Tullow job cuts in Kenya deepen oil export doubts

What you need to know:

A costly clause may expose the government to expenses incurred by the firms during stoppages and other delays.
The production sharing contract between the government and Tullow has never been disclosed, leaving many guessing what level of wealth to expect from the project.

Tullow Oil’s latest job cuts announcement in Kenya has deepened doubts on the viability of the country’s oil exploration

The looming staff layoffs could see up to 325 workers lose their jobs, as deepening financial woes cast a dark shadow on Uganda and Kenya’s wait for an economic boom from their petroleum discoveries.

The British company confirmed to The EastAfrican that an estimated 35 workers at its Kenyan operations will be sent home, while Reuters news agency reported that even deeper cuts are looming.

Its Cape Town and Dublin offices are facing closure while the total workforce will be reduced by a third to 650, according to the Reuters report.

Tullow’s financial struggles are attributed to a sharp drop in revenue from its Ghana operation, delays in operationalisation and sale of its stake in East Africa and reports of poor quality of its Guyana oil discovery.

“The restructuring follows Tullow’s announcement in December that its global oil production and associated revenues in 2020 and beyond would be lower than forecast. In Kenya, the team will be reduced, and will only be focused on the critical path activities that will allow us to continue to target FID [final investment decision] at the end of 2020,” said Tullow Kenya MD, Martin Mbogo, in a response to The EastAfrican’s queries.

The government has however maintained a brave face even as Tullow’s actions paint a gloomy picture.

The financial troubles have put in doubt earlier timelines of Tullow’s commercialisation of the Uganda and Kenyan crude reserves.

Former CEO Paul McDade announced his sudden exit in December, sending the firm’s share price on a sharp spiral.

The Group’s global oil production in 2020 is forecast to average between 70,000 and 80,000 barrels per day (bpd), down from 87,000 bpd, while production for the following three years is expected to average around 70,000 bpd.

Among the critical activities towards achieving FID will include submission of the Field Development Plan, securing Environmental and Social Impact Assessment (ESIA) licences for upstream and midstream, working with the government to secure access rights to land and water, and project financing.

In a memo to all staff dated February 5, 2020, Mr Mbogo told Kenyan employees that the company has been forced to review and assess its financial performance and business operations to ensure resources are allocated in the most efficient way possible and to ensure that the current structure of Tullow is meeting the demands of the business effectively.

The problems facing the London Stock Exchange listed UK conglomerate started late last year after the company downgraded its production outlook and Mr McDade and exploration director Angus McCoss resigned.

The company also abolished its dividend payout, reduced its capital expenditure and cut costs at its operating fields.

Kenya’s Petroleum Principal Secretary Andrew Kamau at the time played down the company’s problems abroad, terming them a “non-issue” in Kenya.

However, Tullow’s projects in Kenya and Uganda have started facing challenges.

The company requires huge resources for the Kenyan oilfields in Turkana and Uganda’s Lake Albert Rift basin oilfields, which are still far from getting to commercial production.

The Kenyan operation, which includes the construction of an oil processing facility and 890-kilometre crude oil pipeline from Lokichar to Lamu, has already experienced challenges that have resulted in pushing the date for first oil export from 2021 to 2022.

In June last year, Kenya reached the heads of terms (HoT) agreement with Tullow Oil, Total and Africa Oil over the planned development of oil discoveries in the north of the country known as Project Oil Kenya.

The agreement covered the key fiscal and commercial principles for the development of discoveries in blocks 10BB and 13T in the South Lokichar Basin, near Lake Turkana, and also provided a framework and commercial certainty required to move ahead with negotiating the fully termed upstream and midstream long-form agreements required before FID.

It also covered the “physical incentives”, including the construction of the pipeline from the remote Turkana region to a planned export terminal at Lamu on the northern coast.

But Tullow postponed the FID until 2020 after signing the agreement.

According to the Petroleum Economist, the decision to delay FID indicates that the project is not running quite as smoothly as the HoT agreement suggested.

Tullow cited government setbacks in securing water rights and in its acquisition of land for the upstream and pipeline developments. It also stated that Kenya's National Environment Management Agency had requested additional community consultations as part of environmental and social impact assessments.

Last month, it emerged that Tullow Oil and Total were planning to reduce their shareholding in Kenya’s first oil development with a joint sale that could see Tullow exit completely, amid uncertainty over the project’s launch.

Tullow hinted last year that it intended to sell up to 20 per cent of its 50 per cent stake in the blocks 10 BA, 10 BB and 13T in the South Lokichar Basin.

The Kenya Civil Society Platform on Oil and Gas (KCSPOG), which has kept track of the project and has previously criticised the government especially on the Early Oil Pilot Scheme (EOPS), said the new developments complicate matters for the project, particularly the financial investment decision that had been pushed to the second half of this year.

KCSPOG coordinator Charles Wanguhu said Tullow’s about-turn will heavily impact the project’s path towards full field development.

“The joint sale is not likely to be completed within the first quarter of the year and a new entrant would not be able to complete all the necessary paperwork and be in a position to make a final investment decision on the project this year. Delays may also be occasioned by tax concerns, with Tullow already embroiled in a tussle with the taxman over its farm down (sale of stake) to Delonex in 2015,” Mr Wanguhu said.

In Uganda, Tullow Oil and French oil marketing giant Total SA pulled out of the construction of 1,445-km East African Oil Pipeline whose cost is $3.5 billion over a tax dispute with the Ugandan government.

In December last year, however, Hanns Kyazze, a communications specialist at the Ministry of Energy and Mineral Development said the government had offered the companies a deal to end the dispute, although he did not provide details of the agreement. The pipeline from Kabaale, Hoima in Uganda to Chongoleani in Tanga, Tanzania, is being developed to transport crude oil to Tanga port in Tanzania.

The development of this pipeline is being led by the licenced upstream oil companies in Uganda, with participating interests by the governments of Uganda and Tanzania.

Uganda has been locked in a dispute with the firms, including France's Total and China's CNOOC, over taxes assessed on Tullow's plans to sell some of its stakes in the country's oilfields.

- Additional reporting by Edwin Okoth.

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RESTRUCTURING
In a memo to all staff, Tullow said: “Due to this review it has become necessary to restructure the company with some roles becoming unnecessary. These factors have significantly affected the ability of the company to continue sustaining the high human resource wage bill.
“The affected employees will include all expatriates and nationals whether on contract, fixed term or permanent terms. Accordingly, the company will pay all the affected employees a redundancy package comprising the employees’ salaries up to the date of termination, their redundancy severance dues, their termination notice or pay in lieu of notice pursuant to the terms of the affected employees’ employment contract and any accrued but untaken leave.”