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Tullow Walks A Tight Rope

The Irish wildcatter negotiates a balancing act between headline grabbing exploration successes and field development risks

“Tullow needs a high profile exploration success to reset sentiment”, writes Investec Securities, the financial analysts.

The company is challenging Tullow Oil’s carefully constructed image of the lead game hunter in the African frontier, asking stockholders to sell the explorer’s shares. “While still a best-in-class explorer”, says the UK based Investec, Tullow “has grown increasingly leveraged to the “P” rather than the “E” side of its portfolio”.

Tullow annua web

Tullow engages a community in Uganda: getting to production here has been a long, hard slog


Tullowreported worldwide working interest production of 79,200 BOEPD in 2012, of which 57,850BOEPD, or 73%, came from African oil and gas fields. These compare with 78,000BOEPD worldwide working interest production in 2011, of which the African output was 53,000BOEPD.

The London listed independent is getting stuck in the exploration wilderness, spending money on vast tracts of underexplored basins even as its production flattens out. Uganda is not coming on stream as quickly as the company hoped as far back as 24 months ago; Ghana hasn’t reached peak production that was promised at on-stream date in December 2010.The company is the operator of the flagship oilfield project in Ghana and the main player in the upcoming production in Uganda. Still, Investec’s views do not necessarily jell with everyone else’s opinion. “Three research analysts have rated the stock with a sell rating, six have assigned a hold rating and twelve have assigned a buy rating to the company. Tullow Oil has a consensus rating of Hold”, the Mideast Times reported on April 30, 2013.

On the bright side,Tullow Oil made the first commercial find in Kenya in 2012, has a long list of exploration and appraisal wells in East Africa, holds the largest acreages under licence in Mauritania, and has participated in the promising Sierra Leone-Liberian basin. The Ghanaian government has given approval for the Plan of Development of the Tweneboa-Enyenra-Ntomme“TEN” cluster of fields, which is now expected to deliver first oil in 2016, with a plateau production rate of 80,000 barrels of oil per day. Future development of gas resources at TEN is anticipated following the commencement of oil startup.  In Kenya, Tullow tested 2,312BOPD in three levels in Twiga South-1, the second discovery in the country. In Uganda, the uncertainty over the size of the refinery to accompany the 200,000BOPD developmenthas been cleared, with President Museveni agreeing to Tullow’s suggestion of  30,000BOPD refinery, alongside the export of crude.

But the exploration successes are mixed and, in the view of Investec, do not provide enough assurance for the market in the face of its sluggish upward movement in hydrocarbon output which provides the hard cash.The two other wells drilled in Kenya and Ethiopia (Paipai-1 and Sabisa_1)haven’t delivered clearly successful results. Ivory Coast keeps coming up with disappointing results and Tullow’s work in the Equatorial segment of South American basins, particularly in French Guiana haven’t been a commercial success.

Investec  highlights “a production profile that has slipped materially to the right, a looming capex bill and an exploration portfolio that, while strong, may not have enough depth to offset fresh production disappointments that Tullow”. The financial analysts say they “estimate a current capex bill (dependent on disposals) in excess of $18Billion out to 2020. As a result, progress on disposals at TEN field and possibly Uganda is required to help meet its capex commitments which can’t be funded by internal cashflow”.

While Tullow and partners are cheering the Ghanaian Government’s approval of TEN, Investec reminds everyone that the 2016 first oil date simply means that the2ndHalf 2015-for-first-oil worst case scenario, suggested in late 2012, has even slipped.

Tullow insists its strength is more about its ability to pick the right exploration targets. “Our exploration-led growth is enabled by our financial strength, which has been significantly enhanced over recent years”, says CEO Aidan Heavey. “We have increased our operational cash flow from production and while we are not a production-driven business per se, it is a key component of the cash flow required to finance a major exploration programme”. Heavey explains that portfolio management is another rich source of funding opportunity for the business. “As part of our ongoing activity, we will sell or reduce our interest in assets at different points in the value curve to either increase the rate of return on investment from our portfolio or to use the proceeds to recycle cash and maintain capital efficiency”.

