Tullow uneasy over asset value as final decision pushed to next year

EPRA has sought the services of a consultant in reaching a Final Investment Decision.

In Summary

•During the first half of 2023, the Group wrote off exploration costs of $10 million (1H 2022: $87 million).

•These were predominantly driven by Kenya, where withdrawal of  JV Partners led to a re-assessment of risks associated to reaching a FID, resulting in a Sh1.4bn impairment.

A view of Ngamia 1 oil rig in Lokichar,Turkana. The rig was initially owned by Tullow and Africa Oil Corp/ FILE
A view of Ngamia 1 oil rig in Lokichar,Turkana. The rig was initially owned by Tullow and Africa Oil Corp/ FILE

Uncertainties on the value of Project Oil Kenya now remains a concern for British oil explorer-Tullow, with the government pushing approvals of its Field Development Plan to next year.

This is from last month, when Energy Cabinet Secretary Davies Chirchir had indicated a decision would have been made, before Cabinet and Parliament approvals.

In the latest developments, the Energy and Petroleum Regulatory Authority (EPRA), the energy sector regulator, has since been assigned to seek the services of a third party, as a consultant in the process.

“The regulator has recently engaged third party consultants to review the revised FDP and extended the review period to Q1 2024. The Group expects a production licence to be granted once government due process has been completed,” the firm said in its financial brief.

The assessment by government includes whether Kenya is interested in pursuing or dropping the Turkana oil project.

If the project continues, then the government will have to give its input on how Kenya’s crude will be handled by the investors.

This includes the planned construction of the 852 km Lokichar-Lamu pipeline for transporting crude oil from Turkana to Lamu port, for export.

Tullow however now says the Group has identified uncertainties in respect to the ability to realise the estimated VIU; or the present value of the future cash flows expected to be derived from its assets.

This is in line with receiving and subsequently finalising an acceptable offer from a strategic partner and securing governmental approvals relating thereto, obtaining financing for the project and government deliverables.

“These items require satisfactory resolution before the Group can take a Final Investment Decision (FID). The Group continues to progress with the farm down process,” it said.

The firm is currently seeking strategic partners in Project Oil Kenya after the withdrawal of Africa Oil Corporation and Total Energies.

The two gave notice of their respective withdrawal from the Blocks 10BA, 10BB and 13T Production Sharing Contracts and the Joint Operating Agreements, effective 30 June 2023.

They cited “differing internal strategic objectives.”

Due to the binary nature of these uncertainties, the Group was unable to either adjust the cash flows or discount rate appropriately.

It has therefore used its judgement and assessed a probability of achieving FID and therefore the recognition of commercial reserves.

According to Tullow, certain risks have increased since December 2022, predominantly around farm down and project financing.

This has been partially offset by an increased equity interest in the project.

Based on this, the Net Present Value has been revised to $246.7 million (Sh36.8 billion) and an impairment of $9.1 million (Sh1.4 billion) has been recognised as at June 30, 2023.

Net present value is used to determine whether or not an investment, project, or business will be profitable down the line.

“Should the uncertainties around the project be resolved, there will be a reversal of a previously recorded impairment,” Tullow noted.

However, if the uncertainties are not resolved there will be an additional impairment of $246.7 million.

During the first half of 2023, the Group has written off exploration costs of $10 million (1H 2022: $87 million).

According to management, the costs were predominantly driven by Kenya, where withdrawal of the JV Partners led to a re-assessment of risks associated to reaching a final investment decision, resulting in the Sh1.4 billion a $9 million impairment.

Discussions with the Kenyan government on approval of the Field Development Plan (FDP) commenced in January last year, after submissions had been made in December the previous year.

An updated FDP was submitted on  March 3, 2023 for review.

Tullow which currently owns 100 per cent of the Turkana oil project is in talks with a number of potential investors, it has reported.

“Tullow is now the sole partner in the project.This has created a more flexible proposition for a strategic partnership and discussions continue with several interested parties,” management said.

Indian Oil Company–ONGC Videsh Limited (OVL) is among those reported to be interested in taking up a stake in the British firm’s Kenyan assets.

ONGC Videsh is reported to be seeking clarity before making an investment decision.

Several interest parties including India’s ONGC Videsh Limited have expressed their interest in coming on board as a strategic partner in the development of our Kenyan asset,” Tullow Kenya BV managing director Madhan Srinivasan, told the Star. 

Whilst the process has taken longer than expected, Tullow remains focused on securing a strategic partnership this year, he said.

Failure to secure a strategic partner would however impact on its ability to progress the Kenya project to final investment decision and unlock value, the firm’s leadership noted.

CS Chirchir had earlier indicated the government was also in talks with Chinese and Indian investors to put capital in the project, as it reviews the final investment.

He said Kenya would continue to back Tullow's push for commercial oil production in Turkana, despite the timelines shifting to beyond 2027.

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