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Troubles at Tullow put in doubt Kenya oil export promise

Troubles at Tullow Oil could derail Kenya’s fledgling local oil industry. The London-based company is facing governance issues while its partner in Lokichar Africa Oil is in financial woes.

Even as Kenya exported the first shipload of oil that earned the country Sh1.2 billion, there appears numerous landmines on the road to commercial oil. Some are surprises while others could be avoided but the players stubbornly look the other way.

The firm, expected to deliver Kenya’s oil promise, in early December announced changes in management. The firm’s chief executive and director of exploration quit and its board accused them of overseeing a series of blunders in the different operations where the UK based oil firm has a presence. Particularly, mistakes that led to the decline of oil production in Ghana.

“Production performance has been significantly below expectations from the group’s main producing assets, the TEN and Jubilee fields in Ghana,” said the firm in a statement.

“The Board has been disappointed by the performance of Tullow’s business and now needs time to complete its thorough review of operations.”

The challenges that Tullow faces could haunt Kenya. The Lokichar project has already experienced challenges that have resulted in pushing the date for first oil export from an optimistic 2021 to 2022 and now a doubtful 2023.

The project is currently at a critical stage in the Kenyan project, where Tullow together with its joint venture partners (Total and Africa Oil) as well as the Government, are preparing the Final Investment Decision (FID) in the second half of 2020.

The FID was expected to be signed in the course of last year but pushed to 2020 owing to the project’s failure to achieve key milestones before the partners can commit.

At FID, the different partners will make commitments on what they will bring to the table to facilitate the development of the oil fields, pipeline construction and other infrastructure.

The firm might also have difficulties raising funds to carry forward its work in Kenya after rating agency Moody’s downgraded Tullow’s rating. It reviewed the firm’s Corporate Family Rating to B2 from B1 and probability of default rating (PDR) to B2-PD from B1-PD.

The downgrade might affect its capability to access loans at friendly terms, a disadvantage considering the stage of Project Oil Kenya, where the partners are expected to go to the market seeking funds to start the field development plan.

“The outlook on all Tullow’s ratings was changed to negative from stable,” said Moodys. “The negative outlook reflects the uncertainty affecting Tullow’s future prospects ahead of the completion of the review of operations currently underway and the appointment of a new chief executive.”

Also standing in the way of Kenya and petrodollars are the construction works for both the oil fields and the pipeline that may delay the project.

According to the Environmental and Social Impact Assessments for both the oil fields including the oil processing facility as well as the crude oil pipeline, construction will take three years after the award of the contracts. Assuming these are given in the course of 2020, the oilfields, the earliest Kenya can start the production will be in late 2023.

“The Lokichar to Lamu Crude Oil Pipeline (LLCOP) Project is anticipated to take 33 to 36 months to construct from EPC contract award and the operational life is expected to be 25 years,” said the ESIA report for the crude oil pipeline, which was lodged with Nema in November.

A separate ESIA report for the oilfields, which is in its draft form and expected to be filed with Nema early 2020, “the duration to the Project First Oil (FO) is approximately 36 months from commencement of construction.”

The National Land Commission has commenced the process of acquiring land that will be used for the pipeline and the oil fields, which will be part of the Lamu Port South Sudan Ethiopia Transport (Lapsset) Corridor.

Land acquisition is usually a lengthy and protracted process and could delay the project. Tullow recently said 75 per cent of the land surveys and valuations have been completed by the National Land Commission.

Listening to community representatives also paints a picture of a community that is unaware of the level of disruption they will have to grapple with once the companies start implementing the commercial phase of the project.

This is slowly dawning on some people on the impact that the project will have in terms of blocking their grazing lands and now claim they have not been prepared by both the company and the government.

“Before the oil exploration started, we would traverse the land without being asked questions. I could move all the way from Turkana East to West… in fact, there was never a major distinction between a person from Turkana East or West but today, people are increasingly aware of where the other person is coming from. It never meant much that I came from Turkana East but now it does,” said a Turkana resident during a recent forum on oil.

“Today, there are areas you cannot graze your livestock or walk freely. This is the impact that the project has had and Tullow has just sunk 40 wells, I cannot imagine what 300 wells will do to us.”

Tullow and its partner Africa Oil in Lokichar are also having a fight with KRA over unpaid taxes, which is demanding over Sh10 billion from the two companies. KRA says the two firms did not pay taxes after selling their stake in different oil between 2012 and 2018.

The taxman is demanding Sh5.2 billion from Tullow in Value Added Tax (VAT), which KRA said Tullow ought to have paid following the sale of its 25 per cent interest in Block 12A to Delonex Energy in 2015 and a further 10 per cent in 2018, to the same firm.

Tullow has disputed the demand with the case currently at the tax appeals tribunal. Block 12A in Elgeyo Marakwet County is now 60 per cent owned by Delonex Energy, which is now the block’s operator.

Preliminary exploration by Tullow in 2016 showed the block has the potential to become a key oil block. After drilling the Cheptuket-1 well, the firm said it encountered oil shows and termed the find as the ‘most significant well result to date in Kenya outside the South Lokichar basin’.

It is also the same with Africa Oil, which sold a 25 per cent stake in the Turkana oil blocks to Maersk in 2015, which was later acquired by Total.

In its latest financials for the quarter to September, Africa Oil noted that KRA is demanding Sh5.15 billion ($51.5 million) from its Kenyan arm in corporate income tax and VAT relating to farm-out transactions completed during the period 2012 to 2017.

“The company has objected to the assessment and is prepared to appeal any further claims made by the KRA in regard to this matter. Management has determined that based on the facts and Kenya tax law that the probability of paying the assessed tax is low,” said the firm in disclosures to investors.

Other than the tax demand, Africa Oil, headquartered in Canada, could also be a weak link among the joint venture firms in the Project Oil Kenya. It noted that it might not have adequate funds to finance the upstream works as well as the pipeline to Lamu, which are estimated to cost Sh300 billion, with each of the three firms as well as Government expected to chip in.

The firm said it might have to sell its stake in the Lokichar oil fields to find required cash.

Africa Oil sell stake

“The Company’s current working capital position may not provide it with sufficient capital resources to complete development activities being considered in the South Lokichar Basin (Kenya),” it said when it published the financial results to September 2019.

“To finance its future acquisition, exploration, development and operating costs, Africa Oil may require financing from external sources, including the issuance of new shares, issuance of debt or executing working interest farm-out or disposition arrangements.”

“There can be no assurance that such financing will be available to the company or, if available, that it will be offered on terms acceptable to Africa Oil.”  

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