Uganda still a cash cow for Tullow Oil

Funny how life can change! Not so long ago, Tullow Oil Plc would release some of its annual reports where it presented Uganda as its main prize asset.

Longer paragraphs of updates on the number of wells the company had drilled in western Uganda, and the spectacular finds it had encountered, were usually the main talking points in the reports.

Things were so colourful then that at some point Uganda accounted for almost the company’s entire profit after the Irish firm sold two thirds of its stake in the country to France’s Total and China’s Cnooc two years ago.

Footnote
Today, Uganda has almost been reduced to a footnote, going by Tullow’s latest report, released last week. In the new report, Tullow lost money – a monstrous  $500 million, partly “relating to an updated assessment of the recoverability of the Ugandan contingent consideration” – whatever that means!

Anyway, matters are not any easier for Tullow after the company also lost more money as a result of the collapsing oil prices.

To ride through the storm, the company says there is “a major internal review of Tullow’s organization… which will lead to substantial long-term cost savings and efficiencies across the group.”

When it finally releases its full-year results next month, Tullow will very likely announce a cutback in expenditure.

Almost 30 years after he left the UK to take up abandoned oil wells in Senegal, Aidan Heavey, the chief executive officer of Tullow Plc, appears to be facing his toughest time ever.

The company says it will concentrate on Kenya, where it is about to carry out tests on some oil wells. The company will also drill more wells in the Ngamia basin. Tullow, perhaps the most successful exploration company in Africa, now intends to spend more money in West Africa, although the company faces some issues with a license in Gabon.

Production at the company’s Jubilee field in Ghana has fewer problems, with production expected to spike. But do not be fooled. For all its trials and tribulations, Uganda remains Tullow’s hot pot of gold; Uganda has an eye-popping 87 per cent oil-discovery rate.

The company has battled tooth and nail to hold onto Uganda – from its battles with Italian oil giant ENI, to its tax woes with Ugandan authorities, right down to unfounded allegations  from some Ugandan legislators that it bribed some ministers. All these fights have left Tullow Oil bruised. From the time it announced a $67 million write-off from the once promising Ngassa well, Tullow has not had that much exciting news from Uganda. Still, Uganda remains the company’s cash cow.

That does not mean, though, that Tullow should not reassess its plans for Uganda. For quite some time, the three oil companies in Uganda – Tullow, Total and Cnooc - have placed much of their hope in Uganda. But Uganda, for all its rich oil-wealth, continues to move painfully slow; it is starting to hurt the oil companies.

The oil companies placed much of their hope on a new licensing round, where the remaining 60 per cent of the Albertine graben would be parcelled out to interested oil companies. That process has been delayed by more than two years.

Moving faster
But now, Uganda appears like it is ready to move a little faster. By the start of this week, the two firms bidding to build Uganda’s oil refinery - RT Global Resources of Russia and SK Group Consortium of South Korea - were expected to have submitted their final offers to Uganda’s government.

The government also says it will announce the winner of the two bids in February, and right after get down to the process of creating a company, a special purpose vehicle, for the refinery.

The government says it will complete the compensation of all those people who lived around the refinery area by March, effectively putting to rest all the court cases and grumbling that have accompanied the process.

A draft plan for the storage and transportation of petroleum products has also been finalised, while the oil companies say they are consulting government on the pre-front engineering studies on the feeder oil pipelines.  Even if Uganda was given the benefit of the doubt over its commitment to move quickly, its history of dragging its feet and the current conditions should create some level of doubt among investors.

The fall in the price of oil will test Tullow’s, and indeed other oil companies', resolve to keep large investments in markets such as Uganda, especially in a country that is heading into an election period. Tullow’s share price has nosedived in line with the drop in oil prices.

Regardless, it is hard to see Tullow leave Uganda without a good fight. Aidan Heavey has been around the continent long enough to know how to pick his battles, and too stubborn to simply quit. Don’t write off the company just yet.  

By
jeff@observer.ug
Twitter: jeff_mbanga