Tullow’s Marriage with Capricorn – Abandoned at the Altar - Africa’s premier report on the oil, gas and energy landscape.

Tullow’s Marriage with Capricorn – Abandoned at the Altar

By Gerard Kreeft

In was only a few months ago—June 2022—that it was announced that Tullow Oil and Capricorn Energy were smitten and anticipations were high. The relationship would flower and blossom, setting new precedents for Africa focused Independents. Now September 2022 Capricorn and NewMed Energy, an Israel-based natural gas company, have found each other and Tullow has been stood up at the altar. What is behind this change of heart?

The simple answer is geo-politics. NewMed has seized the moment to position itself to be an early provider of natural gas/LNG to Europe. Capricorn, with its London stock market listing and its proximity to European markets gives NewMed excellent access to European gas markets. To entice Capricorn shareholders, a dividend of $620Million is being offered at the completion of the deal. Capricorn shareholders will retain a 10.3% of the share capital of NewMed. NewMed will hold 89.7% of the group’s share capital.

Capricorn: A Case of Take the Money and Run?

The Capricorn-Tullow proposed merger, was announced as a merger of equals. Yet Capricorn would be taken over by Tullow. By all accounts Capricorn has a very tenuous existence and was looking for a better suitor. Capricorn Energy’s sole production of some 36,500Barrels of Oil Equivalent Per Day (BOEPD), is coming from its Western Desert, Egypt asset which it bought from Shell in September 2021.

The Shell connection also takes us to India. The Rajasthan asset was bought by Cairn from Shell and discovered in 2004. At the time this was the largest onshore discovery in India for more than 25 years with the potential to provide more than 30% of India’s daily crude oil production.

Cairn Energy sought to raise capital for its India subsidiary Cairn India in order to further develop the Rajasthan block. Subsequently Vedanta Resources purchased a majority stake of Cairn India in 2010 from Cairn Energy for $8.48Billion. According to the Capricorn website $4.5Billion was paid out to shareholders between 2006 and 2012.

Along the way, the Indian government made a retrospective tax demand, and the dispute that lasted seven years and was finally settled by arbitration. The Government of India was required to make to Cairn/Capricorn a final payment of $1.06Billion. This payment has bolstered Capricorn’s wallet.

While its Indian debacle was playing out, Capricorn continued exploration activities elsewhere. It discovered the Sangomar Field in Senegal in 2014, and subsequently sold it to Woodside. Upon first oil, anticipated in 2023, Woodside will pay Capricorn $100Million. Capricorn also participated in the development of two of the largest projects in the UK North Sea, Catcher and Kraken, which began production in 2017 and subsequently sold in November 2021.

Capricorn may now have exploration rights in the UK, Egypt, Israel, Mauritania, Mexico and Suriname but these properties add little to the company’s value at a time when oil and gas assets, especially exploration assets have a diminishing value.

The Capricorn share price on January 5, 2018 was 266 pence, and on June 1, 2022 was 202 pence. At the time of the announced merger with NewMed on September 30, 2022, the share price had increased to 245 pence.  Capricorn’s stock market capitalization as of October 3, 2022 was 755Million British pounds.

Tullow: An Orphan seeking a Home

Tullow Oil, long seen as a preeminent Africa focused independent, has in the last 3-5 years been forced to face, squarely, the reduction of its huge debt load. In December 2019 CEO Paul McDade was sacked by Tullow’s board of directors because the company had to write off $1.2Billion, resulting in a halving of its share price, and a cancellation of any possible dividend. The company share price was 220 pence on January 5, 2018 and on June 1, 2022 it had been reduced to only 55 pence per share price. A four-fold reduction! In the period July-September, 2022 the share price has floundered between 40-43 pences per share.  Tullow’s stock market capitalization on October 3, 2022 was 606Million British pounds which was 20% lower than the market capitalization of Capricorn.  An amazing disparity in investor confidence and stock performance.

Tullow’s debt also was accumulated because of missed production predictions from its flagship operations in Ghana. The company suffered setbacks in Uganda, Kenya and Guyana. In 2020, in order to raise cash, the Irish producer sold all of its Uganda assets to TOTALEnergies for $575Million.  In 2021 the company produced 59,000 bopd (barrels of oil per day): 42,000BOPD from its Jubilee and TEN fields in Ghana and an additional 16,000BOPD from non-operating assets in Gabon and Ivory Coast.

At the time of the merger talks with Capricorn, Tullow Oil’s CEO Rahul Dhir promised production of some 125,000BOEPD by 2025 which it will certainly need in order to further reduce debt and develop its exploration assets. The need for a new plan is urgent.

NewMed: The Prince in Waiting

Yossi Abu, CEO of NewMed Energy, is the prime strategist in building Israel’s natural gas entity which could become an important source for the European Union.  NewMed is Israel’s leading energy partnership in exploration, development, production and sale of natural gas and condensate.  NewMed’s shares trade on the Tel Aviv stock exchange.  In June 2022 the EU, Egypt and Israel signed a tripartite agreement to ship LNG to Europe via Egypt’s LNG infrastructure.

NewMed, originally named Delek Drilling, was founded in 1993 to search for natural gas in the Mediterranean. Subsequently Noble Energy (now Chevron) and two additional companies also farmed in. ‘Yan Tethys’ in 2004 became Israel’s first natural gas project.

Other successes followed:

  • Tamar reservoir in 2009 with proven reserves of 306Billion cubic metres (Bcm).
  • Leviathan reservoir with proven reserves of 650 Bcm in 2010 and FID(final investment decision) in 2017 and now shipping natural gas to customers in Israel, Jordan and Egypt.
  • Aphrodite, in the Cyprus EEZ zone (Exclusive Economic Zone) in 2011 together with Shell and Chevron.

NewMed states that the Leviathan+ Aphrodite fields have gas reserves of 13.4 tcf, comparable to Angola which has gas reserves of 11 tcf. By 2030 the expanded Leviathan Project(1B) + Aphrodite will have production of  200,000BOEPD.

Concluding Remarks

What is surprising is the fluidity and speed of the changing energy landscape. The Tullow-Capricorn merger, once seen as a done deal, was scrapped and instead NewMed has emerged as a potential regional gas player. Given the EU’s search for alternative gas resources NewMed has proven to be at the right place and at the right time.

The real loser is Tullow which must (again)seek new opportunities in the African landscape. Not just oil and gas projects but gas projects seen as a stepping stone to meet CO2 neutrality by 2050. The Tullow dilemma is also a warning to other independents seeking new opportunities. Green deals may be closer than you think.  Also, in its weakened position, Tullow could be swallowed by a larger company who wishes to increase their footprint in Africa.

Capricorn has been rescued from an untimely demise. Shareholders will receive a handsome dividend and Capricorn will be remembered only as providing NewMed access to London’s money markets and to the EU’s heartland. No doubt we will hear more from NewMed in the future.

Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise.  He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe.  Kreeft has Dutch and Canadian citizenship and resides in the Netherlands.  He writes on a regular basis for Africa Oil + Gas Report, and contributes to IEEFA(Institute for Energy Economics and Financial Analysis). His book ‘The 10 Commandments of the Energy Transition ‘is available His book The 10 commandments of the Energy Transition is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition




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