Independents Begin African Exodus

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Upstream independents that had enjoyed a bonanza in sub-Saharan Africa during the long era of high oil prices that began in the early 2000s are starting to reduce their portfolios as the industry meltdown takes its toll. While there are still opportunities out there for frontier exploration, the focus for new entrants is likely to be on ongoing projects with guaranteed sources of revenue and minimal risk. The deal signed last month by UK-listed Cairn Energy to sell its assets in Senegal to Russia's Lukoil, for at least $300 million, is a case in point (EIF Jul.29'20). Cairn, which first entered the country in 2013 and made several deepwater oil discoveries, will part with its 40% stake in the $4.2 billion Sangomar development. The project, operated by Australia’s Woodside Energy, is due to achieve first oil in 2023, with a production capacity of 100,000 barrels per day (EIF Jul.1'20). The Lukoil deal, which is backdated to Jan. 1, is due to be finalized by the end of the year and will involve payment of $300 million in cash, with an add-on of up to $100 million depending on the timing of first oil and the average Brent price during the first six months of production. Cairn says it will use the money to fund other opportunities, including a proposed bid with private equity group Carlyle to take over Royal Dutch Shell's onshore properties in Egypt, as well as to reward shareholders. Once the deal is completed, Cairn will pay out a "super" dividend of at least $250 million, in contrast to the approach of majors such as Shell and BP, which have slashed their dividends in line with austerity. Cairn will remain reliant on cash flow from its equity in the North Sea, while its exploration acreage in Mauritania and Cote d'Ivoire is considered marginal. For Lukoil, the Cairn deal offers a chance to expand its footprint in Africa and buy into a project that will provide steady cash flow. Lukoil's African portfolio is restricted to offshore exploration in Ghana, where it is a partner in a project operated by Norway's Aker Energy, and Congo (Brazzaville), where last year it farmed into an offshore license operated by Eni, after paying $800 million for the 25% stake held by Africa-focused independent company New Age. The Russians have also been angling for projects in Nigeria, so far without success. There is a possibility that Lukoil's Senegalese gambit could be nixed by Woodside, which as a 35% shareholder in Sangomar, alongside Australia's Far with 15% and state oil company Petrosen with 10%, has pre-emption rights. A more probable scenario is that Woodside will pounce on Far's equity, which Far put up for sale after defaulting on its obligations in June. But Woodside has funding restrictions of its own, having slashed its investment budget for this year by some 60% to $1.7 billion-$1.9 billion after the oil price collapsed in March. Another upstream independent forced to trim its African portfolio is London-listed Tullow Oil, which was once hailed as one of Africa's great success stories but is now fighting for its survival, having seen its market capitalization collapse to just $500 million (EIF Apr.29'20). In April, Tullow sold its remaining 33.33% stake in the Lake Albert oil development in Uganda to Total for just $575 million, having nine years ago sold 66.66% of the same project to Total and China National Offshore Oil Corp. for $2.9 billion. While the transaction was approved by a majority of Tullow’s shareholders, it is still subject to the resolution of a long-running tax dispute between the Ugandan government and the other partners. With net debt of some $3 billion and first-half revenues estimated at just $700 million, Tullow remains in a critical state, and any further drop in oil prices could deliver a fatal blow. The company remains heavily reliant on oil production in Ghana, where it operates the Jubilee and Ten fields, which provided around 54,000 b/d in net output during the first half of the year. Due to technical issues with the fields, Tullow was at the end of last year forced to downgrade its oil production guidance for the next three years, causing its share price to crash and triggering the departure of its CEO and exploration boss. France’s Total is now the dominant player in Uganda, but in Africa its primary focus remains Mozambique, where it operates the $20 billion, 13.88 million ton per year Mozambique LNG project that is making steady progress and is due to achieve first production by 2024. In June, Total and it partners finalized a $15 billion funding deal for the project that is backed by a group of international banks, including the US Ex-Im Bank and the Japan Bank for International Co-operation, and several export credit agencies (EIF Jul.22'20).

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