Home GENERAL NEWS Yes, we’re broke but not out; our focus is on FID by year end

Yes, we’re broke but not out; our focus is on FID by year end

by biasharadigest

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Tullow, the British oil company driving Kenya and Uganda’s exploration, is in financial trouble, and is laying off some employees. The managing director Martin Mbogo spoke to Saturday Nation’s Paul Wafula and Allan Olingo about the firm’s future.

Tullow Kenya is selling part of its stake in the Turkana project. How much of it are you selling and who are you looking to bring on board?

We are willing to reduce our holding in the current licences from 50 per cent to 30 per cent. We would prefer to do this before the Final Investment Decision. The process has started and we are doing it with our partners who are also selling down. This doesn’t mean that we are reducing our commitment to the project. It is just a portfolio management issue. I am not at liberty to disclose whom we are in discussions with.

We expect to use the proceeds to cover costs incurred and reinvest part of it to take the project forward. It is not a reflection of our financial position, but of the maturity of the project.


Are Chinese firms among the investors you are having discussions with?

Allow me not to comment on that. However, the Chinese bidders for the stake are not off the table. We have signed non-disclosure agreements on the same with the interested parties, so I have to respect that. We are looking for the profile of a firm that has the commercial interest of the project at heart. We are also looking for firms with the capability to deliver on the unique circumstances of the Kenyan onshore activity, and who have proven experience in this. Our expectation is that by mid-year we will have better clarity on those interested and what the terms of the sale would be.

What is the budget for the project this year, and is it enough to see the project through to the Final Investment Decision (FID)?

Our board in London has approved a project gross budget of Ksh11 billion ($110 million), and, with the current shareholding structure we will provide Ksh5.5 billion ($55 million) of that. I am now under firm instruction to spend within our shareholding structure for this year. We are waiting for our joint partners to approve, or agree on this, so that we can push through to the FID. However, delays in getting such budget approvals hurts the projects, pushing up costs.

Some of your joint venture partners didn’t approve budgets for last year and this year.

It is true that some of our joint venture partners did not approve their budgets for 2019, and also this year. This saw Tullow spend above our shareholding agreement, pushing our expenditures up. So far they haven’t approved the budgets for this year.

How much has Tullow invested in the project since it came in as a partner?

We have invested more than Ksh100 billion ($1 billion), which has gone towards drilling and exploration, the community, the county government from whom we leased the land, and other areas.

How are the Tullow Plc issues affecting the Kenyan subsidiary, now that the Nairobi office has laid off a number of its staff?

At group level, we have stated that we had to reduce production forecast in our cash generating assets. This means that our revenue was going to be less this year. Prudent management required that we adjust with that reality.

However, the Kenyan unit is least impacted because we have the budget to get through to the FID. Because we have to manage our finances, and not bear costs above our shareholding, we are managing reductions in terms of performance and headcount so that we can also undertake activities that will take us to FID.

So where are we in terms of Project Oil Kenya?

We have been working on the Early Oil Pilot Scheme (EOPS), which unfortunately was suspended two months ago. We chose trucking on three main fundamental principles. We needed to understand how much of it there was, how much crude can flow from the ground to the surface, and how to move it either by truck or any other means. It was important that the local communities would allow the oil to move.

We also needed to understand the legislative framework on how that oil would move, and to complete our model. We also needed to understand the value of this oil on the international market, which could only be realised by offering it. This would help us look at what price it fetched relative to the benchmark Brent. Our objective with EOPS was not to make money out of it.

How has the oil trucking business from Lokichar to Mombasa turned out so far?

We have been successful because it has allowed us to have the new Petroleum Act. Out of the desire to do the EOPS, the law governing production and movement of petroleum was realised. Second, we were able to understand the production rate of wells, and get the consistent flow rate. Our results are encouraging as we have produced from five wells and are within expectations. This gives us confidence to produce at the rates we wanted.

The trucking also allowed us to analyse the thermal characteristics of the oil while moving. This is important to help us get the right products to the market. For instance, the trucking containers were thermally insulated, and this allowed us to understand the input temperature that was loaded at 80 degrees in Lokichar and unloaded at 55 degrees in Mombasa. This thermal gradient was important for our scientists to capture oil movement. By offering the oil to the market, it also allowed us to gauge the market sentiment, which saw great interest in the 240,000 barrels we exported mid last year.

Why did the trucking stop?

This is purely to do with infrastructure, the state of the roads. We have a section between Ortum and Sarbit where the roads aren’t motorable to a safe standard. Regrettably, that hasn’t been resolved. We are happy to resume the EOPS when those roads are fixed by the government. Obviously this delay comes with a cost because we have retained leased equipment, prime movers, and professionals. We are having conversations with the government on how much longer this situation will last and alternatives for the project.

When do we expect to have the FID?

We are confident that this will be done by the last quarter of this year, once we have every moving part of this project aligned. To deliver the 100,000 barrels of oil and the 900-km pipeline, we need foreign direct investment of Ksh300 billion ($3 billion). This will be split with Ksh100 billion ($1 billion) for the pipeline, and Ksh200 billion ($2 billion) for investment in the upstream project in the fields.

We have already done the design work and we know we require more than 300 wells to deliver this oil. The design of the pipeline and the processing facilities have been undertaken.

To raise the Ksh300 billion ($3 billion), we are working on a financial structure that requires 30 per cent on equity, and 70 per cent on project financing. To undertake the latter, we need to do our due diligence, which will involve our ability to access land for the project both upstream and downstream, as well as water rights for the project in Turkwel.

So far the National Land Commission has taken the lead on the land acquisition issues and also water.

Once we have all these aligned, and the project partners signed in, we can confidently undertake the FID.

The FID will be at the point at which we have the financing, know the source of it, terms, have access to land and water, and have finalised more detailed commercial arrangements with the government. When we have all these ready, then we can place orders for equipment and start the construction work. We hope to do that before the year ends.


Early this month, Tullow Oil announced that  it would reduce its headcount in Kenya by about 40 per cent as part of a company-wide restructuring following poor performances at its Africa operations.

The company’s projects have been delayed in Kenya and Uganda, where the explorer is looking to reduce its stake in oil discoveries.

Last week, Total chief Patrick Pouyanné dismissed the idea it could buy its partner in East Africa, Tullow Oil, whose share price slumped to 19-year lows in December over a string of bad news, stoking takeover speculation.

Total is a partner in all growth markets for Tullow Oil.

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