05 March 2014, Kampala – On February 5, Tullow Oil Uganda and its partners Total and CNOOC signed a landmark agreement with the government, which charts the course for Uganda’s downstream oil industry operations.
Exactly one week later on Feb.12, Paul McDade, Tullow’s chief operating officer, was quoted by The Wall Street Journal as saying that the company was considering selling its holding in Uganda and then move to neighbouring Kenya where the government has been “more supportive” to the company. To many, this development does not make much sense but McDade made an attempt to explain. In a veiled jibe directed at the Ugandan authorities, McDade suggested that Kenya sees first oil exports “as a national priority,” which does not appear to be the case with their Ugandan counterparts. He said they are looking at phasing of investments in Uganda as there is a lot of priority being given to Kenya.
At an investors meeting in London, McDade said: “They (Kenyans) see it as a project of national priority and they are very focused on getting first oil from Kenya as soon as practical but doing it properly.”
“The real focus for our business at the moment is Kenya,” he told another news channel, Bloomberg.
While Uganda first announced commercially viable oil deposits in 2006, the country is yet to sell even a barrel, which has left the investors led by Tullow frustrated.
While part of the legal framework is now in place, some of the key institutions and infrastructure are yet to be put in place – a clear indication that Uganda has been moving at a frustratingly slow pace towards realizing ‘first oil.’
Also, the controversy over prioritizing the oil pipeline over the oil refinery has proved to be a key sticking point in negotiations with the government over the years and the investors don’t foresee such a situation across the border. In effect, Uganda, unlike other countries where the company operates, has appeared to be a ‘no nonsense negotiator’ over the last few years; to the utter chagrin of the company’s officials.
“Kenya will be easier to develop and the government is very enthusiastic for us to get underway with that development and get first oil as soon as possible,” McDade said.
“They recognize that the pipeline from northern Kenya to the coastline is the critical path and they are in a strong dialogue with us.”
If McDade’s statements are not mere threats as some analysts think, then Kenya couldpotentially become the region’s first exporter of oil as early as 2016 – leapfrogging Uganda. Some analysts refer to them as mere threats because Kenya is at the stage where Uganda was eight years ago and hitting first oil could take another five years. Tullow continues to explore the Lokichar Basin in northern Kenya and the firm doubled its Kenyan oil find estimates in January 2014 to more than 600 million barrels after the Amosing and Ewoi wells found crude. However, although the latest appraisals are way smaller in comparison to Uganda’s confirmed deposits of over 1.2 billion barrels, Tullow says Kenya’s deposits could reach as much as 10 billion barrels.
Tullow Oil, which found Kenya’s first crude, said the nation considers the start of production and exports soon and may be ready to pump as much as 50,000 barrels per day by 2020.
The company together with its Canadian partner, Africa Oil Corp, are working with the Kenyan government on a plan to start field development and export pipeline construction as soon as next year, Tullow said in a statement on Feb.12, adding that they are hoping to sanction both projects in 2015 or 2016 with first oil expected around three years later.
Apparently, Uganda’s oil project has been delayed for the last sevenyears and has weighed on the company’s share price.
The Uganda government has delayed the $15 billion investment planned by Tullow and its partners, Total and CNOOC, to tap the Lake Albert fields.
For the last two years, both the government and the companies needed to agree on the size of a local refinery and an export pipeline–and these were all ironed out in the MoU the parties signed on Feb.05.
This development was another significant step for Uganda as it straightened the roadmap for the commercialization of oil production.
Irene Muloni, the Minister of Energy and Mineral Development,said on Feb.6 that the memorandum would now provide a framework for achieving a harmonized commercialization plan for the development of Uganda’s oil industry.
Muloni said,the comprehensive plan would include the use of the gas resources for power generation, supply of crude oil to the refinery expected to be developed within Uganda [by the government] and the export of crude oil through an export pipeline [by the oil companies].
In the memorandum, the oil companies committed to support the government in its efforts to develop a 30,000 barrel refinery and the government committed to provide support to the oil companies in acquiring approvals for studies and surveys for an export pipeline and to initiate discussions with neighboring countries in relation to cross border frameworks for the pipeline.
Muloni said she expects the country to start producing electricity using its vast gas resources by 2015 while the refinery should be in operation by 2017.However, she added that the refinery shall have the right of first call on production volumes from the licensed areas.
