Deep hopes of oil and the long road ahead

7/29/2019 Deep hopes of oil and the long road ahead

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| Nairobi Business MonthlyMAY

COVER STORY

DEEP

HOPESOF OIL

AND THELONG ROAD

AHEADKenya has discovered oilin Turkana, but will therebe enough for commercial

exploitation?BY AAMERA JIWAJI


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MAY Nairobi Business Monthly |

GREAT EXPECTATIONS

Tullows oil rig atNgamia, Turkana,

the remote areain northern Kenya

that holds thehopes for oil.


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GREAT EXPECTATIONS

throughout the late 1980s and into the 1990s, and

the companys earnings from these cast-offfields

funded its exploration of new sites, particularly in

Africa, where recent oil discoveries are to be found.

In 2000, still a small player in the industry with

interests in Europe and Asia, Tullow made its first

big deal when it purchased mature gas fields from

BP in the southern North Sea. Industry giants

sneered but Tullows turnover jumped to nearly

15 times higher than it had been two years before.

With the price of crude oil steadily rising in themarket, Tullow bought the South African company

Energy Africa, doubled its reserves and expanded

further in the North Sea, making it the dominant

natural gas producer in the area.

The African success

Tullows explorations in Africa continued and

shortly after it made five oil discoveries in Uganda

on the shores of Lake Albert, the company hit its

largest ever discovery in Ghana with an offshore

field of more than a billion proven barrels. Ghana

has begun production and as oil revenues accrue,

its economy is expected to grow by 21% this year,

according to conservative estimates.

Exploration in Uganda has continued paral-

lel with a 56% success rate, and the discovery of

approximately two billion barrels from the nine

(out of 16) wells that Tullow drilled. This discovery

proved geologists right in their predictions about

the connected landmasses linking East Africa

to the worlds biggest petroleum deposits in theMiddle East, and added credence to expectations

of untapped oil reserves in Northern Kenya.

Test and evaluate

Declaring commercial oil find is no small matter.

A whole process of tests must be done, otherwise

a very promising well may empty within a short

time. So Tullow will have to analyse and evaluate

the results from the Ngamia-1 drilling, assess how

well the oil flows and conduct tests on the type of

oil, its density and sulphur content.

Considerable additional data is required

before a meaningful assessment can be made.

THE SCENT OF OIL: Energy minister Kiraitu Murungismells a sample of oil from Ngamia.

Oil exploration is a capital and time intensive

activity and it could take in excess of three years

to determine the commerciality of the Ngamia

discovery, said Mr Mbogo. This is an exciting well

result but must be seen in context. This is the first

result of a multi-well campaign and well only be

able to talk about the prospects for commerciality

after the campaign is completed.

The Midas touch

Tullow Oil, which started in a small Irish town in1985, has developed a global reputation for being

lucky. Their initial investments in gas and oil fields

in Senegal and the North Sea although catego-

rised as depleted assets worthy of discard by the

bigger players such as BP earned them steady

revenues well beyond the period anticipated.

Their purchase of a mature gas field in Senegal

in 1987, for example, was expected to continue

producing for two more years. Instead it continued

spewing oil for 16 years before production finally

ceased in 2003.

Bolstered by this success, Tullow continued to

pick up mature oil and gas fields at modest prices


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The threshold is dependent on a huge range of

factors including recoverable volumes, potential

infrastructure requirements and obviously market

prices, said Mr Mbogo, the companys country

manager.

The way forward is complicated by the remote

location of the discovery. Turkana is a very remote

location and the biggest challenge for us to date

has been the lack of supporting infrastructure, he

said. We have invested a lot of money in rehabili-

tating roads so that we can move the huge amounts

of equipment and other supplies to the rig site and

other sites where we are expecting to explore.

With all these tests to be conducted and invest-ments to be made, there is a significant amount

of further work before any development options

are considered. We are a long way from declar-

ing that anything is commercial, he reiterated.

And he underscores that message in every forum,

avoiding to say what most people want to hear.

As the company continues evaluating its

Ngamia-1 discovery, Kenyans eyes flicker to

neighbouring Uganda and the contestation

surrounding Tullows discovery of oil there,

which also engulfed the exploration and mining

preparations. There are two sticky issues, said

Mr Mbogo. First, Tullow was accused of making

corrupt payments to ministers by a Ugandan MP in

the Ugandan Parliament. Tullow has co-operated

fully with the UK, Ugandan and Maltese Police

and has demonstrated that these allegations were

based on crude forgeries and are entirely false,

he said.

Sharing oil revenues

With regard to taxation, Tullow sold 66% of its

interests in Uganda to Total and CNOOC (China

National Off

shore Oil Corporation) for $2.9 billionand has been assessed for $472 million. Tullow

then paid 30% ($141 million) of this assessment

and is appealing the assessment (as it is entitled

to as a Ugandan taxpayer) in Kampala.

Production sharing agreements that are benefi-

cial to the country have been signed in Uganda,

he said. The contracts outline cost recovery and

profit-sharing from production between the

government and oil companies. And as President

Museveni explained to his Parliament, before the

inclusion of taxes Uganda would receive 58 barrels

from 100 produced, meaning that it stands a better

chance of benefiting from the oil, running away

with 58% of the cake, compared to the companies.

