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'We are moving forward again rather than sideways', says Tullow Oil chief

Tullow Oil’s chief executive says his company is starting to emerge from a rough patch. New production will help, but the firm is still exploring

Aidan Heavey has some reason to be upbeat. A major new project in Ghana has just produced its first oil, technical problems at another nearby development are in the process over being overcome and efforts to produce from reserves in East Africa seem-finally-to be edging closer to fruition.

For the chief executive of Tullow Oil, it all marks a shift in fortune.

After a couple of years of gloomy news, Tullow is regaining some momentum. The company even managed to turn a modest profit in the first half of 2016-a period when weak oil prices have left others heavily in the red. The company's share prices is even starting to tick up.

Heavey says early action and a good understanding with financial institutions were crucial to this outcome. "We are still in the relationship department of banks, not in their recovery section, which is a key indicator," he says wryly, in an interview with Petroleum Economist.

"We've done everything right and we've done it first. So the banks didn't have to tell us to cut our dividend-we did it ourselves. They didn't have to tell us to cut costs-we did it ourselves. We also went out into the market and increased the sources of debt. So we've done everything we should do, without anybody telling us to do it," he says.

The company made a pre-tax profit of $24m in the first half 2016, compared with a loss of $10m a year earlier, despite a slump in revenues to $0.541bn from $0.82bn. The company's bank facilities, together with $300m of convertible bonds launched in July, mean it has around $1.3bn of headroom in terms of debt facilities, Heavey says.

Know the market

Hedging against a low oil price has helped. Around 38,000 barrels a day of Tullow's oil-around 70% of its entitlement volumes-are hedged at $74 a barrel in 2016 and 31,000 b/d hedged at $65/b. Those prices are well above oil's recent trading range.

Profits would have been higher if not for turret problems on Tullow's 120,000-b/d-capacity Kwame Nkrumah floating, production, storage and offtake (FPSO) vessel at Ghana's Jubilee field, which cut production. (The costs for repair should be covered by insurance.)

Jubilee is pumping oil, albeit less than the 100,000 b/d or so it was achieving before problems arose. Gross average production in the second half of 2016 should be around 85,000 b/d (yielding a year average of 74,000 b/d). Tullow is operator of Jubilee with a 35.48% stake. Its partners are Kosmos (24.08%), Anadarko (24.08%), GNPC (13.64%) and Petro SA (2.73%).

The August start-up of another Ghanaian offshore project, Tweneboa, Enyenra, and Ntomme (Ten), should offset some of the income loss from Jubilee. Having sold its first cargo of oil from Ten to Shell, the company hopes to ramp up production to around 65,000 b/d by the end of this year.

Heavey says Ten's production is unlikely to reach the 80,000-b/d capacity of the field's FPSO until an international tribunal rules next year on a dispute between Ghana and its neighbour Côte d'Ivoire over the position of their maritime border, which is adjacent to the Ten acreage. Reservoir management also dictates that a lower flow rate at this stage will serve the firm better in the future, should it drill more wells in the area following the border ruling.

Tightened belts

While the news-and revenues-from Ghana may be improving, Tullow remains cautious about capital expenditure. Capex in 2014 was about $1.7bn, much of it ploughed into Ten. This year, capex should come in at $1bn, with Ten absorbing 60%.

But next year, the figure could be as little as $275m, with a focus on East Africa, as big spending on Ten winds down. The company is retaining an option to spend another $250m in both East and West Africa, if the business climate improves.

Despite limited financial resources and a difficult funding environment, Tullow wants to keep exploring. Says Heavey: "We're very fortunate because we have a lot of oil in the ground and we have lot of developments. We could, as a business, sit back and say: 'OK, let's just produce the assets that we have, pay off our banks and pay big dividends.' But the dividend institutions that would invest in BP or Shell don't invest in E&P businesses. Those that invest in Tullow and its peer group are investing in capital growth and the best way of achieving that in the oil industry is exploration."

Tullow has plans to expand Jubilee to include outlying deep-water reserves, but approval for that project will not come until mid-2017, at the earliest.

As for other pricey deep-water projects, Heavey doesn't see much scope for now. "Big deep-water or offshore developments that require major capital costs upfront and financing are going to be very difficult, unless you get to oil prices of at least $75/b."

Focused patterns

While a project may look viable to a driller at an oil price of, say, $50/b, cautious banks are likely to insist that the oil price is considerably higher to allow for market volatility and other potential problems, Heavey says.

With that in mind, Tullow's upstream focus in now mainly on shallow water and onshore acreage. "We drilled some [deep-water] wells back in 2013 or 2014, which were $100m-200m each. The wells we are looking at now are between $30m and $45m. We're actually more comfortable now with the shelf edge prospects," says Heavey.

The search for lower-cost exploration has included an overhaul of the company's licences in the Guyana basin off Suriname and Guyana, in South America, where it is now focused on shallow-water prospects.

Heavey is understandably keen to play up the significance of ExxonMobil's deep-water discovery in the Guyana basin, which Tullow claims has de-risked the area.

“Those that invest in Tullow and its peer group are investing in capital growth and the best way of achieving that in the oil industry is exploration”

The US company said in June that a second exploration well on its Stabroek block offshore Guyana had confirmed what it called a "world-class discovery" with a recoverable resources of 0.8bbn-1.4bn boe.

The Araku field, offshore Suriname, which could hold 0.5m barrels of oil, is likely to be Tullow's next exploration target in the region-the estimated cost of a well there is around $45m. Tullow's share would be about $14m, reflecting its 30% operator's stake.

Also relatively cheap to drill is Tullow's onshore acreage in East Africa, though finding commercial reserves in both Uganda and Kenya has proved to be the easy part so far. Getting them out of the ground and taking them to market has been far more complex.

Plans to take both the oil produced by Tullow, Total and their partner Cnooc in Uganda and that produced by Tullow and its partners in Kenya to an export terminal on Kenya's northern coast via a single pipeline collapsed earlier this year.

Total managed to persuade the Ugandan government to take a more southerly pipeline route via Tanzania, leaving Kenya and its oil exporters to make their own arrangements.

Worth the research

Tullow had favoured the single pipeline option, but Heavey puts a positive spin on developments. "It's a lot easier to pick a date when you know there is going to be first oil if you are only dealing with one government. It has pluses and minuses, with the minus being that it's going to be slightly more expensive," he says.

In both countries, engineering studies should begin in 2017, with final investment decisions pencilled in for the following year.

In Uganda, 200,000-230,000 b/d through the pipeline is the target, with an estimated full cycle cost of $25/b, including capex, opex and the tariff. In Kenya the figure is 80,000-120,00 b/d gross production via pipeline, with a full cycle cost of $25-30/b, according to Tullow.

The company estimates the fields that it operates in the South Lokichar basin, near Lake Turkana in northern Kenya, have a resource base of as much as 0.75m barrels, and maybe more.

A 2,000-b/d pilot project is planned for the second half of 2017 to take oil from the field to the coast by road and rail before the pipeline is built.

Heavey says producing oil for the pilot scheme will help Tullow understand the reservoirs better. There's also a social and economic function to be performed there. "Turkana is a pretty remote area, so it will be a gentle way of introducing the oil industry, while we help build local content up there, before we get to the main development."

As with its peers, Tullow's future strategy across its global operations will largely be dictated by the oil price. But Heavey believes it is in much better shape to operate successfully in a relatively low oil price environment.

"You're looking at a very different company than it was two years ago. It's much more streamlined, and it's much more cost effective," he says. "We are moving forward again rather than sideways, which is what everybody's been doing for the past two years."

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