To which Investec responds that the portfolio management is not robust. While progress may have been made onthe decision regarding the size of the Ugandan refinery, there still had not been a government approval for the field development, as of June 12, 2013 and this reinforces misgivings about first oil date. “The 2016 first oil target is slipping to a broader 2017-2018 range”, Investec says, arguing that it sees “delays over pipeline routes as a key risk”.

Even if Tullow completes the sale of its Asian assets and Southern North Sea assets in 2013(contributing ~23,000BOEPD), Tullow would still be very challenged.Investec also thinks thatTullow’s admission that the remaining resources to southeast of Jubilee in West Cape Three Points (WCTP) are unlikely to be developed as a standalone project but instead be brought back through the Jubilee FPSO, adds to the odds stacked against Tullow.

Some analysts “advise” Tullow Oil, with a market cap of $16.5Billion, to “emulate the model of Afren”, a much smaller (market cap $2.12Billion), London based producer. Afren acquires undeveloped discoveries, mainly in Nigeria for the purpose of speedy production, and then ensures there are exploration property in its portfolio, in places like Ghana and East Africa, largely for strategic purposes. The key difference is that whereas Tullow lines up assets for both exploratory and development activities, Afren focuses almost entirely, on field development.

There is fundamental irony here. Tullow grew into reckoning largely by acquiring producing, or ready-to-be-produced, assets. Its takeover of Energy Africa in 2004 (the signal event in its 28 year history)doubledTullow’s size by giving it ownership of producing fields in Equatorial Guinea, Gabon and Congo Brazzaville. Now that it has moved further upstream to grow some property organically, it is struggling with the balance.

Investec declares that Tullow may not meaningfully maintain production above 100,000BOEPD until 2018. The analyst sees delays across the company’s production portfolio will put upward pressure on Tullow’s net debt

Tullow argues that financial results in line with market expectations and balance sheet substantially strengthened through debt re-financing and $2.9bn from Uganda farm-down. But the company itself admitted, in the Half year 2012 report, that the Net Income that wasup by 63%, due to the farm down, was “offset by increased exploration write-offs”

Incidentally, Exploration successes-even when field development may be quite far way- are as crucial for Tullow Oil as rapid increase in the production profile. “2012 showed just how much Tullow has to do to keep pace with the exploration expectations the market sets for it”.

In other words, Tullow’s challenge is a result of its own success.”Tullow remains the benchmark for London listed explorers in terms of success ratio and its approach to exploration”, Investec says. “Our view is that the market already appreciates this and as a result, Tullow must deliver exceptional Exploration and Appraisal(E&A) results consistently in order to meet the elevated expectations it is set”.



Who Is Drilling What And Where In 2013?


Kosmos Energy’s Offices In Accra, Ghana

Herewith, a rough, intelligible schedule of exploration and appraisal wells in Africa’s Frontier Basins in 2013.. Overlap from 2012: The Sapele-1 exploration well on the Deepwater Tano Block off Ghana was spud in December 2012. The well is targeting multiple Turonian-aged reservoirs, below a water depth of approximately 1,840 meters. Drilling had reached a depth of approximately 3,900 meters as of the time of our going to press. The primary target encountered a high-quality water-bearing reservoir. Drilling operations at Sapele-1 are continuing to additional reservoir intervals, with total depth for the well planned to be approximately 4,100 meters. The well is expected to reach its total depth in the first quarter of 2013.

Paipai-1 in Kenya had been suspended after  a total depth of 4,255 metres as of the time of our going to press in late February, 2013. Light hydrocarbon shows were encountered while drilling through Lower Cretaceous sands but they couldn’t be flowed.
African Petroleum made a discovery in the Bee Eater-1 well in Block LB-09 offshore Liberia drilled with Ocean Rig’s semi-submersible rig, the Eirik Raude. The Bee Eater-1 well is located 9.5 km north west of the 2012 Narina discovery. AP could not move to the second well in this drilling programme with the same rig, because of the repeated failure of the rig’s Blow Out Preventer, which stretched drilling for 20 days more than could have been achieved.

