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Tullow Share Collapse Leaves Turkana Oilfields Uncertain as Kenya Officials Await Briefing

GBR Team 09/12/2019

The Kenya Government wants to hear from the new Tullow Oil management regarding the future of the Turkana oil fields which are to be jointly developed between the two parties.

This, after Tullow Oil’s market value crashed earlier today on the London Stock Exchange following a management shakeout, and material concerns, regarding the credibility of its past guidance to investors about its financial position, emerged.

This potentially throws into a tailspin plans for a US$3billion (Sh300billion) project for the joint development of the Turkana oilfields and pipeline between the Government of Kenya and Tullow Oil among others.

Dubbed Project Oil Kenya, it is meant to drill an estimated 321 oil wells in three of the ten fields where Tullow Oil and partner Africa Oil have discovered commercial entities of crude.

“The best people to tell us is Tullow themselves,” a senior ministry of Energy official said to GBR of the threat to Project Oil from Tullow’s woes. “We are waiting for the new management to tell us.”

He did not wish to be named as matters of policy are left to the Cabinet Secretary and the Principal Secretary, Petroleum and Mining.

Calls and texts to the CS Petroleum John Munyes by GBR went unanswered.

Paul McDade, the CEO Tullow Oil (pictured) and Angus McCoss, Exploration Director, were pushed out yesterday by the Board amidst what the Financial Times quoted as a loss of “operational and exploration credibility.”

Besides talking up their exploration progress according to analysts, the company revealed that oil from its Guyana fields would be costlier to recover as it contained a lot more sulphur than initially what investors were led to believe. The company also revealed it would recover lower amounts of oil from its Ghanian fields than it had expected.

The news sent Tullow’s share plunging more than 70 percent (a Sh188bn wipeoff in value) on the London Stock Exchange and the company is now valued only at about Sterling 565m (Sh74bn) down from a high of Sh1.9 trillion in 2012.

This would rank Tullow sixth on the Nairobi Stock Exchange by market capitalization ahead of Barclays Bank of Kenya and just behind Standard Chartered Bank.

Analysis: Kenya’s Concerns

While a consultant for Project Oil Kenya said they expect to continue work as normal until they hear from the new management, several concerns will arise for Kenya from this news.

Potential buyout of Tullow

Investors now think Tullow may not be able to attract sufficient equity from making a cash call (rights issue) to shareholders and may need to bring in a buyer. This is also considering its current debt levels at about $2.9bn (Sh220bn) and a projected fall in free-cash flows from $500m (Sh50bn) to $175m (Sh17.5bn).

Such negotiations may put on hold development plans of its Turkana Oilfields with concerns over delayed development of its Ugandan fields amidst tax disputes with the government also playing a part in depressing its stock in recent days.

In case of a buyout, Kenya Revenue Authority, and the Government will especially be keen about the Cost Audits of the amount the company has spent so far in its upstream work. Tullow and its partners, Total and Africa Oil say they have so far spent $2.2bn (Sh220bn) in exploration and appraisal work and a cost audit to determine if that is the amount that has been spent is currently going on.

Africa Oil and Total’s positions will also be of keen interest in government on this matter as commercial agreements especially on shareholders’ contribution to full-field development activities are yet to be negotiated fully.

Also, after the exploration phase, it is expected that a Final Investment Decision (FID) will need to be taken in the coming year and the Government is a 20 per cent partner in the development phase which is meant to cover both the drilling for oil upstream and the construction of a pipeline to take the crude oil to the Port of Lamu for export.

Definitive Commercial Terms – Because the front end engineering and designs part of the project is almost complete, and the project was expected to be sanctioned by all, attention will no doubt turn to the long-form Terms of Commercial Agreements between the Government and its partners that were expected to be negotiated in the coming year.

While the Kenya Government had already agreed on principle on the transaction terms also called Heads of Terms, those generally are not legally binding and the long-form definitive commercial terms may now end up being negotiated on different reasoning.

Specifically likely to raise concern is the actual ability to carry out full field development of the three oil fields where the foundational phase of drilling for oil is expected to take place. This is because unlike the pipeline project, this is a fully equity-funded (by shareholders) including the Government, Tullow and Total. Concerns may now be raised about Tullow’s ability to meet its equity part if it is not assumed to come from its stated initial costs of exploration.

Other timelines that may be affected include the raising of project financing for the crude pipeline. This is expected to be done purely commercially from commercial banks and export credit agencies with equity stake expected to be only 30 per cent.

Any concerns with the upstream partner companies may delay this or make it more expensive especially since the government no longer provides sovereign guarantees for such projects.

Supporting projects on the ground like land and water acquisition with the West Pokot and Turkana County governments may also warrant some attention.

Finally and more generally, International Investment Agreements that Kenya in general has entered, and especially Bilateral Investment Treaties need to be looked at as these are mainly crafted to protect international investors while leaving countries like Kenya vulnerable to international litigation should investors fail to keep up their end of the bargain and governmental action is required. The Energy Sector has seen too many international companies end up costing the country billions of shillings in costly litigation and arbitral awards.

Kenya did win in arbitration against Canadian mining prospector Cortec but it is yet to put in place a more modern legal regime like the South African Protection of Investments Act. While negotiating the full commercial terms, it may be an issue that the government may want to consider.