In the short term, prior to the refinery coming on board, the oil companies will supply crude oil from the contract areas to be used for power generation, according to Muloni. Now that an agreement was reached on how best to exploit the resources, the three oil companies were expected to embark on an implementation plan with government. In September last year, the government issued a production licence over the Kingfisher Field operated by CNOOC and the government is reviewing applications for production licences over eight discoveries in Exploration Area2 operated by Tullow, while another application has been submitted by Total for another field in Exploration Area1.
“The government is very keen to develop the oil resources now that we have agreed on how best to do it,” Muloni said, insisting that the government wants to do this in the most transparent and accountable manner to bring lasting value to the country.
At the Feb.05 signing of the MoU, Tullow Oil Uganda General Manager Jimmy Mugerwa talked of how “pleased” Tullow was with its investments in Uganda, which so far have hit Shs 7 trillion. Mugerwa said the rumours alluding to Tullow exiting Uganda were “baseless.” But if McDade’s statements have credence, where does that leave Uganda’s oil production prospects and what is the way forward for the country’s nascent oil and gas industry?
Gov’t not scared?
Dozith Abeinomugisha, a principal geologist in Uganda’s ministry of energy and mineral development, told The Independent that the government is not scared by Tullow’s pronouncement.
But even if it left according to Abeinomugisha, the action would still be normal oil and gas industry practice.
“Companies come, explore and may choose to leave,” he said. Indeed, Tullow brought CNOOC and Total E&P in a farm down after it also bought from Heritage Oil, which also bought from Hardman.
So, if it decides to sell, Abeinomugisha said, it is their choice but the new entrant would have to respect the commitments that have beenformally made by Tullow.
Don Bwesigye Binyina, the executive director at Africa Centre for Energy and Mineral Policy (ACEMP), suggested that there was no need to panic because Tullow’s decision to sell and focus on Kenya would not necessarily translate into a loss for Uganda.
“It is not good for us to panic,” he said, adding that while Tullow may want oil production to run at a speed similar to that experienced in other countries like Ghana where it operates, there are different factors at play in different countries.
In comparison to Total and CNOOC, Binyina said, Tullow is ‘a cat in the game of wolves’ in the Ugandan oil and gas market and its move could have been prompted by political considerations.
“So, its veiled threats of closing shop should not scare the general public,” he said, adding that it could have made some losses in sunk-in capital in deep sea exploration ventures in the past year, which could justify their impending farm-out to the likes of Total and CNOOC or other players with a considerable large market cap.
“A dollar today is better than one tomorrow for the likes of Tullow,” he said, adding that while Tullow’s next concern is its dividends for its shareholders, the government’s immediate policy concern is the 2016 general elections.
He added that right now it all comes down to who is coming in.
“It will take a wolf to join a party of wolves and going by the international market and reserves of all the majors in this industry, cats like Tullow must now find their level “under the table” or retreat to safer and friendlier and least politically risky grounds like Ghana and Kenya,” he added. Binyina said if your pockets are shallow in an industry dominated by the likes of Exxon Mobil, Saudi Aramco, Gazprom, National Iranian Oil Co, Royal Dutch Shell, PetroChina; you swim in shallow waters, not the deep end. He said Tullow’s threats cannot be reduced to their mid-stream struggles with the Ugandan government, as some pundits are arguing; otherwise we would be having the same threats coming in from Total and CNOOC.
In this case Kenya, which has no recognizable fiscal, policy and regulatory framework, presents Tullow with a new hunting ground for wildcat drilling and exploration, which Tullow has thrived on since 1985, he said.
He added that the announcement is testament to Tullow’s business model and strategy of duo exploration and first mover advantage in new frontiers, as seen in its past success dealings in Ghana, Uganda, and now Kenya. “In this industry, it is incumbent upon each company to design a winning antidote in a very competitive, highly dynamic, risky and capital intensive sector,” Binyina said, adding that this proves to be the winning formula for Tullow at the moment.
Tullow Uganda office were unwilling to answer questions in relation to the reports. But other analysts said a suggestion that Kenya could start producing oil by 2016 sounds a bit bullish.
For starters, the discoveries have been made in the remote and under- developed Turkana region in the northwestern part of Kenya’s rift valley, meaning that if early production was to go on as expected; crude oil shipments would initially be made by trucks or trains for refining at Mombasa Port on the Indian Ocean. In the circumstances therefore, Tullow’s announcement that it could quit Uganda can only be taken either as an ineffectual threat or as an arm-twisting tactic on the government.
– The Independent