Tullow trouble for Uganda

By Haggai Matsiko

Apprehensive government offers to renegotiate as once-prized wildcatter struggles to stay afloat

Since news surfaced that it was being hit hard by the downturn in the global oil markets, the mood at Tullow Oil Uganda’s offices at Plot 15 Yusuf Lule Road in Kampala has been sombre apprehension. With no major works projects planned for the 2015 financial year, Tullow Uganda is effectively in hibernation.

It is a far cry from the past when blue-helmeted Tullow field staff, clad in their blue and sometimes white overalls mingled with the executives in sharp suits even as their trucks and latest model SUVs competed for space in the small parking.

Back then, Ugandans eyeing investments in the oil industry courted Tullow for any business not taken by international players like Ojec, Harliburton and Schlumberger; the dominant suppliers at Tullow’s camps.

Today, tension is the new king as Tullow officials wait for a directive from London for another major staff layoff—the second in less than a year.

When asked about what shape the looming layoff might take, the Tullow Head of media, George Cazenove stuck to the official communiqué and told The Independent that there would be job cuts across Tullow and that includes Uganda.

When asked to what extent the delay by the Uganda government to award it Production Licenses had contributed to Tullow Oil’s current financial situation, Cazenove said curtly that “They haven’t.”

Tullow’s recently released financial report that showed it made a loss after tax of $1.64 billion in 2014. Accompanying notes spoke of impairment charges and a loss relating to the Uganda farm-down as the major contributory factors.  Up to US$482 million loss was marked against asset disposals in Uganda.

But Tullow remains positive. When asked whether the company would participate in Uganda’s new round of licensing, Cazenove again said laconically: “We don’t comment on licensing rounds.”

That was a slight contrast to the past when Cazenove has been quoted as having responded with a “no”.

Currently as things stand, Tullow is not involved in any activity in Uganda and plans none for 2016.

Even the US$170 million it has marked for the East African operations, seem to be for mainly Kenya, where exploration and appraisal are on-going.

Tullow last lay off 41 staff in March 2014. At the time it said it had accomplished the major works in its fields and the staff had no role in the future.

The current anticipated layoffs are part of Tullow Oil’s strategy to survive crumbling oil prices (at US$48 in mid-February). Tullow made a US$1.6 billion loss for the year ending December 2014 and a huge debt of US$3.1 billion is sitting on its books, according to its financial results released on Feb.11.

Weighing Tullow’s options

With Tullow’s debt now over three times its earnings, observers in and out Uganda are weighing the ability of its local subsidiary— Tullow Uganda to mobilise resources for the production phase.

Tullow Uganda owns 33.3% of Uganda’s discovered oil resources and requires about US$12 billion investment to turn that into cash.

Commenting on Tullow’s performance and prospects, company Chief Executive Aidan Heavey remained positive.

“2014 was a difficult year for our industry and a challenging one for Tullow,” he said, “In response to this and the fall in the oil price, we have reset our business and are focusing our capital expenditure on high-quality, low-cost oil production in West Africa.”

He added that Tullow had increased and diversified its sources of debt capital, reduced exploration expenditure, implemented significant cost saving initiatives, and were suspending the dividend.

According to Heavey, those measures would provide the company with substantial headroom and liquidity to deliver its strategy.

An investors’ advisory by Barclays Bank agreed.  It described Tullow’s decisions as pragmatic given the company’s current capital commitments and noted that the target of $500 million cost savings over three years is material and shows that Tullow management is focused on ensuring the company remains a low-cost oil producer and developer.

Hopefully, Tullow’s optimism will reassure Uganda government officials since Tullow officials continue to pledge a commitment to the country.

It is a different tone from February 2014 when Tullow Oil’s Chief Operating Officer, Paul McDade, hinted at Tullow bailing out.

At the time, McDade told the Wall Street Journal:  “[Kenya]”will be easier to develop and the government is very enthusiastic for us to get underway with that development and get first oil as soon as possible. So as we look at the phasing of our investments there’s a lot of priority being given to Kenya. If it continues to be very material and grow then we may look to modify our holdings in Uganda.”

McDade’s comment kicked up a storm in government circles in Kampala.

But when The Independent alluded to that in a recent story, aim, Tullow Uganda’s Corporate Affairs Manager, Conrad Nkutu, insisted that the company was the single biggest investor in Uganda and was committed to the country.

Nkutu’s reassurance is music to the over 100 Ugandans that Tullow employs throughout its operations. Tullow has also spent over US$200 million on 600 local service providers/suppliers and another US$7.5 million on training Ugandans since 2004.

Nkutu’s comments fly in the face of those looking at the red all over Tullow’s books currently and claiming the company may have trouble raising cash for its Ugandan obligations especially given that its focus is now on the US$4.6 billion TEN project in Ghana.