Conoil, the Nigerian independent, successfully tested the first of two hydrocarbon filled reservoirs in its deep well in shallow offshore Nigeria. The company flowed in excess of 2,000BOPD of light oil in one of the two reservoirs in which it conducted Drill Stem Test in Ango 1Stk 3, in Oil Mining Lease(OML) 59. The tested reservoirs are located  between 15,400ft True Vertical Depth and 15,550ft TVD. This probe has opened up a whole new sequence in the southwestern, swampy part of the continent’s most productive basin.

Now to 2013…

Tullow has three rigs operating across Kenya and Ethiopia, including Weatherford-804  and Sakson PR-5One successfully completed testing Twiga South(2,800BOPD in three levels) as of late February 2013, another  drilled and suspended the Paipai well (both in Kenya)and the third was on the Sabisa well in Ethiopia. Tullow also plans to drill Kongoni structure, Twiga North and Kamba, all in Kenya, as well as Sabisa North and Tutule in Ethiopia. These aresome of the 11 exploration and appraisal wells in the region that Tullow hopes to drill in 2013. The company plans to carry out up to five well tests to de-risk further basins and to understand the potential scale of the South Lokichar discoveries.

The company is expected to test Ngamia 1 later in 2013. Ngamia-1is the basin opening well, drilled in early 2012. It encountered over 100metres of Net Oil Sands.

Ophir Energy plans to upgrade the Mbawa South lead offshore Kenya to a drillable prospect and drill the structure by second quarter 2013.The location is in Block L09 offshore Kenya

Meanwhile, Kenyan authorities insist that Vanoil Energy must commence drilling its first well in the country before July 31, 2013. With sufficient technical justification, the government says, the company  may place its first two wells anywhere within the boundaries of Block 3A and 3B to satisfy the work programme obligations within the Initial Exploration Period of its Production Sharing Contract (PSC).

OphirEnergy is planning to spud one of two wells in East Pande, in Tanzania’s shallow offshore Block 7, before the end of the First Quarter 2013.In the country’s deeper waters, however, the BG led BG/Ophir consortium has proposed two wells (4H and 4J)in Block 4, scheduled for drilling before March 31, 2013. In the second quarter, the partners will return to appraise the structures that have shown so much promise, as discoveries. They will be drilling one appraisal well each on the Chewa, Jodari and the Mzia structures. Jodari-1, drilled in 2012, was reportedly the partners’ largest discovery in Tanzania. With 124 metres of net pay “in two high-quality base Tertiary sandstone reservoirs”, Ophir thinks the well “de-risked Lower Tertiary section, of comparable age to outboard basin floor fan play in Mozambique” and exceeded “pre-drill mean estimate of 2.2 TCF by 55%”.

Tullow Oil’sNet production for 2012 from the East and West Espoir fields in Cote d’Ivoire averaged 3,400 BOEPD as natural field declines continue to be managed. A new drilling campaign of eleven infill wells (seven producers and four injectors) across the field is to start by the end of the first quarter of 2013.

In Angola, Cobalt Energy will drill six wells, some of them to appraise the Cameia-1 discovery. The company is hoping the results would convince government to sanction its plans for early production

Kosmos Energy anticipates spudding the Sipo-1 prospect, which is located onshore Cameroon on the Ndian River Block, in early February. Results from Sipo-1 are anticipated around the end of the first quarter 2013.

Equatorial Guinea-Ophir will pursue its lucky streak off the coast of this small, volcanic island on the Gulf of Guinea with three wells:  Silanius East, Viscale East and Helius East, all in the third quarter of  2013.

Ophir proposes to drill Manga MN1 prospect in its 100% operated Manga block offshore Gabon. There’s also a likelihood that Petrobras will drill the seemingly highly prospective Ntsina Padouck Deep in the Ntsina  Block. Tullow plans a two well exploration drilling campaign in the Kiarsseny Block,  to commence in the middle of 2013. Beyond exploration, the company expects “significant offshore and onshore drilling activity to continue on all fields in 2013, with a programme exceeding 60 infill wells across the Gabon portfolio”.

Statoil plans to drill two wells in Block 5, in the prolific deepwater offshore Mozambique, starting with the Cachalote well which is scheduled to commence drilling in Q2 using the Discoverer Americas rig.

