Tullow job cuts deepen oil export doubts

Wednesday March 18 2020

Tullow’s latest job cuts announcement in Kenya has deepened doubts on the viability of the country’s oil exploration.
The job cuts plan, coming shortly after the firm announced the sale of its entire stake in Kenya and plans to cut its capital investment in the Kenya project, is likely to pour cold water on the project, which was hyped by the government as among Kenya’s key economic breakthroughs.
The firm, which has been the principal operator of Project Oil Kenya, with Total Oil and Africa Oil as its joint partners, has been facing financial constraints that may now see the group’s workforce cut by approximately a third globally, with potential office closures in Dublin and Cape Town among a number of measures to reduce costs and overheads.
Tullow has nearly halved its capital spending in Kenya to Sh4.06 billion, down from the Sh7 billion spent in 2019.
The move reflects the firm’s global reduction in expenditure by half to around $75 million and cancellation of its $100 million dividend plans with fears that even more radical measures may be announced alongside the full-year results expected on March 12.
It is not clear how many staff Tullow will lay off in Kenya, where its staff count stands at 650, but the latest $800 million write-off on its exploration costs in Kenya and Uganda after lowering its forecast for long-term crude oil prices and the sale of its entire stake speaks volumes.
The government has however maintained a brave face even as Tullow’s actions paint a gloomy picture.
Petroleum Principal Secretary Andrew Kamau told the Sunday Nation that there was nothing to worry about the company’s actions as they are normal business practices.
“I guess it makes sense in this phase of the project where negotiations on legal aspects, land, water and the sourcing for funds may not need a 100 per cent workforce. I am not speaking for Tullow though, what I know is that we are on track, with the project management contract tenders of the upstream already out as we move toward the final investment decision and full field development,” Mr Kamau said.
Analysts however see the latest developments as likely to negatively affect timelines.
Even more disruptive is the announcement by Total that it was also willing to sell half of its 25 per cent ownership on the oil blocks. The cash-rich French oil giant was expected to be the saving grace in the project as Tullow’s financial muscle grew weaker.
The Kenya Civil Society Platform on Oil and Gas (KCSPOG), which has kept track of the project and has previously criticised the government especially on the Early Oil Pilot Scheme (EOPS), said the new developments complicate matters for the project, particularly the financial investment decision that had been pushed to the second half of this year.
KCSPOG coordinator Charles Wanguhu said Tullow’s about-turn will heavily impact the project’s path towards full field development.
“The joint sale is not likely to be completed within the first quarter of the year and a new entrant would not be able to complete all the necessary paperwork and be in a position to make a final investment decision on the project this year. Delays may also be occasioned by tax concerns, with Tullow already embroiled in a tussle with the taxman over its farm down (sale of stake) to Delonex in 2015,” Mr Wanguhu said.
Tullow is still stuck in Uganda in an attempt to complete a similar sale of stake that has been dragging over a tax dispute with the Uganda Revenue Authority.
Mr Wanguhu also believes the sale, which will give an opportunity to a deep-pocketed investor to control 65 per cent majority stake, gives such a buyer complete control of the project, which may speed up decision making.
Kenya’s path to oil riches has been slippery, with expensive trials likely to gobble up most of the revenue from the project.
The continued delay makes the yield worse for Kenya as the recoverable exploration costs soar above the Sh200 billion Tullow claims to have spent.
As early as August 2016, Tullow Oil officials, led by then Chief Operating Officer Paul McDale, President Uhuru Kenyatta that the firm would have enough stocks ready to export by June 2017 but the targets have kept changing since then.
A lot remains secret about the project, including what tax incentives the National Treasury offered to the oil multinationals, with expected margins likely to be eroded should the government consent to generous incentives to Tullow.
The joint venture partners had reportedly sought government guarantee to protect them from issues like the stoppages that have plagued the project, a costly clause that may expose the government to expenses incurred by the firms during stoppages and other delays.
The production sharing contract between the government and Tullow has never been disclosed, leaving many guessing what level of wealth to expect from the project.