The skinny on Uganda, Tullow and everyone else

Tullow Oil

Source: Tullow Oil

As the corporate and political drama around Uganda’s Lake Albert Rift Basin oil reserves unfolds, it appears that Heritage and Eni are out, while CNOOC and possibly Total are in.

The FT revealed today that Tullow, after blocking Eni’s attempt to buy into the Ugandan development, has now presented the country’s government with the CNOOC and Total as alternative partners – with CNOOC as Tullow’s preferred option.

The reason for all the excitement? The fields are suspected to hold more oil than previously thought.

It’s a complex and fast-moving situation. First, here’s a catch-up of the convoluted events of the past few weeks:

  • In Uganda, Tullow owns one field outright, and jointly owned two fields with Heritage Oil. The two partnered on development of those fields.
  • Heritage agreed to sell its stake to Eni, to focus on its Kurdistan holdings.
  • Tullow then exercised its pre-emption right to block the sale to Eni, so Tullow itself could buy Heritage’s interest.
  • The Ugandan government wrote to Tullow on January 20 saying that it did not want Tullow to buy Heritage’s stake, because – no doubt mindful of the ‘resource curse’ – it feared a monopoly situation.
  • Tullow’s chief executive Adrian Heaney promised talks with at least one other possible partner were advanced, and last Friday met with Uganda’s president, Yoweri Museveni. Yesterday, Tullow presented two possible partners – CNOOC and Total – to invest in the fields, and develop them with Tullow.
  • Tullow declared CNOOC its preferred partner, and officials from Tullow, CNOOC and the Ugandan government all met in Kampala yesterday.

As Oswald Clint and Neil McMahon of Bernstein Research wrote a week ago, if Tullow succeeds in buying Heritage’s stake, it needs a ‘farm-in’ investor regardless of the Ugandan government’s monopoly fears:

Financing for the transaction has been provided by Tullow’s core banks. Most recently, Net Debt was £664M equating to a Net Debt-to-Equity level of 27%. Yesterday’s deal assuming new debt of $1.5Bn will cause gearing to double though we expect this to be temporary until proceeds from the farm-out process are received.

Why is CNOOC preferred? No-one was commenting yesterday, but we’ve previously written that in general, cash, access to cheaper resources and a willingness to operate in security-sensitive areas are advantages of Chinese companies for western IOCs. Again, from the Bernstein analysts’ note:

While we suspect Tullow is aiming to extract more value via this move via a preferred farm-out partner, they also want to have more of a say in the ultimate development of these reserves which they discovered.

And of those suspected bigger reserves? As with any exploration project, it’s too early to say, but it’s enough to generate a little excitement. Last week, after Tullow announced a successful appraisal well drilling in block 2 – the block it wholly owns – Cit’s Mark B Kofler wrote:

Following this morning’s drilling update there are no revisions to previous guidance on resource potential at Kasamene. However, the positive result further validates Tullow’s increasing understanding of the local geology.

Related links:

CNOOC favoured as Tullow’s Uganda partner (FT)
The questions surround Tullow vs Eni in Uganda (FT Energy Source)

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