Tullow to Stress Existing Finds Over Exploring After Oil’s Crash
By Paul Burkhardt November 05, 2014
Tullow Oil Plc (TLW), a British oil producer active across Africa, will emphasize exploration onshore in Kenya over costly offshore wells as the company grapples with lower oil prices.
“We just cannot compete on the international scene unless we cut those costs back,” Tullow Chief Executive Officer Aidan Heavey said in an interview in Cape Town. With “a high cost environment and lower oil prices, you really have to focus in on the areas that are more cost-effective to develop.”
Tullow has made several discoveries in Kenya’s northwest, putting the East African country on the path to becoming an oil exporter. Despite that the producer’s shares have tumbled 45 percent in London this year as offshore exploration wells off Mauritania failed and crude prices crashed. Video: Goldman Sees No Supply Glut Fueling Oil’s Deep Dive
“We’re very fortunate that we have a very big portfolio with different types of projects,” said Heavey, who thinks the U.S. shale boom has dimmed investor interest in offshore exploration, where the costs of making and developing discoveries can be higher.
“Right now shareholders don’t particularly want big exploration because if you find oil in deep water the big question is, ‘where is the capital going to come from to develop it?’” Heavey said.
The company has been able to reduce drilling costs in Kenya to $7 million per well from $50 million as exploration has progressed, he said. Blog: Stress Management Jubilee Field
Tullow, which has a market value of 4.3 billion pounds ($6.8 billion), has made some of Africa’s largest oil discoveries over the last 10 years, developing the Jubilee field off Ghana and finding oil in Uganda.
At the start of this year, the company said it would spend about $1 billion on exploration, including campaigns in Mauritania, Norway, Kenya, Guinea and Ethiopia. Two wells off Mauritania, among the most expensive the company had planned, failed to find oil or gas.
“The sharp decline in share price has clearly had an impact on management,” analysts at Investec Plc said in a note to clients today. “Focus will have to be on projects with a clear path to value creation, and in this market that has to be development, rather than exploration.” Story: Who's Afraid of a Stress Test?
As well as Kenya, the company is looking to develop a second project off Ghana and start production in Uganda, where progress has been held up by negotiations with the government.
Tullow is in talks with Namibia’s government to withdraw from the Kudu gas project, in which it has a 31 percent stake, Heavey said. Indian Ocean
In Kenya, where exporting oil will mean building a $4.5 billion pipeline from the north of the country to the Indian Ocean, Tullow must deal with politicians looking to levy taxes on the nascent oil industry and protests from local residents. The company is confident it can overcome both. Video: ECB Stress Tests: Which Banks Will Fail?
President Uhuru Kenyatta said in August that the nation should maximize benefits from its mineral resources and consider capital gains taxes on oil discoveries.
“Putting a capital gains tax on that in my view is totally wrong and it doesn’t help the industry grow,” Heavey said. “Especially within a climate like this where there’s been a vast amount of cash flow that’s moved out of the international sector into the shale industry in the states, so any uncertainty creates problems.”
Discussions are taking place with the government over the issue, he said. Video: EBF Says Stress Tests Show Robust Banking Sector
Tullow and its partner Africa Oil Corp. (AOI) are having to placate local populations as drilling operations move from one area to another.
“We’re moving the rigs from one location to other areas, which are different communities, which means the workforce that was on the rig we need to change out,” said Paul McDade, Tullow’s chief operating officer. “It creates new tensions.”
Progress has been made over the design of the pipeline. Whether the line will take a northern or southern route through the country and how it will be financed remains under discussion, McDade said.
More broadly, Heavey said the company is well placed to weather the dip in oil prices, which reached a four-year low in London trading today.
Tullow has a hedging program in place for the next two years and “a very strong cash flow and a very strong banking facility,”, Heavey said. “The whole thing is not to get excited, have a cup of tea, think about the best way forward.”
I hate to say it, but there is no guarantee that Tullow will drill Namibia. Their main focus continues to be Ghana (production) & onshore Kenya (proven oil).
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PCL Price at posting:
3.0¢ Sentiment: Hold Disclosure: Held
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