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No quick fix for Tullow

The embattled producer warns of another year of sluggish production and project hold-ups

Anglo-Irish independent Tullow Oil has downplayed hopes that the new year could signal swift rejuvenation—after its 2019 annus horribilis where a series of production downgrades, potentially uncommercial discoveries offshore Guyana and continuing delays to key African projects drove the firm’s share price down by over 80pc, the largest nose-dive in the company’s history.

Full-year 2020 output is projected at around 75,000bl/d oe, a drop of almost 10,000bl/d oe from current full-year 2019 figures, according to the firm’s latest operational update. And production forecasts had already fallen behind previous projections. Back in 2018, the firm promised net output of around 100,000bl/d oe net for 2019—with Ghana delivering c.180,000b/d oe in gross production—and a maximum combined gross potential of 330,000bl/d oe from Kenya and Uganda.

Serious setbacks across its portfolio have undermined these ambitions crashing. Ghanaian production from the Jubilee and TEN fields was repeatedly downgraded last year, marred by water injection and gas handling problems. This year, the tie-in of the J-54 water injector well at Jubilee is underway, but further maintenance downtime is scheduled for the end of January to boost gas processing capacity.

Source: Tullow * 2019 included Jubilee production-equivalent insurance payment of 2,000bl/d oe

At TEN, a production well on the Ntomme field has begun and will be tied-in at the conclusion of the first quarter. Both fields’ production profile is now projected to remain flat until end-2022, offset by newly drilled wells, before natural decline begins to erode output. 

Stagnant growth

Tullow thus desperately needs some of its development projects to break its way but has suffered more ill-fortune. The early oil pilot scheme in Kenya, which transports crude out of the Ngamia and Amosing fields in the South Lokichar basin to Mombasa, was suspended in January following devastating floods across the country. Production had been at 2,000bl/d oe and reached a milestone in August with the first ever oil cargo from East Africa.

The Kenya Development Plan for the South Lokichar Development project was targeted for late-2019 FID but is still in the negotiation stages with the Kenyan government. The joint venture is projected to flow 60,000-80,000bl/d oe and pump crude through a newly constructed export pipeline to the coastal town of Lamu. More positive news out of the Nairobi administration would be welcome for Tullow.  

It could also do with a more amenable host government elsewhere in east Africa. Its Uganda joint venture, where Tullow had hoped to reach FID by mid-2019, remains stalled. After Kampala rejected its $900mn farm-down to Total and China’s Cnooc, Tullow must either swiftly come up with a new plan to deliver the stake reduction it has made a condition of taking FID or consider changing tack and trying to take the project forward before agreeing its dilution.

Filling the void

Falling crude production across 2019 has had an alarming impact on the company’s finances. Full-year revenue is predicted to total $1.7bn in 2019, a fall of $159mn year-on-year, while gross profit is expected to be just $0.7bn—a $382mn decline from the previous year.

Re-appraisal of the average oil price, from $75/bl to $65/bl, triggered a net write-off cost of $1.3bn post-tax, mainly to its Kenyan and Ugandan assets. In comparison, Tullow’s write-off costs the previous year totalled $246.3mn, primarily related to the Wawa and Akasa assets in Ghana. 

The potential for major offshore Guyana oil discoveries to boost both Tullow’s reserves and share price also disappointed. High sulphur content from the Jethro and Joe prospects and low net pay from the Carapa well meant all three offered no immediate guarantee of commerciality.

Source: Tullow

Tullow says that, until the results from the drilled Carapa well, in the Kanuku block, are processed, there will be no more exploration in the promising province. “In terms of further Guyana drilling this year, we really do need to integrate that real-world data that we have got from our three wells into our various models,” Mark MacFarlane, Tullow’s chief operating officer, told the company’s trading update conference call. “So, it is unlikely that we will be drilling any Guyana wells this year.”

With no prospect of an imminent Guyanese exploration success boost to its equity performance, Tullow’s Latin American win hopes may focus on neighbouring Suriname. Tullow plans to drill the Goliathberg North prospect in Block 47 in the second half of 2020—its prospects potentially buoyed by the January announcement by US independent Apache of a light oil discovery in Block 58, proving the extension of high-quality crude across the Guyanese maritime border. On the other hand, Tullow drilled the Surinamese Araku well in Block 54 in 2017, but returned no oil.

The company also expects to spud the Marina prospect offshore Peru, in Block Z-38, at the end of January, taking around 60 days to complete. The prospect sits adjacent to the prolific Talara basin on the northwest section of the Peruvian coastline.

Tullow tries to remain optimistic, despite the headwinds that have buffeted it. “The board and senior management are confident of the long-term potential of the portfolio and see meaningful opportunities to improve operational performance, reduce our cost base, deliver sustainable free cash flow and reduce our debt,” said Dorothy Thompson, Tullow’s executive chairwoman, in the firm’s operational update statement. 

Source: Petroleum Economist
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