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Tullow hopeful of Kenya FID this year

The operator remains positive, but the future of Kenya’s first oil development remains very uncertain

Tullow Oil says that FID on the Turkana oil development in northern Kenya is still possible by the end of the year. However, the project’s operator has said it needs to farm-down at least part of its 50pc stake if the project is to proceed and the cash-strapped company could yet exit the project altogether.

Tullow and its partners Total (25pc) and Canadian-registered Africa Oil Corp (25pc) had hoped to take FID by the end of 2019.  This was put back due, in part, to a lengthier-than-expected process by the Kenyan authorities. Heads of terms with the government, covering legal, tax, transportation and regulatory issues, were signed in June 2019.

Besides oil production in the remote Turkana region’s South Lokichar Basin, the development includes an 820km pipeline to the coast at Lamu. The total cost could run to more than $3bn.   

Tullow spokesman George Cazenove says the company believed the project was making headway and FID in 2020 was possible. “It is progressing. Our two targets are to farm-down our stake and to get FID done by the end of the year. We are on track for both and, while the FID is ambitious, it is doable,” he tells Petroleum Economist.

Challenges mount

Making major progress will be challenging. Tullow stated last year it wanted to reduce its stake in blocks 10 BA, 10 BB and 13T to around 30pc, while Total is seeking to reduce its stake by around half. The firms are working with French investment bank Natixis to coordinate a joint sale.

The project’s future has been further complicated by Tullow’s dire financial position, exacerbated by production problems in Ghana and poor exploration results in Guyana. This led to the departure of chief executive Paul McDade and exploration director Angus McCoss in December, and a collapse in the company’s share price. The outcome has been swingeing cutbacks in spending and staff levels globally, including in Kenya where Tullow’s local workforce is being reduced by some 40pc.  

“Our two targets are to farm-down our stake and to get FID done by the end of the year. We are on track for both” Cazenove, Tullow Oil

The government, nonetheless, remains upbeat. Petroleum principal secretary Andrew Kamau has said he believes Tullow’s problems outside of Kenya will not adversely affect investment in the project.    

However, it is not certain that Tullow would restrict its farm-down to a 20pc stake, given its need for cash, and could even sell its entire stake in the project if it can find a buyer, according to industry sources close to the project. Should Tullow relinquish its role as operator, further delays to the project seem likely.

Total is unlikely to be a contender to take over, given it has been seeking to cut its stake. It had never been a strategic investment for Total, having inherited it through its acquisition of Maersk Oil. Maersk originally acquired the stake through a farm down from Africa Oil, which has been investing more heavily in other areas of Africa.  

All outcomes are believed to remain on the table, including Tullow’s continued operatorship and the partial sale of the Tullow and Total stakes to one or more buyers.

If a 2020 FID does look possible, Tullow would be reluctant to give up on a stake in a project which could be generating badly needed oil revenues for it in 2023-24, assuming pipeline construction starts in 2021. The blocks, which are estimated to hold around 560mn bl of proven and probable (2P) reserves, are seen producing c.30,000-40,000bl/d initially, potentially rising to 100,000bl/d.       

Early oil pilot on hold

Meanwhile, an early oil pilot scheme (EOPS) to take small quantities of oil already produced in the South Lokichar Basin to Mombasa by truck remains suspended, after roads in northern Kenya were washed out by flooding in January. They will not be resumed until all parties are happy the roads have been repaired to a safe standard. The first cargo of South Lokichar crude (240,000bl) was exported from Mombasa in August 2019. Around 150,000bl from the EOPS are currently in storage in Mombasa.    

Source: Petroleum Economist
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