The TEN project is critical to Tullow because most of its debt matures after its first oil – in the middle of 2016. Tullow revenues are also prudently hedged at around 60% of its 2015 oil sales with an average floor price of around $86 per barrel.

But Tullow Oil is also being watched closely since its chiefs admitted on Feb.14 that they may be compelled to breach the terms of its biggest loan facility after amassing debts of US$3.1 billion. Its financial report indicated a gearing or Net Debt over Net Assets of 77%. Not good since favoured gearing in the global oil sector is between 10 and 20%.

These numbers are critical to Uganda because Tullow has the biggest number of applications for Production Licences—nine—its other partners Total E&P and CNOOC have three and one respectively.

CNOOC which is the only one to be awarded a PL has spent over $2 billion, the biggest chunk into implementing requirements for the Kingfisher production licence. It received the PL in 2013 and it is spending heavily on production infrastructure.

Tullow in its 2014 figures noted that between US$8-12 billion is required to develop Uganda’s resources.

The problem is that for now Tullow seems liquidity constrained and hoping on the US$4.6 billion TEN Project in Ghana. The project is 50% complete with first oil expected in mid-2016 and 80,000 bopd gross around the end of 2016.

Some Ugandan officials say were the government to issue Tullow its 9 PLs, it would struggle to find the resources required for it to implement works around them.

Tullow, according to some officials, is partly protected by its US$2.9 farm down with CNOOC and Total which gave the three players a 33.3 percent stake in all the assets. This means that whether Tullow gets the PL or CNOOC gets it, all of them have to contribute towards financing operations.

Renegotiating contracts

The other positive for Tullow, The Independent exclusively reveals that officials at the Ministry of Energy’s Petroleum Exploration and Development Directorate (PEPD) are opening up a re-discussion of all three companies’ PL applications.

The Independent has seen a letter in which, Ernest Rubondo, the Commissioner PEPD noted that with the recent oil prices falling below US$ 50 per barrel, most of the applications would not make economic sense to develop.

“This is because,” Rubondo noted, “the breakeven price for the submitted development plans is mainly between US$50 and US$60 per barrel. It is important that the companies are engaged on how developments can be undertaken profitably if the oil prices did not go up quickly.”

This could buy Tullow some time. In any case, Tullow Head of media, George Cazenove assured The Independent that money would be no problem.

He said: “Because Tullow will have 100,000 barrels of oil a day of low cost production at around the same time that we are aiming to get FID [Final Investment Decision] in East Africa, there will be no issue for Tullow and its financing.”

As The Independent reported two weeks ago, due to delays by government to award them PLs, the oil companies were forced to push a head a key timeline—the Front End Engineering Design (FEED) —until 2016. The FEED is what determines whether the project is achievable or not. The extension of the FEED, directly means that the companies cannot reach the FID before 2017. And after the FID, the companies need 36 months before Uganda can realise first oil—the reason The Independent concluded that Uganda can only get first oil by 2020.

Tullow Uganda, as its General Manager Jimmy Mugerwa said late 2014, is wary of farther delays. Mugerwa back then also hinted on the likely impact of delays.

“Delays by Uganda could see the price dropping due to the newly discovered reserves in the USA due to this new technology (producing more resources which could rival Saudi Arabia’s by 2020),” Mugerwa said, “if this makes the world oil price to collapse, investors will flee (below $60-$70 a barrel). Hence we need to capture the opportunity when it is still hot otherwise we will miss out (miss out on both revenues & jobs).” Mugerwa now has to deal with his worst case scenario. When he first spoke, he  appeared to be copying from a script by Elly Karuhanga, the Chairman of the Uganda Chamber of Mines and Petroleum (UCMP).

At almost every oil function, Karuhanga would call for speed from President Yoweri Museveni. “Capital is a coward,” he would say, “it only goes where it grows.”

But late last year, Karuhanga told The Independent that the Ghana example had proved that Uganda was not wrong after all to take the necessary steps to avoid mistakes that the likes of Ghana who rushed have made.

At the time Ghana’s Cedi was falling apart and it had borrowed heavily from the Chinese and messed up its economic fundamentals. But with the fall of oil prices, Karuhanga has found his voice again.

Recently, he told The Independent that Uganda now needs to move beyond tough negotiations over 1-5 percentage points over what is recoverable to the big picture—jobs, revenue, amongst others.

It helps that he is the Chairman of UCMP—an organ that brings together players in the mining and oil industry. Every year, UCMP brings in potential investors and experts to explore Uganda’s potential—that is what the Museveni wants—and he has attended and spoken at these events.

Under this body, Karuhanga is still in position to push for Tullow and its partners’ interests. All the players are hurting—Total is also shedding off some staff as The Independent reported last year. But unlike, CNOOC and Total, which are financial giants, Tullow’s situation seems more pronounced.