North Africa:

PA Resources plans to drill an appraisal well on the Elyssa Field in Tunisia 2013, and an exploration well elsewhere in country’s offshore Zarat Permit.

Tullow’s drilling campaign in Mauritania, scheduled to commence in the second quarter of 2013, is designed to drill new deeper plays in the offshore Mauritanian basin which have not been tested by previous exploration wells. Three of the four wells are scheduled to be drilled in 2013 using the West Leo rig which has been operating in Ghana for Tullow. The Group believes that there is significant follow-on potential if any of these wells proves to be successful.

Longreach plans to drill its first well on the SidiMoktar permit onshore Essaouira Basin in Central Morocco in first half of 2013. In the same country, Circle Oil plans a six well drilling programme for first half of 2013 in the Sebou and Lalla Mimouna Permits. The campaign is aimed at boosting natural gas reserves on the acreages. Circle projects over 50% increase in gross production from 4.5MMscf/d to between 6.5 and 7.0MMsc/d in First Quarter 2013.

Meanwhile, the least likely drilling project on Kosmos Energy’s 2013 schedule is in Morocco.  The company, says that “first drilling offshore Morocco is targeted to commence as early as late 2013”.

Kosmos’ planned capital programme in the country provides for additional geologic studies, as well as further processing and interpreting of 3D data already acquired on the Agadir Basin Blocks. Included in the 2013 capital programme are funds for the completion of the Company’s acquisition of an additional 37.5 percent interest in the Essaouira Block.

Exxoil plans a two well drilling programme in Tunisia, including one well onshore on the Sedouikech prospect in the RasMarmour permit targeting 20 MMBO STOOIP and one well planned for the offshore Mahdia permit targeting up to 179 MMBO STOOIP. The proposed drilling on the Mahdia permit is the less certain of the two, as the operator only commenced, in mid February 2013, a 300 sq km 3D survey, to delineate the drilling location.

Vegas Oil and Gas’ 2013 work programme in Egypt includes the drilling of 4 further wells (1 producer and 3 injectors) in the first half of the year. The NW Gemsa Concession, containing the Al Amir and Geyad Development Leases, covering an area of over 260 square kilometres, lies about 300 kilometres southeast of Cairo in a partially unexplored area of the Gulf of Suez Basin.

Waiting For Ugandan Development Sanction

Tullow, CNOOC Limited and TOTAL presented a joint development plan concept for the Lake Albert Rift Basin to the President of Uganda and his Government  in July 2012. A Committee was then set up by the Government  comprising representatives of key ministries and the three Operators to discuss the remaining issues in order to progress the Lake Albert Rift Basin development plan with a view to harmonising plans for the development during the first half of 2013. Tullow Oil’s latest official report says that “Constructive discussions are ongoing.

Planned Output For Nefertiti is 2,500BOPD

Dana Petroleum has been given the go-ahead by the Egyptian government to further develop the Nefertiti oil field in the Gulf of Suez following the successful completion of an appraisal well.
The Aberdeen-based independent, in partnership with INPEX, successfully drilled the exploration well Nefertiti-2X at the end of 2012. The well tested at a maximum stabilised flow rate of 1,850 barrels per day (BOPD) with an Electrical Submersible Pump (ESP), and the field is expected to produce around 2,500 BOPD (1,625 BOPD net to Dana) when it comes on stream in June 2013.
Following the successful appraisal, the two companies agreed with the Egyptian General Petroleum Company on Nov. 7, 2012 that the Nefertiti field was a commercial field. Eng. Osama Kamal, Minister of Petroleum and Mineral Resources, approved the lease on Jan. 20, 2013.
Dana’s Managing Director in Egypt Nick Dancer described the Nefertiti field as “a first for Dana in that it is an offshore field that we have explored by drilling extended reach wells from an onshore location”. He said that “whilst increasing the complexity of the wells”, the technique“reduces the drilling and subsequent development costs and reduces development time as well as protecting the offshore environment including a number of coral reefs”. Mr Dancer is delighted his company has“been given the green light to progress the development, and also undertake further drilling in the area to test a different play concept in the Nefertiti Field.”

