Tullow’s Sh150bn exploration bill raises queries on costing methods

Irish oil firm Tullow said it has so far incurred $1.5 billion (Sh150 billion) in exploration costs to be recovered once production begins, running ahead of the Kenyan government’s planned auditing of the company’s expenses from Turkana operations.

Tullow spokesman told the Business Daily that the company and its joint venture partners have invested over $1.5 billion in and outside the Lokichar basin since entry into Kenya in 2010, adding that it shares a quarterly work programme and budget update with the government for review.

British charity Oxfam and civil society groups have expressed fears that in the absence of proper audits, explorers such as Tullow may inflate recoverable costs ultimately denying Kenyans the full benefits of their national resource.

Lokichar basin – with proven reserves of 600 million barrels of oil - is estimated to have a 25-year production lifespan, with an output of 80,000 barrels of oil per day, according to Tullow’s regulatory filings.

Petroleum principal secretary Andrew Kamau declined to reveal the last time the government carried out cost recovery audits on Tullow and its partner Africa Oil, raising concerns that Kenya may be in the dark.

The Ministry of Energy in November 2013 opened the search for a consultant to audit the financial operations of explorers who have made commercial oil finds, but the identity of the selected firm has never been made public.

Tullow’s final total deductible costs will be known once its field development plan currently under discussion with the government is approved.

“The actual project cost and layout will only be known once these plans have been agreed with the government,” Tullow said.

Kenya’s failure to start auditing the operations of oil explorers means the government and local communities remain unclear about the economic potential of the oil finds and the extent of operational costs involved.

Production sharing contracts signed between Kenya and oil explorers stipulate that those who strike commercial oil deposits are entitled to fully recover their costs over the production cycle.

Kenya’s interest in the two Lokichar blocks 10BB and 13T stands at 20 per cent and 22.5 per cent respectively.

Oxfam and the lobby group Kenya Civil Society Platform on Oil and Gas have raised fears that leaving Tullow unchecked may lead to unethical practices such as taking out costly shareholder loans for funding and making auxiliary payments on non-core expenses such as entertainment.

“Government needs to initiate cost recovery audits immediately. There is a mistaken presumption that audits are required only after production begins,” said Charles Wanguhu, platform coordinator at the civil society lobby.

Tullow said it has signed the extractive industry transparency initiative, a voluntary mechanism which promotes and supports improved governance among players in the mining, oil and gas industries obligating it to make full disclosures.

“Tullow is a strong advocate of transparency,” the company said in response to Business Daily queries.

Kenya has prepared a draft Petroleum Bill that seeks to establish an Upstream Petroleum Regulatory Authority whose function is regulate upstream petroleum operations in Kenya, including auditing explorers’ costs.

“The functions of the authority shall be to audit contractors for cost recovery,” says Section 15(n) of the proposed law currently at the Attorney-General’s office.

Tullow and its partner Africa Oil in March 2012 announced they had struck oil in Turkana. The companies said they have so far drilled more than 30 exploration and appraisal wells at a cost of $1.5 billion.

Meanwhile the ongoing collapse of crude oil prices – which have tanked by a third in a year to last week’s closing average of $43.44 per barrel – has also threatened to dilute Kenya’s earnings from crude oil exports.

The Petroleum Bill proposes a revenue sharing model where local communities will receive a five per cent share of profits from oil, host county government (20 per cent) while the remaining 75 per cent stake will go to the national government.

Tullow has disclosed that the processing facility to be set up at Lokichar will have a design life of 25 years and a processing capacity of 80,000 barrels of oil per day.

“Production is expected to follow the normal production schedule; which basically means starting at a low production level and ramping up over time to a peak production level, maintaining this peak for a number of years and ramping down as the deposits become depleted, till the project is eventually decommissioned,” Tullow said.

The civil society lobby has developed three scenarios on the possible earnings from the oil find – a floor price of $45 per barrel, $65 per barrel and a peak price of $85 per unit – with expected production to begin in the year 2021.

Mr Wanguhu says revenues to the government will peak in the late 2020s at $650 million per year with oil prices at $45 per barrel, at $1.7 billion if prices soar to $65 per barrel and an ambitious annual earnings of $2.7 billion if oil prices climb to $85 per barrel.

“This points out that there is a very short period within which Kenya can maximise benefits from the sector,” he said, warning that Kenya should continue to focus on key sectors such as agribusiness and service sectors.

The break-even price for waxy oil from the Lokichar basin is about $42 per barrel, according to studies by Oxfam and the civil society lobby group.

It sets the pipeline tariff at $10.70 per barrel and takes an $8 per barrel discount due to the waxy quality of the oil.

Morningstar Inc., a Chicago-based research and investment management firm, says that the break-even prices for oil from Lokichar basin is at about $50 per barrel.

Tullow in February revealed $25 per barrel as the cost covering capital expense, operating expense and tariffs.

Kenya has so far licensed 44 out of its 46 oil blocks and to date Tullow Oil is the only explorer to have made commercial discoveries of oil.

The list of global explorers scouring for oil and gas in Kenya includes Texas-based CAMAC Energy, American firm ERHC Energy and Australian company Swala Energy.

Others are Canadian firm Vanoil Energy, Statoil from Norway, London-based Ophir Energy, Italian multinational Eni, Edgo from Jordan, Nigerian firm A-Z Petroleum and State-owned National Oil Corporation of Kenya (Nock).