Indian Eyes Sh356.5bn Tullow Oil stake in Turkana

In Africa?s frontier environment, drilling may bring a higher reward, but since most exploration takes place offshore, single wells can cost hundreds of millions of dollars, increasing the industry?s susceptibility to lower oil prices.

Two Indian state-backed companies are in talks to buy Tullow Oil’s stake in Turkana oil projects for Sh356.5 billion ($3 billion).

This will be one of the largest deals in Kenyan history, giving a foreign government a stake in a venture aimed at developing infrastructure for oil production.

According to Bloomberg, ONGC Videsh and Indian Oil Corp may buy the stake for between $2 billion and $3 billion.

Executives from India’s largest refiner, Indian Oil Corp, and ONGC Videsh, the country’s second-largest oil and gas firm, met with Kenya’s Energy Ministry last week in an effort to smooth the deal.

Petroleum Principal Secretary Andrew Kamau requested a comment from Tullow in response to a statement issued on Twitter over the weekend.

“The Kenyan Ministry of Petroleum and Mines hosted a meeting with Tullow, OVL and IOCL in Nairobi last week as part of Tullow’s ongoing process to secure a strategic investor for Project Oil Kenya,” Tullow had said on Twitter. “The meeting was positive and the parties agreed to hold further discussions.”

India, the world’s fourth-largest oil consumer, has directed state oil companies to acquire assets abroad in order to improve the security of its energy supplies. The country imports roughly 80% of its crude needs.

Following the agreement, the Indian state-backed companies will be joint operators of the project, according to Bloomberg.

Tullow is the project’s current operator, with a 50% stake, while partners Africa Oil Corp. and TotalEnergies SE each have a 25% stake.

Since Tullow discovered crude in Kenya in 2012, the potential deal represents a resurgence of Kenya’s desire to export oil on a commercial scale.

Tullow submitted a final field development program to the government in December, reviving a project that had stalled while the company focused on debt management and strategy finalization.

Tullow, which discovered oil ten years ago, has faced pressure from Kenya to develop the Turkana oil wells, which it expects to yield up to 120,000 barrels per day once production begins.

In March 2012, Kenya announced the discovery of oil in Blocks 10BB and 13T in Turkana, raising hopes for the petro-dollars needed to fuel economic growth. However, crude oil production has yet to be fully commercialized in the country.

Tullow had been given until December 2021 to present a comprehensive investment plan for oil production in Turkana or risk losing the concession on two exploration fields in the area.

Tullow and its project partners, Africa Oil and Total, had originally planned to make a final investment decision in 2019 and begin producing oil this year or next.

A deep-pocketed strategic partner would allow Tullow to mitigate its risks for the multi-billion shilling project, which includes the construction of a crude pipeline and oilfield processing facilities.

Tullow previously announced plans to sell a significant portion of its 50% stake in the blocks, citing financial difficulties.

The Ministry of Energy downplayed concerns about the delays in Kenya’s oil dream, claiming that the plans had finally taken shape.

Kenya’s contract with Tullow for the concession of the two Lokichar Basin blocks — the 4,719 square kilometer 13T and the 6,172 square kilometer 10BB — included a clause allowing the government to exercise a back-in right, which essentially means buying back a percentage of ownership before production begins.

These rights enable Kenyans to own a portion of oil-producing blocks once they have been certified to hold reserves, shielding taxpayers from the high-risk initial exploration stage.

Mr Kamau, who previously stated that the government has the right to buy back 15% of one block and 20% of the other, maintains that the government does not have to exercise that option.

Over the life of the field, the British company expects to recover 585 million barrels of oil (mmbo).

According to an audit conducted by the British petroleum consulting firm Gaffney Cline Associates, the commercially extractable volume increased from 433 million barrels to 585 million barrels (GCA).

Tullow estimated that production from the wells would cost $22 per barrel.

At the current crude price of $100 per barrel, the reservoir’s potential crude is worth Sh33.7 trillion ($284 billion), which is nearly three times Kenya’s GDP, while the proven commercially viable reserves are worth Sh6.9 trillion ($58.4 billion).

Kenya, on the other hand, would not earn the entire amount when production begins, with a significant portion going to production and shipping costs. According to an earlier plan, the waxy crude will be shipped from the fields to the port of Lamu via a 20-inch, 825-kilometer heated pipeline.