• In 2019, Tullow Oil Plc, the principal partner behind the Kenyan and Ugandan commercial oil development projects released their full financial year results that reported a loss of £1.7 billion.
• This was compounded by the failure to make progress on crucial projects in Kenya and Uganda.
Markets for oil and other commodities and equities have experienced significant volatility and price declines since the final week of February amid concerns over the economic effects of the Coronavirus.
More recently, markets fell after the Organization of the Petroleum Exporting Countries (OPEC) and partners failed to reach an agreement to continue crude oil production cuts to stabilize oil prices.
Saudi Arabia not only increased oil production but also significantly discounted its export oil prices. Brent oil price instantly dropped from about $50 to a low of $33 per barrel. This was seen as a retaliation against Russia for its failure to support an OPEC decision to decrease oil production by a shared total of 1.5 million barrels per day (mbpd) meant to protect prices from reduced global oil demands caused by coronavirus impacts.
In the escalating war between the Saudis and Russia, the United Arab Emirates has since followed Saudi Arabia in promising to raise oil output to a record high in April, as the two OPEC producers raise the stakes in a standoff that has severely affected global crude prices.
The extra oil the two Gulf allies plan to add is equivalent to 3.6 per cent of global supplies and will pour into a market at a time when global fuel demand in 2020 is forecast to contract for the first time in almost a decade due to the coronavirus outbreak.
Oil prices have almost halved since the start of the year on fears OPEC states would flood the market in its battle with Russia after Moscow rejected the oil-producing countries' call last week for deep output cuts and a pact on cutting output that has propped up prices since 2016 collapsed.
By raising supplies, Riyadh and Abu Dhabi will add a combined 3.6 million bpd of extra oil in April to a market already awash with crude, compared to their existing output that has been limited by the pact with Russia that expires in March. What do the new developments in the oil sector portend for Kenya and Uganda's quest for first oil development?
£1.7 BILLION TULLOW OIL LOSS
The final investment decision that is to be made in relation to the full-field development of the South-Lokichar basin in Kenya, Tullow and its partners had proposed to the government that the Amosing, Ngamia and Twiga fields be developed as the foundation stage of the South Lokichar Development. This stage includes a 60,000-to-80,000-barrels-per-day Central Processing Facility and an export pipeline to Lamu. The gross capital expenditure associated with the foundation stage is expected to be in the region of Sh300 billion with the final investment decision expected by the end of this year.
In 2019, Tullow Oil Plc, the principal partner behind the Kenyan and Ugandan commercial oil development projects released their full financial year results that reported a loss of £1.7 billion, partly from the reduced output at the Jubilee and TEN fields in Ghana. These problems were compounded by the failure to make progress on crucial projects in Kenya and Uganda.
Assets in both countries contributed towards a write-off charge of $1.25bn. Tullow looks unlikely to recover in 2020. The collapse of the Opec+ alliance and the growing threat of Covid-19 means greater market volatility will likely push crude prices to new lows. Tullow has even highlighted the risk to its own survival. “The Group may not be able to sufficiently progress any planned portfolio management activities,” it said in a statement.
“There is a material uncertainty, that may cast significant doubt, that the Group will be able to operate as a going concern.”
For now, Tullow is maintaining its 2020 guidance level. The company is projecting an output of 75,000bl/d oil equivalent(oe)and has maintained its capex level at $350mn. To safeguard its finances, Tullow has also hedged around 60pc of its crude sales volumes this year at $57/bl and 30pc in 2021 at $52/bl. The company thus faces the real risk of bankruptcy if conditions do not improve.
If crude persists at its current level — or drops even lower — the company’s finances face a significant threat.
“If oil prices remain at or below their current levels for an extended period of time, this would adversely impact our future financial results,” Tullow said in a statement.
The company’s free cashflow breakeven for 2020 stands at $45/bl Oil equivalent, while Brent dipped below $33/bl on 12 March. Tullow, therefore, has just enough liquidity to operate for 12 months under the worst-case scenario — in which it fails to meet production guidance and crude trades below $30/bl for a protracted period.
Cost-cutting is the priority, to try and outlast the market low. The company has slashed the size of its workforce by 35pc and is closing all offices beyond its London base. Tullow has pledged net cash savings of $200mn into 2022. Most significantly, the board says it will raise more than $1bn from portfolio management this year.
West Africa holds the company’s most important producing assets, so East Africa is the most likely source for funds. The company has confirmed a formal sales agreement in Kenya, and the farm-down in Uganda is still ongoing. US bank Jefferies believes the assets are worth a combined $958mn at a long-term oil price of $62/bl.
CHINA EFFECT
China is back on a front-row seat in the bid for Kenya’s oil, as the project’s joint partners contend with uncertainties due to lack of funds. It has emerged as the favourite potential partner to help Kenya realise its oil dream after the key players, Tullow Oil Plc and Total SA, kicked off the process of selling part of their stakes in oil discoveries in South Lokichar basin.
The project’s future has been further complicated by Tullow’s dire financial position, exacerbated by production problems in Ghana and poor exploration results in Guyana. This led to the departure of chief executive Paul McDade and exploration director Angus McCoss in December and a collapse in the company’s share price. The farm-down by the two oil majors will further delay the project, which has seen its timelines shift every year, raising the costs that will eventually be borne by the taxpayer.
China National Offshore Oil Corporation is one of the favourite bidders for the 32.5 per cent stake up for sale, which would make it the majority partner in the project and a key decision-maker in unlocking the current stalemate. In Project Oil Kenya, Tullow currently has a 50 per cent stake, with Canadian firm Africa Oil and Total SA holding 25 per cent each. Tullow has announced that it is selling 20 per cent of its shares, while Total is offloading half of its stake, or 12.5 per cent.
The new shareholding structure would be CNOOC 32.5 per cent, Tullow 30 per cent, Africa Oil 25 per cent and Total 12.5 per cent. CNOOC has a large strategic interest to bundle the Kenya oil assets together with those it manages in Uganda. The Chinese firm owns 33 per cent of the assets in Uganda’s Albertine Basin, together with Total and Tullow Oil.
Other than the government's failure in Kenya's instance to meet key milestones in the last six months of 2019, further delays exacerbated by Tullow Oil's precarious financial situation, the ongoing problem posed by the Covid-19 outbreak and the resultant Saudi-Russian Oil Output war means the Project Oil Kenya is still but a long pipe dream. Simply unattainable at present.
The same scenario applies to Uganda.
Ogwang is a petroleum and energy economist