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Business
In just three months, shareholders have lost Sh180.6 billion in paper wealth.

Perhaps Tullow Oil Plc, the company at the heart of Kenya’s much-hyped oil fortune, is a fraud.

Perhaps the British oil explorer is just unlucky – business in the world of oil and gas exploration has not been impressive.

In fact, the sharp drop in the global prices of crude oil has cast a dark shadow on Tullow’s financial prospects.

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The result has been a violent shake-up of its C-suite, which has in turn led to a bloodbath at its counter at the London Stock Exchange.

In just three months, shareholders have lost Sh180.6 billion in paper wealth.

The shockwaves have crossed the Atlantic, hitting Kenyan shores hard, with Tullow’s local subsidiary, Tullow Kenya, announcing staff cuts. Globally, the firm is expected to put 300 employees on the chopping block.

Tullow Kenya Managing Director Martin Mbogo said the restructuring is group-wide and informed by Tullow’s announcement in December that its global oil production and associated revenues in 2020 and beyond would be lower than forecast.

“In Kenya, the team will be reduced and will only be focused on the critical path activities that will allow us to continue to target FID (Final Investment Decision) at the end of 2020,” said Mr Mbogo.

Slipping away

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Tullow may just rise from financial ruin and guide Kenya into the long-awaited economic bliss that comes with being an oil exporter – few Kenyans believe this, though.

People are disgruntled and have taken to social media to rail at the Tullow project, calling it a scandal. Perhaps there was no commercially viable oil after all, they claim.

Indeed, nearly nine years after Kenya’s 2012 announcement that it had struck oil, the dream seems to be slipping away.

For three decades, Tullow has been more than just an oil explorer; it has been an alchemist of sorts, a Biblical David that has outwitted many Goliaths by turning impossibilities into possibilities.

Where oil and gas behemoths such as Shell, BP, Exxon, Total and Chevron only found traces of oil in Turkana, the British explorer found relatively high deposits of the mineral.

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The oil find, said Tullow, could be monetised, catapulting Kenya into the league of oil-exporting countries.

But now, some experts have cast doubt on the size of the country’s oil reserves, and poor global prices of the commodity have added to the gloom.

Further, the government and Tullow are yet to decide on how commercial oil production will proceed.

There is also no infrastructure for extracting oil on a large-scale basis, and the project is not backed by a vision on how this new oil wealth can be realised.

Even worse, Tullow’s finances are now in a shambles. But the firm, which traces its origins to Ireland, is bullish.

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“We would not be investing what we have if we thought the resources were not commercially viable,” said Mbogo.

But a financial risk expert with experience in oil and gas exploration in Central Africa and North America believes the situation Kenya finds itself in is one of hype gone wrong.

It is, he says, a mix of two situations: one being a miscalculation, which is typical from mid-sized oil producers like Tullow.

“The other is that of a resource owner such as Kenya that does not understand the reality of earning rent on the natural resource,” said the expert, who asked not to be named as he is not authorised to speak to the media.

Once oil is struck, he said, it is pegged as being a P50 resource. This means it has a 50 per cent chance of being produced.

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“Tullow had spent money to get to this stage, and indeed done an honest job,” he explained.

Unfortunately, political announcements about the find became pegged on dollar earnings from the projected number of barrels that would be produced.

Years after the oil find, however, the only known income realised so far is Sh1.2 billion from the Early Oil Pilot Scheme, which was highlighted in government data, showing a jump in oil export revenue.

Unfortunately, despite the modest gain, the government appears unprepared and tight-lipped on the way forward.

After spending close to Sh7 billion of taxpayers’ cash to axle-up Tullow’s exploration efforts, the government has not issued clear timelines on how the country’s oil will be monetised.

When Tullow announced that it had struck oil in Turkana, Kiraitu Murungi, the then Energy minister, was quoted saying “the oil that was discovered in Uganda is much lower than what has been discovered in Kenya”.

Best-case scenario

These fighting words from the current Meru governor, according to our source, “was to make the government’s income appear very large”.

And the announcement was followed by Tullow saying it could pump out  750 million barrels of oil from the Lokichar Basin.

To add on to the hopes of the people of Turkana and Kenyans in general, the firm said further exploration could add to the barrels recoverable from the region.

Tullow has, however, since revised the recoverable oil from the Lokichar oil blocks downwards to 560 million barrels.

It, however, explained that the 750 million barrels were a “best-case scenario” and that 560 million barrels present a more realistic case.

An even more realistic scenario, however, is 250 million barrels – with recovery at more than 90 per cent.

But, what is an ‘oil reserve’ and is it any different from an ‘oil resource’?

By the time Mr Murungi was being quoted in 2012, and made claims that were neither approved nor denied by Tullow, Kenya had an oil resource with a 50 per cent chance of being produced.

“However, P50 resources do not always become P90 reserves; that is an amount you can safely budget costs and revenue of extraction against,” said our source.

Moreover, even these reserves fluctuate in value when prevailing factors such as the global price of a barrel of oil are taken into account, which is what is technically known as Net Present Value (NPV).

NPV is calculated by subtracting the cost of extraction over the lifetime of an oil field from the price per barrel.

“That NPV, of course, also influences what the government earns and what the value of pipeline infrastructure would be.”

Many mid-sized firms such as Tullow badly underestimate these costs, said the expert, thus stretching their finances.

