- The Ministry of Petroleum has rejected Tullow’s compensation bill, arguing it was excessive and not justified.
- Oil firms recover their exploration costs over years once production and sale of the commodity start, which in Kenya’s case is planned for 2022.
- But Tullow requires commitment from the government that Kenya owes the firm $2 billion (Sh204 billion) and wants to use the pledge to sweeten the offer for sale of its stake.
British oil explorer Tullow Oil is locked in a vicious fight with Kenya over the London Stock Exchange-listed firm’s demand for Sh204 billion as compensation for its six-year works in the Turkana oilfields.
The Ministry of Petroleum has rejected Tullow’s compensation bill, arguing it was excessive and not justified.
Oil firms recover their exploration costs over years once production and sale of the commodity start, which in Kenya’s case is planned for 2022.
But Tullow requires commitment from the government that Kenya owes the firm $2 billion (Sh204 billion) and wants to use the pledge to sweeten the offer for sale of its stake.
Tullow, which has a 50 percent stake in blocks 10 BA, 10 BB and 13T in the South Lokichar Basin, submitted the compensation bill last week.
“We have written back to them demanding for justification on the $2 billion dollars’ bill. Our own audit points to a lower figure,” said a top official at the Petroleum ministry, who spoke on condition of anonymity.
“Tullow is in serious need of cash and they are rejecting the government’s position that the compensation bill is lower.”
The exploration bill has been the subject to speculation for years following delays by the government to hire a firm to audit the costs.
Kenya hired an undisclosed firm in 2016 for the audit, whose findings are be used to challenge the Tullow bill.
A lack of agreement on the compensation could force Kenya and Tullow to go for arbitration in the UK in line with the crude oil exploration contract.
The disagreement over the bill also adds to Tullow’s financial constraints that have seen the firm plan to cut a third of its staff to save about $20 million after being hit by weak output in Ghana, delays in East Africa and lower-than-hoped-for oil quality in Guyana.
Industry sources have also said the Africa-focused firm aimed to sell its Kenya projects, once vaunted as an engine for growth.
Tullow and Toronto-listed Africa Oil, which holds a 25 percent stake in the blocks, first discovered crude oil in the Lokichar Basin in 2012.
Tullow estimates the fields contain 560 million barrels in proven and probable reserves and expects them to produce up to 100,000 barrels per day from 2022.
Now, Tullow and French oil major Total aim to reduce their stakes in Kenya’s first oil development, with a joint sale that could see former exit completely amid uncertainty over the project’s launch.
Tullow, which operates the project, last year indicated it intended to sell up to 20 percent of its 50 percent stake in the blocks.
However, it is now reportedly willing to sell the entire stake after disappointing exploration results in Guyana and production problems in Ghana that prompted the ousting of its chief executive and wiped out nearly half of the company’s market value.
Total, meanwhile, aims to sell up to half of its 25 percent stake in the Kenyan project.
Buyers of the stakes would require clarity and commitment from Kenya on the compensation bill, which will also influence the buyout prices.
Total and Tullow Oil had agreed with the government to develop a crude oil pipeline from Lokichar to Lamu on Kenya’s coast, setting the stage for commercial export of crude oil from the Turkana fields.
The exports were also to kick off reimbursement of Tullow investments from exploration to the output of oil.
The fields already produce about 2,000 barrels of oil per day as part of an early production system. The oil is trucked from Turkana to the port of Mombasa. A first cargo of 250,000 barrels was shipped on a tanker last August to Singapore for Sh1.2 billion.
Tullow has also been betting on crude oil price remaining above $70 a barrel for its Kenyan project.
“Exploration costs written off are predominately driven by a write-down of the value of the Kenya and Uganda assets due to a reduction in the group’s long-term accounting oil price assumption from $75 (Sh7,575) per barrel to $65 (Sh6,565) per barrel,” Tullow said in a January trading update.
Oil prices jumped by around four percent on Tuesday after the biggest one-day rout in nearly 30 years, as investors eyed the possibility of economic stimulus, although a looming price war weighed on sentiment.
Brent crude futures were yesterday up $1.44, or around four percent, to $35.80 a barrel.