Tullow Oil, which is managing the oil reserves in Ngamia 1 under the now-bankrupt Lokichar Africa Oil, its London-based company is facing governance issues and is slowly sinking with the fallacious Kenyan oil-exporting dream.
Even as Kenya exported the first shipload of oil that earned the country Sh1.2 billion, there appear numerous landmines on the road to commercial oil. The firm, expected to deliver Kenya’s oil promise, in early December announced changes in management. The firm’s chief executive and director of the exploration quit and its board accused them of overseeing a series of blunders in the different operations where the UK based oil firm has a presence. Particularly, mistakes that led to the decline of oil production in Ghana.
“Production performance has been significantly below expectations from the group’s main producing assets, the TEN and Jubilee fields in Ghana. The Board has been disappointed by the performance of Tullow’s business and now needs time to complete its thorough review of operations.” said the firm in a statement.
Here is how the Kenyan dream of exporting oil was exaggerated. The Lokichar project has already experienced challenges that have resulted in pushing the date for first oil export from an optimistic 2021 to 2022 and now a doubtful 2023. The project is currently at a critical stage in the Kenyan project, where Tullow together with its joint venture partners (Total and Africa Oil) as well as the Government, are preparing the Final Investment Decision (FID) in the second half of 2020.
The FID was expected to be signed in the course of last year but pushed to 2020 owing to the project’s failure to achieve key milestones before the partners can commit.
At FID, the different partners will make commitments on what they will bring to the table to facilitate the development of the oil fields, pipeline construction, and other infrastructure.
The firm might also have difficulties raising funds to carry forward its work in Kenya after rating agency Moody’s downgraded Tullow’s rating. It reviewed the firm’s Corporate Family Rating to B2 from B1 and the probability of default rating (PDR) to B2-PD from B1-PD.
“The outlook on all Tullow’s ratings was changed to negative from stable. The negative outlook reflects the uncertainty affecting Tullow’s future prospects ahead of the completion of the review of operations currently underway and the appointment of a new chief executive,” said Moodys.
According to the Environmental and Social Impact Assessments for both the oil fields including the oil processing facility as well as the crude oil pipeline, construction will take three years after the award of the contracts. Assuming these are given in the course of 2020, the oilfields, the earliest Kenya can start the production will be in late 2023.
“The Lokichar to Lamu Crude Oil Pipeline (LLCOP) Project is anticipated to take 33 to 36 months to construct from the EPC contract award and the operational life is expected to be 25 years. The duration to the Project First Oil (FO) is approximately 36 months from commencement of construction,” said the ESIA report for the crude oil pipeline, which was lodged with Nema in November.
Land acquisition is usually a lengthy and protracted process and could delay the project. Tullow recently said 75 percent of the land surveys and valuations have been completed by the National Land Commission.
“Before the oil exploration started, we would traverse the land without being asked questions. I could move all the way from Turkana East to West… in fact, there was never a major distinction between a person from Turkana East or West but today, people are increasingly aware of where the other person is coming from. It never meant much that I came from Turkana East but now it does. Today, there are areas you cannot graze your livestock or walk freely. This is the impact that the project has had and Tullow has just sunk 40 wells, I cannot imagine what 300 wells will do to us,” said a Turkana resident during a recent forum on oil.
Tullow and its partner Africa Oil in Lokichar are also having a fight with KRA over unpaid taxes, which is demanding over Sh10 billion from the two companies. KRA says the two firms did not pay taxes after selling their stake in different oil between 2012 and 2018. The taxman is demanding Sh5.2 billion from Tullow in Value Added Tax (VAT), which KRA said Tullow ought to have paid following the sale of its 25 percent interest in Block 12A to Delonex Energy in 2015 and a further 10 percent in 2018, to the same firm.
In its latest financials for the quarter to September, Africa Oil noted that KRA is demanding Sh5.15 billion ($51.5 million) from its Kenyan arm in corporate income tax and VAT relating to farm-out transactions completed during the period 2012 to 2017.
“The company has objected to the assessment and is prepared to appeal any further claims made by the KRA in regard to this matter. Management has determined that based on the facts and Kenya tax law that the probability of paying the assessed tax is low,” said the firm in disclosures to investors.
“The Company’s current working capital position may not provide it with sufficient capital resources to complete development activities being considered in the South Lokichar Basin (Kenya), it said when it published the financial results to September 2019. To finance its future acquisition, exploration, development and operating costs, Africa Oil may require financing from external sources, including the issuance of new shares, issuance of debt or executing working interest farm-out or disposition arrangements. There can be no assurance that such financing will be available to the company or, if available, that it will be offered on terms acceptable to Africa Oil.” Africa Oil, headquartered in Canada reported on their bankruptcy and unable to chip in the Sh 300 Billion Governments Project Oil Africa.