Discussions over new partners for the field are “a very live process,” though it’s too early to say whether there will be a single or several new partners, Dhir says on the sidelines of the Africa CEO Forum in Abidjan.
Previous partners TotalEnergies and Africa Oil in May announced they were withdrawing from South Lokichar, where commercial extraction has yet to start, after the search for a further strategic partner failed to bear fruit. The audit report on Tullow’s 2022 financial statements prepared by EY says that the Kenyan project “carries inherent risks that the project does not progress to development, requiring the write-off or impairment of the related capitalized costs”. The methods used by the company to generate the net present value of the asset are “acceptable,” the auditors wrote.
Dhir remains firmly convinced of the viability of the project. The asset has already had $2bn invested in it, so it’s a “well-defined resource,” he says. The all-in production cost of $22 per barrel makes it one of the lower-cost oil projects currently available, he adds.
Tullow has concentrated exposure to Ghana, which accounts for about 70% of oil production and reserves. The company, Dhir says, was geographically spread out and “under-invested” in Ghana when he took over. While big companies can reduce risk through diversification, smaller ones need to have focus and a deep understanding of the jurisdictions where they operate, he says.
Still, Dhir is willing to consider other African opportunities and could add one or two new jurisdictions. “We occupy the white space that the big boys leave behind,” he says. “The white space in Africa is increasing.”
Getting maximum value out of mid to late-life oil assets is “what the white space is all about in Africa,” especially in West Africa, Dhir says. Non-traditional sources of financing, such as trading houses, could increase the financial firepower at Tullow’s disposal, and conversations with trading houses have taken place, he adds. M&A vendors might also be willing to help with greater use of deferred and contingent payments. “We’re willing to look at those sources.”
Ghana tax dispute
Future oil demand uncertainties lie behind Tullow’s strategy of avoiding long-cycle investments. That makes sense in financial terms, but when at some point exploiting mid to late cycle oilfields ceases to be viable, there’s no sense yet of whether and how Tullow will be able to reinvent itself.
Dhir defines his strategy as one of “capital discipline” focused on delivering short-term returns. He is confident that global demand for oil will increase this year and in 2024. There is a “high degree of uncertainty” on the long-term future of oil demand, and the only safe bet is that it will likely turn out to be different from expectations, he says.
One risk of concentrated exposure in Ghana is that the potential impact of tax disputes on the company’s finances increases. Tullow has filed requests for arbitration with the International Chamber of Commerce in London over two disputed tax assessments from the Ghana Revenue Authority (GRA). The disputes, which relate to loan interest deductions for between 2010 and 2020 and proceeds from Tullow’s corporate business interruption insurance policy, total $387m – about the same as the company’s valuation on the London stock market.
The GRA has targeted other companies besides Tullow, Dhir says. He likens the issue to a married couple quarreling, saying he is “very comfortable” with its position and confident that Ghana will accept the arbitration ruling. A hearing is due in October, and Tullow remains willing to discuss the issue with the government, Dhir says.
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