18 February 2014

Uganda: Deconstructing Tullow Oil's Comments and Their Future

The words hit home with a thud. From somewhere in London, Paul McDade, the chief operating officer of Tullow Oil, picked up the phone last week and spoke to the Wall Street Journal.

This was less than a week after the company, together with its Ugandan partners Total E&P and Cnooc, had signed a memorandum of understanding with the Uganda government over how to develop the oil production infrastructure in the country.

Of even more significance, it was a couple of hours after Tullow Oil had released its group financial statement for 2013.

McDade spoke about the company's future plans and how optimistic he was about new discoveries in Mauritania, activity in Ghana, and the sale of some of its assets in the southern North Sea. But it was what he said about Uganda that raised eyebrows.

Kenya "will be easier to develop and the government is very enthusiastic for us to get underway with that development and get first oil as soon as possible. So as we look at the phasing of our investments there's a lot of priority being given to Kenya. If it continues to be very material and grow, then we may look to modify our holdings in Uganda," McDade said.

With that, McDade sparked off a topic that few officials in the industry dare to speak out publicly - comparing the Uganda and Kenya governments and which of the two was more supportive to the interests of the investors.

But McDade's comments also pointed to a deeper problem eating up the oil firms in Uganda - Uganda's sluggish pace in moving its oil industry forward. Has Tullow's patience been pushed to breaking point?

News spread on the wires like wild fire. Questions were asked of what Tullow meant exactly. The company has not offered further information. And why should they?

There, really, should not be any fuss over what McDade said. For long, some government officials have known that Tullow would have to reduce its shareholding from the current 33.3 per cent. The reason is that Tullow does not have the financial muscle to develop Uganda's oil fields.

Close to $12 bn is needed before Uganda can produce first oil. While Cnooc can bank on China for a bailout if the need arises, and Total has substantial reserves, Tullow does not have such strong options, and neither can it commit long-term capital in a country like Uganda where deadlines in the oil industry keep shifting.

In any case, it makes sense for Tullow to reduce its Uganda stake. The company has some sort of magic wand when it ventures into new areas, finding oil in wildcat wells.

From snapping up abandoned oil fields in Senegal in the mid-1980s to finding oil in countries like Kenya, where earlier efforts had hit a dead end, Tullow is high up there among the top African oil explorers.

Therefore, it could be better if Tullow stuck to exploration and played a minimal role in oil development and production. If we are to question McDade's comments, then maybe that should centre around the timing. Coming a day after Tullow had released some depressing numbers - net profit between 2012 and 2013 slumped by more than two thirds partly as a result of a $200m increase in write-offs - the comments could be seen as shifting the focus away from the figures.

The people who usually watch those numbers are the shareholders, who lately have seen the stock drop from the higher levels it was three years ago, when the company was preparing to sell some of its Uganda stake to Total and Cnooc.

Some shareholders have been frustrated by the delays and troubles Tullow has faced in Uganda, with some reacting by dumping the share. Tullow has the burden of appeasing those interests too. Plans to reduce its Uganda stake, one of its golden assets, could see some investors targeting the stock again.

Concentrating on Kenya would be good for the company. Share prices of oil companies tend to jump whenever there is a success story such as a successful strike of a well or talk of a takeover. The stage of oil development is dull, and shares hardly react to news there.

Then again, Tullow has to be careful about what it says. Although Tullow has said it is in Uganda for the long term, Kenya will be keen to know whether the company is serious about reducing its role in Uganda. Kenya will want to know whether Tullow will not make the same move again as it goes about developing its industry.

At the end of the day, Ugandan officials are not expected to be jolted into panic over Tullow's latest comments. Frankly, they had long seen this coming.

Twitter: @jeff_mbanga

The author is the business editor at The Observer.

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