Tullow ends virus hiatus but Kenya budding oil export plan still in limbo

Workers walk past storage tanks at Tullow Oil's Ngamia 8 drilling site in Lokichar, Turkana County, Kenya, February 8, 2018. [Reuters]

While operations at Tullow Oil’s Turkana oil fields are slowly resuming following a three-month hiatus, commercialisation of Kenya’s oil still faces major delays.

The company together with its partners Total and Africa Oil, Tullow had in May issued the government with a force majeure notice in which it said it could not meet its contractual obligations due to Covid-19 restrictions.

But last week, Africa Oil in a statement said the joint venture partners had written to the Petroleum Ministry withdrawing the notice.

The firm cited improvement in Covid-19 restrictions globally, including the resumption of local and international flights. This, the firm noted, allowed the restart of various workstreams under the Project Oil Kenya.

Even as Tullow and its partners go back to work, the project still has to grapple with issues that had in place before the pandemic broke out.

These include the planned farm-outs by Tullow and Total Oil. The two companies are still in the process of selling half of their stakes in the project, and as one industry player notes, this is usually a complex process that might see some aspects of the operation progress at even a slower pace.

There are also other factors that Tullow has cited over time, including the government’s provision of water and land rights, which it noted have moved at a slower than expected pate.

And while the companies have identified the Turkwel Gorge as an ideal source of the huge amount of water needed for the project, getting the requisite approvals has not been forthcoming.

It also needs the National Land Commission (NLC) to acquire and deliver land for both the development of oil fields as well as the pipeline to Lamu. NLC has already started the process of acquiring the land.

In an earlier forum, Shell Ghana Managing Director Brian Muriuki explained what a force majeure means and why it is not good for Kenya’s fledgeling oil industry

“What force majeure does is it stops the clock. What you see happening is there will be a clock stopping on everything both technical and commercial sides up to when it is lifted,” said Muriuki, who has previously worked for Shell in Kenya and consulted for the Kenyan Ministry of Petroleum.

He spoke during a virtual discussion on oil production and new exploration in Kenya under Covid-19.

“Everything from a scheduled perspective will shift…. (it could mean) potential delays of FID and project execution.”

Oilfield Movers Chief Finance Officer Mwendia Nyagah noted that the force majeure cited by Tullow and its partners was in addition to other issues that the industry had been grappling with.

These include the planned sale of 50 per cent stakes by Tullow and Total. Tullow has a 50 per cent stake, and the transaction would reduce its stake to 25 per cent. Total has a 25 per cent stake.

“It comes in the background of Total and Tullow intending to sell part of their stakes. That was already a big spanner in the works... the farm-out itself may take a long time if we take Uganda as a reference point,” he told the virtual forum organised by the Africa Energy Chamber.

Economically viable

Tullow expected the force majeure to “delay FID (final investment decision) and impact the ongoing farm-down process”. This is in addition to the earlier delays it had anticipated owing access to such things as water and land.

The company has recently said it expects a lower level of challenges from the community, citing success in the implementation of the Early Oil Pilot Scheme (EOPS), which it noted helped reduce the risk for the project as it enters the commercial phase.

“Factors that influence the successful delivery of the Kenya project and reaching FID by end of 2020 are dependent on government support to deliver access to land, water and the offloading berth currently being built at Lamu Port and successful engineering, procurement, and construction (EPC) tenders for the upstream facilities and pipeline,” said Tullow in a recent update to shareholders.

“Failure to achieve this may result in higher-than-anticipated costs leading to the project not being economically viable at current oil prices.”

Thus while the force majeure notices may have been withdrawn and the project still grapples with the old problems that have resulted in major delays already.

The project was expected to get to the FID phase by the end of this year, but the three months of inactivity might push this to 2021.

During this stage, the joint venture partners are expected to commit resources as well as agree on the award of key construction contracts. Only after FID can the partners award contracts for such critical project components as pipeline construction.

Tullow had earlier this year said the FID would take place later this year, having pushed it forward from early 2019.

The project was earlier expected to export the first cargo of commercially produced oil in 2021. The project was, however, pushed to 2022 and later to 2023.

To achieve first oil in 2023, the players needed to reach FID this year as well as award major contracts, including for the construction of a pipeline to Lamu this year.

The pipeline could take about three years to build and see it completed in late 2023 and in time for the first exports.

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