By the time Kenya struck oil, Brent crude oil, a type of sweet light crude oil, averaged $111.67 (Sh11,200) per barrel. Approximately 159 litres of crude oil make a barrel.

Today, that price per barrel has plunged to under $60 (Sh6,000).

The Kenyan economy had staked its hopes on mining and oil resources, which would “enhance economic growth once (their) full-scale exploitation commenced”, according to a 2014 Treasury document.

“It is expected, therefore, that economic growth by 2018 will be relatively higher than the current estimates due to the impact from this sector (oil) as well as the Standard Gauge Railway,” said the Exchequer in its 2014 Budget Policy Statement.

One study by the World Bank even estimated that the government would rake in close to Sh900 billion from oil revenues, enough to pay for the Standard Gauge Railway (SGR) project.

And with a flurry of oil exploration and development in the region, Kenya saw an opportunity to become the “preferred regional petroleum transporter of choice”.

A planned crude pipeline from Lokichar to Lamu is part of the multi-billion-shilling Lamu Port-South Sudan-Ethiopia-Transport (Lapsset) Corridor.

“With the ongoing exploration for petroleum and gas, regional petroleum and oil potentials and strategic location of the port of Mombasa and Lamu, it is imperative that Kenya starts to invest in an oil pipeline to position itself as a preferred regional petroleum transporter of choice,” said the Treasury in 2014.

But then Uganda changed tune, opting for the Tanzanian route for its pipeline.

Moreover, oil and gas, though in its infancy stage, has been weaved into President Uhuru Kenyatta’s Big Four agenda as a job creator.

The Treasury has also created a fund for the country’s newfound wealth as the oil frenzy built up to a crescendo.

Some analysts have linked this new optimism to the government’s fiscal priorities, which has seen it go on a borrowing spree, spiking the country’s debt levels to Sh6 trillion.

Pre-resource curse

The International Monetary Fund has labelled this phenomenon the “pre-resource curse”, where countries embark on risky borrowing on the back of overly rosy projections.

Studies do not include Kenya, but Ghana, Tanzania, Lebanon, Mongolia and Sierra Leone are just some of the countries that have suffered the pre-resource course.

Although Tullow Kenya boss Mbogo denies that there are plans for Tullow to exit the Kenyan oil blocks and that it has always wanted to reduce its equity by half to 25 per cent, international media reports say Tullow Plc is ready to throw in the towel.

The 35-year-old firm has had enough of the wildcatting, where it has been venturing into countries like Kenya, Uganda and Ethiopia, painstakingly digging for black gold.

As part of its cost-saving initiative, the new management has significantly slashed its exploration budget. Saddled in debt, the company is open to offers “at a proper value”.

As a result, as things stand, Kenyans might as well continue nursing their dream of becoming oil exporters on their own.

Will the sale of Kenyan holdings earn the trinity of Tullow, Canada’s Africa Oil and France’s Total enough money to recover their investment? What will be left for Kenyans?

According to the Petroleum Act, the sharing of profit oil is based solely on production volumes, with the maximum State share achieved when production exceeds 100,000 barrels a day.

Tullow’s estimates on how much Kenya can pump out once commercial production begins will be clearer after the FID is done. This should go on for 25 years.

In corporate finance lingo, FID is the equivalent of eating the pudding to determine its taste. The FID was to be completed in late 2019.

Black gold

With this, the country would know if it has enough of the black gold to warrant a seat at the high table of major oil-exporting countries like Nigeria.

Most likely, Kenya will square out with small-time oil producers such as Uzbekistan, which is so far the only country with comparable oil wealth to Kenya’s.

The two countries have around 600 million barrels of proven crude oil reserves each, compared to Uganda’s 6.5 billion and Ghana’s seven billion.

Petroleum Principal Secretary Andrew Kamau had not responded to our requests for comment by the time of going to press.

The matrix of the whole oil saga is complicated by the fact that by the time the country begins commercial production, it needs to have in place a specially made crude oil pipeline of about 825 kilometres from Lokichar to the coastal town of Lamu.

The pipeline’s entire length will have to be constantly heated to keep the waxy oil in a molten state for easy evacuation.

Construction of the pipeline is costly and time-consuming and should have been, ideally, a joint venture with Uganda.

In one of its documents, the State Department for Petroleum expects to spend around Sh10 billion on “preparatory activities” for the Lokichar–Lamu crude oil pipeline.

The cost of the pipeline has, however, been estimated at around Sh4 billion.

By the end of June last year, the State had spent close to Sh1 billion just surveying the land.

Land acquisition, one of the hurdles that proved a turn-off to Uganda, is yet to start. Still, Mr Kamau told The Standard in an earlier interview that it would take the country only 18 months to build the pipeline.

But an Environmental Impact Assessment report that Tullow lodged with the National Environment Management Authority (Nema) for the crude oil pipeline in November last year talked of between 33 and 35 months.

Commercial production

The country had been trucking 2,000 barrels of oil daily from the oil fields of Lokichar to the defunct refinery in Mombasa for export, in what is meant to be a precursor to commercial production set for 2022.

Tullow has been fuzzy about its total investment so far in appraisal and exploration, with the figure oscillating between Sh150 billion and Sh200 billion. This figure is likely to go up as the firm gears up for commercial production.

Capital costs are subject to recovery at a rate of 20 per cent per annum.

Due to the lack of clarity, the government was recently forced to enlist the services of an audit company to help it ascertain Tullow’s true investment.


World Bank Tullow Oil Turkana Oil EOPS

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