In comparison, Kenya has sketchy legislation

making it an attractive market for Tullow and

other oil explorers. Although a model produc-

tion-sharing contract (PSC) is publicly available,the percentages of revenue sharing between the

Kenyan government and Tullow are still a closely

guarded secret. Many observers fear such secrecy

can easily tempt some people in government to

cut backhand deals with Tullow at the expense

of Kenyans.

We believe that the contract strikes a fair and

equitable balance between the government and

investors considering the risk associated with this

type of exploration campaign, said Mr Mbogo,

without giving much detail. This (PSC) obvi-

ously doesnt include the percentages as these

are commercially sensitive.

COVER STORY

Do1. Respect the environment and the

communities in which you work

2. Work with the local community and make

sure they understand your plans

3. Be a safe and responsible operator

4. Do as much planning and preparation as

possible ... and then do some more

5. Hold your nerve oil exploration is not for

the faint-hearted

Dont1. Be arrogant or dismissive of local concerns

2. Be careless in handling sensitive material,

environments or situations

3. Be cavalier about safety; make it your no. 1

priority

4. Make any assumptions; check everything,

and again

5. Make careless public statements

manage expectations carefully

Five dos and dontsfor oil exploration

Country Manager Martin Mbogo at a site inspectionof Ngamia-1

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In 2011, 26 of the 35 exploration and

appraisal wells that Tullow drilled

globally discovered hydrocarbons giving

a success ratio of 74%. Is it luck? What

would you attribute it to?

This success is a result of our bold exploration-

led growth strategy. Through investing in years

of careful geological evaluation, we have devel-

oped numerous high-equity, high-quality oppor-

tunities that have met our stringent criteria for

entry into our current prospect inventory.

By investing in a great team of people and

looking towards a long-term horizon, we have

been able to seek out success in frontier areas

and deliver consistent multi-basin exploration

success, which is now being leveraged through

multi-basin developments.

26 years after starting the company you

are seeing the rewards. What are the

take-homes from the experience?

It has been a long journey but the reward for me

is in building a successful business that has a

long-term future. I have also loved working in

Africa for the past 26 years and, I hope, I am

making a difference in the lives of the people

that work for and with Tullow.

With every new discovery of oil, what are

the lessons you have learnt which you

carry forward, and in particular which

you have applied to Kenya - especially

drawing on the Ghanaian and the Ugan-

dan experiences?

The biggest lesson is to take things carefully and

cautiously and to manage expectations accord-

ingly. People get very, very excited about oil and

gas and I understand that but it is critical that

discoveries and their ramifications are kept in

perspective at all times. I think, with regards to

Kenya, we do draw parallels with Uganda in thesense that we are very excited about the wells

that we are going to drill but it will take a long

time to be sure of exactly what the size of the

resource is.

You have been described as a company

that eats left-overs. Is this a deliberate

strategy or was it the way to start? Has

that strategy changed as you have experi-

enced more success?

I dont think we eat leftovers. What we do is

concentrate on certain geologies and geogra-

phies that we know and like; this does mean that

were exploring in regions where other compa-

nies have failed in the past but they didnt have

the technological benefits that we have now.

They also didnt have the superb geologists and

engineers that we have.

Having discovered the Jubilee fields in

Ghana and become one of the bigger

names in oil, will you go the way of other

large oil producers and chase bigger and

riskier bets going forward?

We have a consistent strategy and business

model that is working very well. We create value

in two ways. We find oil through successful

exploration and strategic acquisitions. We sell

oil, by developing to produce or farming down

to enhance our portfolio of assets and skills,

both of which generate cash flow for reinvest-

ment in the business and support a well funded

balance sheet.

This way, we are establishing a distinctive

competitive advantage and evolving into the

leading global independent exploration and

production company with a solid financial

foundation, differentiated from our Energy &

Petroleum peers by high-impact exploration-

led growth.

What advantages has your small size

given you, compared to the larger play-

ers? How will you retain these advan-

tages as you grow?

Tullow has a number of key attributes that form

the bedrock of our success. While assets and

licences come and go, we have consistently

invested in having a great team of people and

ensuring we put relationships ahead of short-

term gains. This long-term approach has enabled

us to be successful in seeking out frontier areas

and finding new basins.

Over the years, Tullow has developed a wide

range of skills and competencies that will

ensure that we maintain the core foundations

of our business while building a base that will

support the rapid growth we are experiencing.

These include managing mature assets, becom-

ing one of the best dealmakers in the sector,

building a track record as a world class explorer

and developing superior operating capability.

Tullow has deliberately chosen to focus

on oil and not gas. Why?Were better at finding oil and we see greater

long-term value in oil than in gas. That said,

were perfectly happy to find gas; wed just prefer

to find oil.

Any mistakes you have made as a

company in exploration in the past?

I dont think weve made many mistakes - thats

the nature of oil exploration. The key is to learn

from those mistakes. Even wells that find noth-

ing but water are still useful in terms of lessons

learnt.

FOUNDER AND CHIEF EXECUTIVEOFFICER OF TULLOW OIL, AIDANHEAVEY

1978: qualified as a chartered accountant

197479: auditor at RJ Kidney & Co

(accounting firm)

197981: financial controller at Aer Lingus

(airline)

1981-1985: financial controller at Tullow

Engineering (agricultural machinery

manufacturer with a small oil distribution

arm)

1985: bought out the oil business from Tullow

Engineering and founded Tullow Oil

1985 to present: CEO of Tullow Oil

GREAT EXPECTATIONS

Q&AWe see long-termvalue in oil, not gas

Deep hopes of oil and the long road ahead

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