Lure of money takes oil discovery to unexpected places

Lure of money takes oil discovery to unexpected places

Lure of money takes oil discovery to unexpected places

No commercially exploitable oil had been discovered in Kenya until Tullow Oil began drilling this year in the blazing savanna of the Rift Valley, about 250 miles northwest of Nairobi.

In May, the company said that its first well had produced promising results, finding more oil-bearing sands than wells drilled in the geologically similar Lake Albert region of Uganda, where Tullow discovered a 1.1 billion-barrel field in 2006.

If Kenya turns out to be another Uganda, Tullow will have been instrumental in opening up no fewer than four new oil basins in the last six years. Three, including the jumbo-size Jubilee field in the deep waters off Ghana, are in sub-Saharan Africa. The fourth, off French Guiana in South America, was the payoff of a bet that the same oil-bearing rocks found in West African waters would also be present off the coast of Latin America.

Is it luck?

“On their track record – you have to say it is really good,” said Neil Piggott, a veteran explorer, who now heads exploration in Brazil for BP.

Named for a small town outside Dublin, Tullow was founded in the mid-1980s by Aidan Heavey, an accountant for the Irish airline Aer Lingus. He was intrigued by the idea of working over small oil fields in Africa that the large companies had missed. He knew little about the industry, but a friend at the World Bank helped him gain access to some gas fields in Senegal.

Under Heavey, who remains chief executive, the London-based company has grown into an exploration juggernaut with operations in more than 20 countries, a stock market valuation of about $22 billion and an exploration force of some 200 geologists and geophysicists. Tullow plans to spend $1 billion this year on exploration and appraisal, nearly as much as its 2011 operating profit of $1.1 billion.

Despite Heavey’s early inexperience, his company has proved better than most of its larger rivals at making big discoveries. “It wasn’t me being a good geologist,” Heavey, 59, said in a telephone interview. “I did what I was good at and picked the best people.” The company’s output is growing fast, but remains small at 78,200 barrels a day of oil and oil equivalents for 2011.

Analysts place Tullow in the vanguard of a cutting-edge group of oil companies that also includes the US companies Anadarko Petroleum and Kosmos Energy. “The thing that is incredible about Tullow over any of the other companies is their consistent track record of going into frontier basins, where no one else has found anything, and turning that into hundreds of millions of barrels,” said Rob West, an analyst at Bernstein Research in London. “They are an absolutely top performer.”

Tullow strikes oil in about 70 per cent of its exploration and appraisal wells, about double the industry average, according to West. Tullow’s challenge is that as it grows bigger and tries to produce oil, not just find it, it will run into increasing problems and costs. For instance, the company has encountered delays and been hit with a $472 million tax bill in Uganda, which it is disputing. “They are trying to turn themselves into a Shell. It is difficult to do that successfully,” said Stuart Joyner, an analyst at Investec Securities in London.

The company’s exploration chief, Angus McCoss, who moved to Tullow from Royal Dutch Shell in 2006, said that Tullow ignored industry dogmas and did “its own thing”. The oil giant BP, for instance, decided not to participate in the early drilling in the deep waters off Ghana, because the type of geology there often leads to expensive dry holes, according to Piggott, the BP explorer. Kosmos and Tullow wound up finding Jubilee, one of Africa’s larger fields, in 2007.

McCoss says he believes the Jubilee field is part of a rich geological trend that stretches up the coast of West Africa and is also found across the Atlantic. According to this theory, lying under the waters off Latin America is a mirror image of the rich oil deposits off West Africa, left there when an ancient land mass called Pangaea split apart.

Late last year, McCoss tested his thinking when Tullow drilled a well off French Guiana. By then, Tullow had enough credibility to draw in two European majors, Shell and Total, to assume much of the estimated $250 million cost. In September, Tullow announced that it had found a large quantity of oil. McCoss says the field could be larger than Jubilee, with 1 billion barrels or more of recoverable oil.

This month, Tullow announced a discovery off Ivory Coast, buttressing McCoss’ theory. The Kenya discovery is a land-based application of McCoss’ approach of finding oil in one place and then looking for analogies. After raising cash from its Uganda find by selling two-thirds to Total and China National Offshore Oil Corp, or CNOOC, for $2.9 billion, Tullow went in search of similar rift valley plays in Kenya and Ethiopia. Taking advantage of the lack of interest in those countries, Tullow has been able to put together about 38,610 square miles of exploration territory, an area about the size of Indiana, for only about $23 million. There are risks, of course.

The company’s earnings and market valuation will very likely be tightly pegged to the price of oil, which has fallen sharply in recent months. Deepwater exploration wells can cost hundreds of millions of dollars, and a run of bad luck could sour investors. In addition, as the company expands, new finds will have less impact.

Still, the industry is likely to keep pouring money into sub-Saharan Africa because it is less explored than other parts of the world and because of its proximity to China and other energy-hungry Asian economies. Explorers had strong years in the region in 2010 and 2011, finding the equivalent of more than 5 billion barrels of oil each year. This year already looks substantially better, with volumes approaching 10 billion barrels. “Africa is very much an important exploration province,” says Martin Kelly, chief sub-Saharan Africa analyst at the Edinburgh-based consulting firm Wood Mackenzie.

In a telephone interview, Leakey said that there were still scars remaining on the landscape from Shell’s exploration activities years ago. But Tullow’s attitude has been different, he said, giving credit to Heavey. “He has shown to be a very decent person with a very good attitude toward the responsibilities an oil company might have to an area like this,” he said. Leakey said the local people were nomadic herders, and he feared that the central government would use the oil for its own purposes and just give the local people “sweets and little gestures”. For his part, Heavey said that his company was open to creative ways to share the wealth. For example, Tullow has listed its shares on the Ghana Stock Exchange. “We have to make sure we are transparent in what we do and make sure we do things properly,” Heavey said.

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