Geza Ulole
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- Oct 31, 2009
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Tullow seeks state agreement on Turkana costs
Tullow seeks state agreement on Turkana costs
The project has resumed after a five-month halt, but doubts are growing over its future
Tullow Oil’s longstanding ambition to sell part of its stake in Kenya’s much-delayed Turkana crude project may depend on the Anglo-Irish firm agreeing state compensation for its development costs.Kenya’s Turkana oil reserves, discovered in 2012, are estimated at 560mn bl. Tullow owns 50pc of the project, while its partners, Canada’s Africa Oil Corp. and Total, each hold 25pc.
A top Tullow executive told Petroleum Economist last year that FID would likely happen in the second half of 2020, having signed heads of terms with Kenya last June, but this year’s oil price slump has again placed the project in doubt.
“I do not know how long the audit process will take. We need a viable project first”, Tullow
In August, Tullow and its partners withdrew a force majeure notice, declared in May, as Covid-19 restrictions eased and the government confirmed tax incentives would continue to apply.
Tullow described as “ludicrous” a Kenyan newspaper report claiming it had asked for KES204bn ($1.88bn) in compensation from Kenya’s government in lieu of exploration costs incurred from 2012 onwards.
“We have submitted our expenditure for audit ahead of cost recovery as and when production starts, but clearly we only recover our costs from production as per [the] licence,” says Tullow.
On the government response to its submission, the company says: “We are going through a process—an entirely normal process that happens in all oil producing countries—to agree what costs are covered.”
Tullow expects to reach an agreement with the Kenyan government, adding “the joint venture has spent circa $2bn in Kenya since 2011. We would look to recover a considerable part of that plus development costs as part of cost recovery. I do not know how long the audit process will take. We need a viable project first.”
Test case
These negotiations will be the first significant test for Kenya’s 2019 petroleum and energy bill as well as the authority and capacity of the fledgling energy regulator, says Edward Hobey-Hamsher, a senior analyst at consultancy Verisk Maplecroft's Africa Risk Insights team.“If the two parties cannot agree, the base-case scenario is that Tullow seeks international arbitration, a right enshrined in the petroleum act,” he says.
“A lengthy drawn-out case would re-establish perceptions of Kenya prior to the legislative reforms as a frontier market unprepared for IOCs engaged in latter-stage exploration and production. It would also hasten the planned divestments and farm-downs of Tullow and Total, while deterring new market entrants.”
$895mn – Drop in value of Tullow Kenyan assets
The lack of export infrastructure remains the biggest challenge to the Turkana project, according to Hobey-Hamsher, with Turkana’s oil slated to be transported from the 4.33km2 oil production and processing facility to Lamu port in northern Kenya via an 820km, $1.1bn pipeline.
The pipeline’s route and capacity has still to be agreed, and the connection is unlikely to be commissioned before 2027, consultancy Wood Mackenzie estimates. Tullow had hoped to complete it in 2023.
The company, which in its half-year results slashed the value of its Kenyan assets to $295.4mn from $1.19bn a year earlier, has suspended plans to sell a 15-20pc stake in Turkana “pending a comprehensive review … to ensure it continues to be robust at low oil prices, and also consider the strategic alternatives for the asset”.
Tullow has also delayed FID.
Total to exit?
Total, which did not respond to requests for comment, has refused to commit its share of the Turkana budget for the 2020 financial year, according to Kenyan media. The French major has also threatened to quit Kenya, Africa Intelligence reports, citing a company letter to Kenya’s petroleum secretary.“Total and Tullow want to at least farm-down their Kenyan interests, which is not the greatest signal,” says Conor Ward, an upstream analyst at research and consulting firm GlobalData Energy. “Total is the largest, most stable of the partners, so if they farm out completely then this project will likely face increased financing hurdles."
FID is now likely in 2022, according to both Hobey-Hamsher and Ward.
“From our valuations, this is quite a good project,” adds Ward. “If oil prices return to 2019 levels next year, they should attract some more interest from other companies.”
Tullow seeks state agreement on Turkana costs
The project has resumed after a five-month halt, but doubts are growing over its future
www.petroleum-economist.com
MY TAKE
Kuna nchi inachezwa hapa baada ya Total executives kuwa part of decision board on Lokichar-Lamu pipeline saahii GoK ina deni la kuilipa Tullow Kenya halafu Total inakataa ku-commit kwenye mradi!
CC: Tony254
