Industry Trend Analysis - Exploration Looking To Support Pipeline Development - JUNE 2017

BMI View : Cash flow from Tullow Oil ' s projects in Ghana will help finance exploration in Kenya as Tullow and its partners look to boost recoverable reserves to over 1 billion barrels , support ing project economics of the proposed export pipeline.

Exploration levels in Kenya will remain elevated in 2017 as Tullow Oil and its partners Ma e r sk Oil and Africa Oil Corporation look to appraise existing discoveries, de-risking the area and hoping to expand to the resource base. The primary focus will be the South Lokichar Basin which has previous attracted the highest level of drilling activity. Tullow Oil is conducting two programmes in the basin; one focusing on the development of existing discoveries through the Early Oil Pilot Scheme and the second, a four-well exploration and appraisal programme. In its January 2017 trading statement, Tullow Oil allocated USD100.0mn to pre-development spending for Kenya in 2017, in addition to USD125.0mn of exploration and appraisal spending with a potential for another USD75.0mn if required. We have held a constructive view on Kenya's hydrocarbon potential for a while given its position as one of the most prospective onshore frontier areas ( see ' Onshore Acreage Desirable ' , 10 November 2015).

Drilling Campaign Starting Again
Rotary Rig Count
Source: Baker Hughes, BMI

Total and Tullow have had significant success in neighbouring Uganda where 17 oil discoveries have been made in the Lake Albert Basin, totalling 1.7bn barrels (bbls) of oil ( see 'Upstream Focus Shifting East', November 4 2016). Tullow and its partners are hoping to emulate the success in Kenya and build up the resource base. At the time of writing Kenya's recoverable resource base stood at 766mn bbl with the potential for substantial upgrades given another drilling successful campaign. The CEO of Africa Oil, Keith Hill, stated that it is aiming to boost 2C reserves to over one billion barrels, which would give the companies a workable resource base to secure pipeline tariffs and a lending base.

The new drilling campaign started in Q416 with the spudding of the Erut-1 well on December 18th, lying in close proximity to the Etom-2 well; which discovered 102m of net pay with favourable reservoir characteristics in December 2015. At the time of writing, drilling work was being wrapped up and results should be released by February 2017 at the latest. Once drilling is completed at the Erut-1 well, the rig will move to drill the Amosing-6 well, targeting undrilled volumes as an exploration well. This will be followed by Ngamia-10, an appraisal well to the south of the Ngamia discovery and final well at the Etete prospect, a structure that is 2km south of the Etom field. Of the four wells being drilled, two are exploration and two are appraisal. There is also the potential for four further wells in 2017 depending on the initial results.

First By Road Then By Pipeline
Map Of Kenya And Exports Routes
Source: Tullow Oil

While the exploration and appraisal work is ongoing in 2017, Tullow also plans to start small scale production to start recovering some cash flow for the project ( see ' Upstream Momentum Despite Headwinds Above Ground ' , July 28 2016). Initial production is planned for mid-2017 and will export around 2,000 barrels per day (b/d) via truck to Mombasa. Cash earned from the Early Oil Pilot Scheme will help fund ongoing exploration and development work, in addition to the ultimate aim of building an export pipeline from the Lokichar Basin to the port of Lamu. The planned pipeline is estimated to cost USD2.1bn and will be 890km in length with the partners aiming to reach a final investment decision for the project by late 2018, followed by first production in 2022. Furthermore, first oil from the Ghanian TEN project in August 2016 has helped shore up Tullow's balance sheet providing a steady cash flow to pay down its considerable debt load. First oil from the project marked an end to Tullow's projects in Ghana allowing the company to rotate into Kenya and concentrate its efforts on developing its assets in the East Africa.