KCSPOG 2022 MID YEAR OIL AND GAS UPDATE
On 1st of June, Tullow Plc announced their agreement to merge with another British oil and gas company, Capricorn energy Plc to create “a leading African energy company with a material and diversified asset base and a portfolio of investment opportunities delivering visible production growth”. From the statement, each Capricorn shareholder will be entitled to receive 3.8068 new Tullow shares per Capricorn share and at the end of the merger, Tullow will hold 53 per cent of the combined shares and Capricorn the remaining 47 per cent.
The planned merger into an African powerhouse listed at the London stock exchange shows the singular focus on Africa as the frontier for exploration and development and comes at an interesting time when there is renewed vigour for oil and gas development to cushion Europe’s exit from the Russian market in shoring up its production. The companies in their statement said the merger was a compelling strategic, operational and financial rationale to access and accelerate near-term organic growth, add new reserves and resources cost-effectively. Capricorn already has extensive investments in Egypt and will take on the opportunity to self-fund Tullow’s resource development in Kenya. The merger is therefore expected to strengthen Tullow’s financial position and continued recovery after the turbulent 2020.
With the company strategically positioning itself as an African company and with a deep portfolio in Ghana, Egypt, Gabon, Côte d’Ivoire and expanding production in Africa, at the core of the new company’s policy should be implementing disclosure of the contracts, exploration and production data in managing community expectation and promoting transparency and accountability in the sector. The combined company, which is expected to announce a new name, will clearly be a major player in Africa’s market and this should come with a mandate to disclose and set up social and environmental commitments for their projects as part of their investments and not ad hoc contributions. The pan African focus can also be viewed as a move to strategically position the company in Africa’s market with its resource wealth for energy transition. The company’s current assets are in oil and gas but as energy transition continues to pick pace, companies will be looking to explore and develop critical minerals required for transition that can be found in Africa.
As of now, Tullow’s position has been strengthened and the pan African focus will be something to watch out for in the continued development. For the Kenyan project, in December 2021, Tullow and the its Joint Venture Partners submitted the final Field Development Plan (FDP) to the Ministry of Petroleum and Mining (MoPM) after a 15-month extension from the government. According to the Petroleum Act, the Cabinet Secretary (SC) is required to review and approve the FDP after which the CS should submit to Parliament the FDP and the Production Sharing Contract (PSC) within 30 days of approval. Parliament is then expected to either ratify or refuse to ratify the FDP and the PSC within 60 days of receipt of the submitted documents. During the ratification process, parliament is mandated to undertake public participation.
In February, CS Petroleum and Mining, John Munyes, resigned from his position before approval of the FDP and was replaced by Dr (Amb) Monica Juma in March. As it stands, the FDP is still at the Ministry and is yet to be approved. Parliament is expected to adjourn indefinitely in June and dissolve in the next two months as Kenya heads to the ballots therefore, the FDP’s ratification process cannot be undertaken under the 12th Parliament. The FDP, thus, will remain at the MoPM until the new government is sworn in and a new Cabinet Secretary appointed. The handover to a new government will see some delays in the project’s continuity as the next administration familiarise with the project before any reviews and approvals are done. Taking all this into account, a decision on the Tullow’s FDP will probably be made at the end of this year or early next year.
Tullow announced in their 2021 full year results that they are keen to work with the Ministry in ensuring that the FDP is approved and ratified by Parliament. The company indicated that the FDP approval was conditional on most notably, the successful introduction of a new strategic partner. Tullow had written off 430 million dollars exploration costs in 2020 and the final plan was revised to achieve a higher production plateau making it more bankable. This combined with the new merger strengthens Tullow’s position to attract a new strategic partner for the project. Tullow was very clear in their submission that a strategic partner is needed prior to taking the final investment decision, however we await to see whether this position might be reviewed in light of its strengthened financial position from the expected merger.
The FDP, the environmental and social impact assessments (ESIA) and other agreements are required between government and the operator before the final investment decision is made. The South Lokichar Field Development ESIA is still pending from NEMA and it is not clear when the approval will be given. The Russia-Ukraine war has elucidated energy security challenges globally and renewed interest in oil and gas investment providing investment opportunities as regions such as Europe seek alternative suppliers in a bid to reduce reliance on Russian energy. With the renewed interest, Tullow’s project oil Kenya could secure a strategic partner with more ease and whichever government comes in after the election needs to take advantage of the window of opportunity and work on getting the project to final investment decision sooner.
Still on upstream, Italian oil multinational ENI began drilling at the Mlima-1 prospect located in bloc L11B in the Lamu basin in December 2021 and was expected to complete the process by February. 3 months after the expected completion, there is no official word yet on the outcome of the drilling operations. Ideally, ENI is supposed to submit the results of the drilling to MoPM who then make an announcement of the results. From MoPM’s silence we can infer that there were no viable discoveries and the same is already being reported from various news outlets.
Currently, Kenyans are in a state of limbo with anxiety whether the Tullow project will reach the final investment decision and expectations of whether there are any discoveries by ENI that will enhance exploration and production. Disclosure of exploration and production data is important in helping citizens understand the potential of the sector and manage their expectations in line with project timelines. MoPM is mandated by law to disclose various information including on all exploration and appraisal activities carried out, field development plans, state participation, production costs, production volumes, details on the composition of petroleum produced, and how production volumes and values disclosed have been calculated. Disclosures of the Tullow FDP and ENI’s exploration outcomes promote transparency and accountability of Kenya’s oil and gas sector and ensures active citizen’s participation in the processes. The government needs to be prudent in adhering to the various regulations in informing the citizenry of the status of the projects as well as take advantage of the renewed interest in oil and gas development to ensure Kenya is poised as an energy frontier.