sharing in governance of extractive industries

Modelling of Tullow’s Turkana in Kenya shows the economics are still not locked in

First published by Johnny West on openoil.net

A financial model of Tullow’s Turkana project in Kenya has yielded several interesting results: first, that Turkana county and the local community will receive hundreds of millions of dollars before any cap set by central government would kick in; second, that although the national oil company has a back-in right of 20% in the project, it is unlikely to earn significant extra revenues for the Kenyan state.

But perhaps most surprising in a project that has been in and out of national headlines for the last five years now is that it is not certain that it will go ahead. The economics, in the jargon, are still not locked in. This puts Tullow’s Final Investment Decision (FID), scheduled for 2019, in a different light.

The model shows this by projecting Net Present Value to Tullow from the project if it goes ahead in the form the company has so far presented. That is to say, with a Foundational Stage of 250 million barrels of oil to be produced, against capital expenditure and pipeline costs quoted in Tullow’s reports, and operating costs and prices within the range of normal estimates.

Under these conditions, the Turkana project struggles to become profitable by producing only 250 million barrels. The company has declared much higher levels of resources in the fields, but these have yet to be converted into the official reserves figures that normally form the basis of estimating project economics. If they are converted, and the field size becomes much bigger, then the project could achieve profitability under price ranges of $60 a barrel. But against the smaller production profile currently declared, Tullow would need a price boom to be able to make the field profitable.

It’s an interesting point because major extractive projects such as Turkana often dominate public discourse for years. In the case of Turkana, local and national authorities have conducted continuous discussions over the right level of sub-national revenues, the government persuaded Tullow to initiate an early “export by trucking” project to set the ball rolling, and there have been several stoppages of operations on the ground because of disputes with local residents already keen to see benefits from the project. All that and yet, the model suggests, it is not yet certain that it will proceed.

Other headline conclusions from the model are: that Kenya’s National Oil Company, which has a back-in right of 20% in the project, is unlikely to drive major extra earnings to the Kenyan state because it has to finance its own involvement. This can happen either as a result of borrowing from the project (which is built as a scenario in the model) – but then the company has to pay the project back, with interest, before it gets to keep its share of the dividends. Or, the company could raise capital on financial markets. In which case it may acquire the financing to answer cash calls from an early stage – but at a “cost”, to the state at least, of having diluted state ownership which then means that subsequent dividends will also be divided between private and public shareholders.

We are pleased to have completed this assignment with a Kenyan partner – Invhestia Africa Limited, a financial analysis company based in Nairobi.

The Turkana oil project fiscal model and accompanying narrative report are published under Creative Commons license. All data and assumptions are explicit and sourced.

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