‘the recapitalization means it is Tullow that retains flexibility rather than the banks’, quoted on Proactive Investors.co.uk.
Intelligencebriefs.com quoting Paul McDade, said ‘that Tullow has a strong set of low cost production development and exploration assets in Africa. Through the rights issue the firm will be able to focus on business growth, breakeven after three years of making loss. “To achieve this goal, the firm also aims at improving its production and sell assets (as it did recently in Uganda) to further reduce its debt”.
Kenya should get back to the driver seat in this sector, if it ever was.
These are personal views and due diligence is advised