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Tullow buys Hardman, but Kudu stalls

UK-LISTED explorer Tullow Oil has agreed to buy Australian junior Hardman Resources for A$1.47bn ($1.1bn). The deal will boost Tullow's reserves by 30% and strengthen its position in Mauritania and Uganda. The two firms are already partners in Uganda and together discovered first oil in the Albertine basin earlier this year.

At the same time however, Tullow has suffered a setback in Namibia, where, not for the first time, its Kudu gas-to-power scheme has come unstuck. The firm admitted early last month that it is struggling to reach critical gas- and power-sales agreements with local groups, despite protracted negotiations.

In a 25 September statement, Tullow said it would pay A$2.02 for each Hardman share. The deal is backed by the Hardman board, with shareholders offered the choice of taking either cash or shares in the new company. Analysts have described the Hardman deal as a little on the pricey side, but said it offered Tullow good potential for growth.

Tullow chairman Pat Plunkett described the acquisition as a great strategic fit for the company, which has interests in 17 countries, spanning Europe, South Asia and Africa. Hardman is especially strong in Africa, where it also helped pioneer the development of Mauritania's embryonic oil sector. "The Hardman Resources team has built up a business with exposure to high-impact assets," Plunkett said.

The transaction – still subject to shareholder approval, which is expected in December – would add some 6,000 barrels of oil equivalent (boe) a day to Tullow's production figures. The UK firm said recently that its oil production – excluding the contribution from Hardman – was likely to climb to 75,000 barrels a day (b/d) by year-end and to reach 80,000 b/d by the close of 2007. Production from Africa represents close to half of Tullow's existing output.

The deal will also inject fresh momentum into Tullow's exploration strategy, adding 16 new wells to the firm's 2006/07 campaign. As well as establishing full operational control in the newly proved Albertine basin in Uganda, it will also deliver a sizeable full-cycle business in Mauritania, where Hardman has a 19% stake in the producing Chinguetti field. Despite some oil-flow problems at the field, with output far short of targets, Chinguetti has contributed strong cash flow to the Hardman books. Hardman's other upstream assets include Tanzania, the Falklands and French Guiana.

In Namibia, meanwhile, Tullow intends to develop the 1.3 trillion cubic feet (cf) Kudu field to feed an 800 megawatt combined-cycle power plant in the country, from which surplus electricity will be sold to neighbouring South Africa, which is experiencing energy shortages. But Tullow's chief operating officer, Paul McDade, has told Reuters that talks with power offtakers are "proving more challenging" than expected. Failure to pin down agreements with the Namibian state-owned power firm, Nampower, and South Africa's state-owned Eskom are now "the most significant challenge" to the project schedule, McDade said.

At the start of this year, the company described 2006 as an "important year" for the project. But it now looks as though no formal agreements will be in place until 2007 at the earliest. The gasfield development has been dormant since Kudu's discovery in the 1970s, despite attempts by companies such as Shell and Chevron to breathe life into various project ideas, including a possible liquefied natural gas (LNG) venture.

Attention is shifting to a two-well, appraisal drilling programme, starting in March, to firm-up additional gas reserves. The first appraisal well is planned for the Kudu East area. If successful, Tullow says this will "open up a multi-trillion cubic feet play", which will be further appraised with the second well.

Tullow claims Kudu could hold as much a 9 trillion cf in upside and that boosting reserves might unlock other development scenarios, including revisiting the LNG plans. The power project, however, remains the key area of focus for the commercialisation of the reserves, Tullow stressed. A pipeline to channel gas to South Africa through Namibia has also been suggested in the past.

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