Tullow: Virus could rain on Kenya’s oil parade

The Coronavirus pandemic is likely to further delay Kenya’s dream of starting commercial production of oil.

In its latest update to shareholders, the British-based company at the heart of oil production in Kenya has expressed doubt over the country’s ability to complete the Final Investment Decision (FID) before the end of this year.

“In Kenya, a number of key workstreams have been suspended due to Covid-19 restrictions and while focus remains on the critical activities required for a Final Investment Decision (FID), Tullow will continue to monitor the impact these restrictions may have on the FID target,” explained Tullow in a statement.

FID is a technical term for when the project execution phase begins and the big money starts being spent on its construction. With FID, Tullow can embark on large-scale production with the country officially joining the club of oil exporters. But this is now in doubt.

The country has 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. Even worse is the sharp decline in the price of oil in the global market, with experts noting that at a price of below $20 (Sh2,120) a barrel, Kenya’s oil production is not viable.

Early this year, Tullow announced a restructuring of its operations after “disappointing exploration results in Guyana and production problems in Ghana”, which led to the resignation of the company’s chief executive and the exploration director in December.

The shake-up led to a bloodbath at its counter at the London Stock Exchange, with shareholders losing Sh180.6 billion in paper wealth in three months.

In Kenya, employees were put on the chopping board with the company eying a farm out - the assignment of part or all of an oil, natural gas or mineral interest to a third party for development.

Tullo 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 earlier projections.

“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 at the end of 2020,” said Mr Mbogo. There are reports that the government has questioned Tullow’s calculation of capital investment, which the firm estimates at around Sh250 billion.

This saw the Petroleum and Mining Ministry recently enlist the services of an audit company to help it ascertain Tullow’s true investment.

“The objective will be to confirm the validity of the expenditures and the completeness of the revenue and production based on the terms of the agreement and the production sharing contracts of blocks 10BB and 13T,” said the ministry.