Colleagues, especially those with an interest in East Africa energy developments.
As many of you will have heard Total announced last week that they are purchasing Tullow’s entire 33% interest for $500m in cash plus $75m at FID. At an acquisition cost of $1.0 to $1.5 per barrel, this could be seen as a good deal for Total. I personally predict that FID is about 18 months away. Oil prices need to recover from current levels and Total and CNOOC will need to believe that oil prices will return to at least an average of $50 per barrel Brent for the next 15-20 years. Many of the contractors that worked on the pipeline ( EACOP), the Kibale Industrial Park facilities, and Tilenga will need to be reengaged and update their contracts. I am still sceptical that this project can justify a pipeline tariff of $12.30 per barrel, a refinery in Hoima for up to 60,000 bopd and make a decent return. There are many moving parts but Total is taking advantage of their strong position.
One of the outstanding issues in the previous transaction( which was called off August 31st, 2019) was the eligibility of the historical costs for cost recovery and of course capital gains tax. Some of this has been resolved but not all was disclosed in the announcement by Total last week. And of course, I suspect that CNOOC will now have 30 days to decide if they want to take 50% of the Total acquisition. CNOOC are the ‘operator’ of Kingfisher and have agreed many of the contracts for that development. Total is the ‘operator’ of Tilenga which is also under scrutiny by NGO’s in France per the submitted court case which has now had to move to a different court. So all in all, 18 months is not much time to get a lot done in a complex project with challenges and moving parts remaining.
And as I’m sure you all know, the price of oil is on a ‘roller coast’ for the last week, mostly down for now. It will take some time for decision makers to either reduce the cost structure of new projects such as Tilenga/Kingfisher/EACOP or to gain confidence that the project will be viable at an oil price like $50 per barrel or lower.
Crude oil stocks in the US are nearing peak capacity which will inevitably lead to oil production being shut in. Up to 1.0 million bopd has already announced to be shut in in the US/Canada fields on top of the OPEC+ announcement of 9.7 mmb/d which is not due to commence until May 1. Crude stocks as seen in the EIA graph below are at peak seasonal levels
To top it all off, due to the significant reduction in road/automotive transportation, refinery/storage of gasoline is already well above ‘normal’ stock levels as shown above.
As of April 27th, Brent crude for June was trading at $20 per barrel and WTI was trading at $14 per barrel.
These are not comfortable times for anyone in the oil industry from producers, to suppliers to refiners to marketers. Some traders will have made a lot of money in the last few days, but many more companies will be on the verge of bankruptcy. Some anticipate 100’s of companies in the US will go bankrupt and many more will just be liquidated with no refinancing options whatsoever. Survival will be the hope of many. Companies like Total and CNOOC will be in the ‘driver’s seat’ as the Tullow acquisition demonstrates.
The Energy Transition will no doubt be facing many issues, challenges and uncertainties, now more than ever. More to follow next issue.
Note: I would appreciate your feedback on my updates.
Greg