Tullow planned exit complicates Kenya’s petrodollars quest

Tullow’s planned exit from its equity stake in Project Oil Kenya has opened up fresh questions into the country’s future oil exploits.

This is even as the government holds out for a positive outcome from its Early Oil Pilot Scheme (EOPS) with the Anglo-Irish firm expected to deliver its final investment decision (FID) later in the year.

For starts, Kenya will be looking at a new operator on its crude developments should Tullow successfully relinquish its stake in the project whose stake currently stands at 50 percent.

“It changes the whole outlook for the Kenyan project. This is an adjustment to the entire national outlook,” Platform for Oil and Gas Coordinator Charles Wanguhu told Citizen Digital in a January 24 interview.

Originally, Tullow had planned to overhaul its equity investment in the project to the tune of 30 percent in an announcement made in November last year.

According to the operator whose correspondence was backed by Petroleum Principal Secretary Andrew Kamau, the potential exit of Tullow has always been up in the air with the plan being drawn on the trim to equity holding before the FID.

“Tullow has always said that we would farm down before the final investment decision. This is the start of the process,” the operator said in response to media queries on the project’s exit.

While news on the potential exit has been read as doom to Project Oil Kenya, Wanguhu argues the quest for petrol-dollars by Kenya may not have entirely sunk as the sale presents the potential entry of a larger player.

“It’s not all doom and gloom yet. You are looking at a majority shareholding on offer as both Tullow and Total puts up their stakes for sale together. As such, this is one solid block which would be attractive to a bigger investor,” he said.

Not an easy road

The enlisting of Natixis to run the joint selling process, reported first by news agency Reuters comes on the back of a challenging year for Tullow which saw both the Group’s Chief Executive Officer Paul McDade and exploration director Angus McCoss step down.

Tullow has had to cut back on its 2020 production expectations to between 70,000 and 80,000 barrels per day (bopd) following technical challenges and anticipated decline in stocks for its ongoing Ghana operations.

Further, Tullow’s exploits in Guyana have been surprisingly underwhelming with results yielding samples with a high sulphur content to shade the oil’s commercial viability in a climate change conscious market.

As a result, the combined matters of concern have seen Tullow adopt a conservative out turn on future production and capital expenditure (CAPEX) in subsequent years with generated free cash flows for instance being expected fall by half in 2020.

The firm has already suspended its dividend pay-out for the period as it undertakes a considerable review of its business.

“The board has been disappointed by the performance of Tullow’s business and now needs time to complete its thorough review of operations,” said Tullow’s Executive Chair Dorothy Thompson.

Tullow’s sale of equity in Kenya may one hand serve to unlock some much needed capital to reinvest in future developments.

Nevertheless, the proposed exit is hardly an automatic process with the government potentially standing as a road block to a deal.

Routinely, grand transactions of that nature almost certainly accompany major claims from government including unforeseen tax demands.

Already, Tullow has faced a tax related shutdown in Uganda after failing to agree on all aspects of tax treatment of its proposed farm down to Total and the China National Offshore Oil Corporation (CNOOC) in 2019.

Managing expectations

The potential entry of a larger player as Project Oil Kenya operator may in part lead to a more efficient development project by optimizing scale efficiencies and leveraging on easier decision making from the reduction in shareholding.

Kenya remains with open options to tapping a new operator with the closest from the pool being the China National Chemical Corporation (ChemChina) which owns the ChemChina UK Limited, the subsidiary which made the purchase of Kenya first batch of crude in August last year.

Other firms on the board include the China Petroleum and Chemical Corporation (Sinopec), the Royal Dutch Shell and ExxonMobil.

Nevertheless, the managing of expectations remain pivotal as Kenya’s oil exploits remain in large part-modest.

“The new developments allow for a reality check on petrol dollars. We are not going to be a big crude State as revenues won’t make a major difference to the economy. What we require is an efficient process in extraction,” added Charles Wahungu.

From an estimated reserve of 560 million barrels, Kenya stands to fetch a mere Ksh.3.4 trillion in revenues from the prevailing market price of Ksh.6054.88 ($59.89) per barrel of Brent.

The earnings which are exclusive of represent a mere 32.7 percent of Gross Domestic Product (GDP) in 2019.

Further, Kenya can draw lessons from higher grossing oil producers who have begun diversifying investments from the oil and gas sector as climate change sentiments take a foothold as investors shy away from the sector.

Giant crude producer Saudi Arabia for instance struggled to attract foreign investors during its public listing of the Saudi Aramco- the national petroleum and gas company forcing the government to opt for a domestic listing in its quest to unlock funds for post-oil developments.