Tullow cuts production forecast and delays FIDs
The Africa-focused oil firm is struggling with technical problems and protracted negotiations with host governments
Tullow Oil has revised down its production forecast for the full year 2019 due to drilling problems in Ghana and the timing of final investment decisions (FIDs) for other projects in Kenya and Uganda, in which has a stake, remain highly uncertain.
On announcing its first half results today, the London-based company stated that it now expected its share of oil production from West Africa—where all its producing assets are located—to be in the 89,000-93,000bl/d range for the full year 2019. It had estimated 93,000-101,000bl/d at the start of this year.
Most of Tullow's production comes from Ghana, where it operates the Jubilee and TEN developments. The firm's other production comes from non-operator stakes in blocks in Gabon, Cote d'Ivoire and Equatorial Guinea.
Ghana TEN delay
Tullow had expected production from its Enyenra-14 well on the TEN field in Ghana to come onstream this year, but the company has so far been unable to resolve mechanical issues related to deviated drilling in the well. As a result, gross production from the TEN field is now expected to average 63,000bl/d in the full year rather than the 83,000bl/d Tullow predicted in February.
"We're very pleased the government is being flexible in that discussion, coming to really good compromises with the private parties" — McDade , Tullow
Tullow chief executive Paul McDade said that, as the timescale for the repair was unclear, the company had decided to take Enyenra-14 out of its full-year forecast. He added that he was confident that the well would eventually start producing.
A problem with the Enyenra-10 well earlier this year led to lower than expected first half gross production from the TEN field of 61,500bl/d, though this has since been rectified and the well is said to be producing normally.
Tullow made a profit after tax of $103mn in the first half 2019 on revenues of $872mn. By contrast it made a profit after tax of $55mn on sales of $905mn in the first half 2018.
Capital expenditure in the first half totalled $248mn, with full year capex forecast to be $570mn.
Pressure on Uganda
Tullow hopes to boost production in future through its stakes in projects approaching FID in Uganda and Kenya, but, while both could get the green light within the next 18 months, progress is far from guaranteed.
Uganda continues to provide headaches for the company. It remains mired in a long-running tax dispute with the Ugandan authorities, which has prevented it selling part of its 33pc stake in a project covering blocks around Lake Albert. Tullow wants to reduce its stake in the development to 11pc by farming out to operators Total and Cnooc.
McDade told Petroleum Economist today that Tullow would not be prepared to consent to FID on the project while its stake remained at its current level. Meanwhile Total has indicated that other conditions to enable a FID could be in place by the end of 2019.
"The main message we are trying to send to the government, as much as anyone else, is that we won't go through FID at 33pc. We will get down to 11pc," he said.
89,000-93,000bl/d — Tullow's 2019 projected production
The alternative to reaching a settlement on the current tax dispute, he said, would be to restructure the proposed deal and restart the fiscal negotiating process. But this route would take much longer.
"We don't believe that this is truly in anyone's interest. All it is likely to do is delay the project, and therefore delay all the benefits of inward investment. And, ultimately, the cash flow from the project to the country," he added.
Another potential stumbling block for Ugandan oil exports is the failure so far of the Ugandan and Tanzanian governments to finalise an accord over the terms for the construction of a £3.5bn ($4.4bn), 1,445km pipeline to take the oil from landlocked Uganda to the Tanzanian port of Tanga. Total believes that any outstanding issues could be resolved by the end of 2019, according to McDade.
Uganda may also be increasingly keen to resolve outstanding issues surrounding the developments, given it needs to reassure investors that the oil sector is viable if a licensing round launched in May 2019 is to be a success.
Further Kenya FID delay
Tullow has again revised the proposed date for FID on its planned oil development in a remote area of northern Kenya near Lake Turkana, this time to the second half 2020. The firm had previously aimed to make the decision in late 2019, before stating, as recently as June, that it was moving FID to an unspecified time in 2020.
The delay is little surprise, given the company had described its earlier FID dates as ambitious and has been involved in protracted talks with the government over the project's financial viability, which effectively delayed progress on other aspects of the project.
McDade said the signing of a heads of terms on the project with the government in June was a positive step, accommodating Tullow's aim of ensuring that the project would provide "a good investable return" at $50/bl.
"We're very pleased the government is being flexible in that discussion, coming to really good compromises with the private parties, getting a good agreement in place that gives us the fiscal protection at low prices that underpins the project," he said.
The project, which could produce up to 100,000bl/d, involves the construction an 800km pipeline to an export terminal at Lamu on Kenya's northern coast. The cost of both upstream facilities and the pipeline has been estimated at $3bn. Tullow also expects to reduce its 50pc stake in the main Kenyan producing blocks prior to FID. Its partners are Africa Oil and Total.
Company executives are saying little at this stage about its prospects in offshore Guyana, where it is carrying out a three-well drilling campaign this year on acreage it operates adjacent to the multiple discoveries made by ExxonMobil.
Exploration success in Guyana could create a capital allocation dilemma for Tullow, which is also keen to pursue further exploration and production activity around its existing production areas in Ghana.