Eni Produces 333MMscf/d From New Algerian Field

Eni has commenced gas sales in partnership with the Algerian state company Sonatrach, from the MenzelLedjmet East (MLE) field,located in Block 405b. The multi-fluid processing plant, which came on stream on 31 January 2013, allows for the treatment of rich gas for the daily production and sale of 333MMscf/d of gas, 15,000 barrels of oil and condensate and 12,000 barrels of LPG. The project was completed around four  years after Eni’s acquisition, in December 2008, of the Canadian company First Calgary Petroleum, which owns the block.

Eni has been present in Algeria since 1981 and participates in 24 exploration and development licenses which are currently in production, and in eight permits under development. In 2012, Eni was the leading producer in the country with a daily equity production of approximately 80,000 barrels of oil equivalent. With the start of production at the MLE field and other projects, Eni strengthens its presence in the country, and expects to achieve a daily equity production of 100,000 barrels of oil equivalent in 2013.

El Merk On Course For 2012 Date

Algeria’s El Merk oil and gas project is on course for commissioning in the fourth quarter of 2012. The El Merk central processing facility will serve as a production hub for the region, processing hydrocarbons initially from Block 208, operated by the Sonatrach/Anadarko Association, and from the unitised EMK field located on a portion of both
Block 208 and the Sonatrach/ConocoPhillips operated Block 405a.
The project will be operated by Sonatrach and Anadarko on behalf of the El Merk partners: Sonatrach, Anadarko, Maersk Oil, Eni, ConocoPhillips and Talisman. Block 208 is located 90 km south of the Sonatrach/Anadarko-operated Hassi Berkine South (HBNS) facility.

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Sasol’s Sales Soar

Sasol says its earnings for the 2012 financial year is expected to grow by about a quarter of last year’s.
Africa’s largest privately owned producer of petroleum and related products plans to publish its financial results for the 2012 financial year on September 10.
Sasol produces petrochemicals and petroleum products from South African coal and Mozambican gas, invests in Coal To Liquid and Gas To Liquid projects around the world and runs an upstream E&P subsidiary which
produces crude oil inWest Africa. It has, of late been putting money and effort in shale gas assets in North America.

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Nigeria’s Bid Round Minister’s Discretionary Powers Restrained By New Laws

The forthcoming licensing round for Nigerian oil acreages will be influenced by two new laws : the Public Procurement Act and the Local Content Act.
Both were signed into law after the country’s last competitive bidding round. The PPA came into effect in June 2007, two months after the country’s last acreage sale. The Local Content Law was signed into law in April 2010. Nigeria scheduled a bid round for June 2012, which failed to take place. Still, officials at the Department of Petroleum Resources(DPR), the regulatory agency, insist that the round will be announced sometime later in the year.

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NPDC Increases Production In OML 26

Crude oil production has ramped back up in Nigerian state company NPDC operated Oil Mining Lease (OML) 26.
The production returned to 11,000BOPD, as of August 6, 2012. This is just about the volume that Shell was delivering on the same property as of the time it exited in early 2011. The acreage is one of the three recently given up by Shell and partners and acquired by Nigerian indigenous companies. NPDC holds 55% of the
equity and is operator.

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New Discovery May Lead To Fourth Field Development Offshore Ghana

Tullow Oil may have set off a chain of events for a fourth field development plan offshore Ghana.
The Wawa-1 discovery in the Deepwater Tano licence, announced on July 17, is located 10 kilometres north of the Enyenra-3A well, testing the previously undrilled, updip portion of the licence. More crucially, however, pressure data shows that it is a separate accumulation from TEN(Tweneboa, Enyenra and Ntomme), a cluster of fields whose development plan is on course for submission to the Ghanaian authorities.
Another such cluster of fields, the MTAB(Mahogany, Teak, Akasa and Banda) is in pre-development plan stage. These two developments, each of which is predicted to deliver at least 100,000Barrels of Oil Per Day at optimum when completed, are separate units from the Jubilee field, currently producing 70,000BOPD, and scheduled to be scaled up to 125,000BOPD by 2013.

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