Issue 119 • 27 July 2007

Tullow Oil plans focus on previously unfashionable frontiers Ghana and Uganda

The Irish company is raising its spending to fund the apparently happy consequences of its recent success with the drillbit in previously unfashionable Ghana and Uganda.

Tullow Oil is increasing its projected capital expenditure for 2007 to £400m ($822m) from the £350m announced at the start of the year to fund an increase in exploration activity, particularly in Ghana and Uganda.

The company is reallocating capital away from the UK, where chief financial officer Tom Hickey told a conference call on Tullow’s 11 July operational update that current high operating costs, low gas prices and high taxes meant there was little incentive to increase production in the North Sea.

Consequently Tullow had lowered its full year production forecast to 72,000-75,000 boe/d, with most of the reduction arising from the UK, he said. The reverse was true in Africa, where Tullow has strong production growth and is looking to accelerate investment.

“What we have seen over the last six months is the benefit of the large exploration portfolio that we have, and our ability to move our finances and our capital across to areas where we see the biggest value-added to our shareholders,” said chief executive Aidan Heavey.

“The successes in Ghana and Uganda are very important, both from the point of view that there’s material upside both in the appraisal of these discoveries, but also in the large exploration acreage positions that we have around them. I think these projects, coupled with the Kudu project [in Nambia; see Gas below], are in a position where there could be a substantial step change in our business over the next few years and give us a very material production over a very long life.”

Heavey said Tullow was reviewing its portfolio as some smaller assets would no longer be material as the company grew.

He said Tullow, which acquired Energy Africa in 2004 and Hardman Resources last year, did not plan any further acquisitions for now. “I think we have a lot on our plate,” he said. “There’s enough upside in our business right now to keep us quite happy for a while.”

Asked about funding, Heavey said Tullow was able to meet its needs from its own resources. “We have enough flexibility within our assets to fund our activities,” he said.

Chief operating officer Paul McDade said Africa had seen very strong production growth, with output seen averaging 40,000 b/d in 2007. Growth has come mainly from the start-up last December of the Okume field in Equatorial Guinea, which McDade said had had a much faster production build-up than expected. “What we have seen, which is very pleasing, is a much lower than anticipated early downtime. We had built in some teething and start-up downtime, but that hasn’t materialised and we’ve seen a very low downtime.”

Tullow also reported on the following operations on the Atlantic coast:

• Côte d’Ivoire – the Espoir and West Espoir fields are producing 32,000 b/d. Five production wells have been completed on West Espoir, and four further production wells are planned in H2 07. “We continue to infill drill. That drilling is indicating potential above expectation, and that’s likely to give us opportunity to invest further in the Espoir area,” McDade said.

• Congo-Brazzaville – Eni has taken over operatorship of the M’boundi field, where a dip in production is expected in H2 07/H1 08 because the partners are reducing gas flaring to preserve reservoir energy. “While this has very positive long-term value, in the near term it is likely to result in lower average production rates of 45,000 b/d during H2 07,” Tullow said. McDade said this would reverse later next year as the water injection programme started to take effect.

• Ghana – Tullow and its partners have announced plans to fast-track appraisal of the Mahogany discovery, with the Belford Dolphin drillship contracted to return for a well on the Deepwater Tano block in August (AE 118/14, 117/9). The Mahogany-1 well found a significant accumulation of 37° API oil in a large stratigraphic trap straddling the Deepwater Tano and West Cape Three Points blocks.

General manager exploration Angus McCoss said Tullow’s previous reserve estimates of 250m barrels of P50 (proven and probable) and 600m bbls of P10 (proven, probable and possible) were probably conservative. “We now see upward movement on both of those numbers,” he said, but declined to give a new figure until appraisal drilling had been carried out, which McCoss said could require four or five more wells. The stratigraphic trap was a classic Tullow play, he said, noting that Tullow has acreage along the West Africa Transform Margin in both Ghana and Côte d’Ivoire. “We will be chasing this play and the success of Mahogany westward along the play fairway.”

Ugandan success

In Uganda, McCoss said the Nzizi-2 well drilled in May had encountered hydrocarbons in four zones, two of which demonstrated producible oil, and one of which flowed dry gas at a rate of 14m ft3/d.

“Opportunities to utilise the gas as an energy input for the early production system will now be studied,” Tullow said.

The fourth zone was a higher-risk basement play where Tullow found a large, stored volume of oil. This was immovable on test at that location but nonetheless encouraging from an exploration play point of view, McCoss said, adding that in the fourth zone, Tullow had demonstrated the lateral extent of the oil-bearing reservoir sands in the Kaiso-Tonya area, and that this would help move forward plans for both the early production system and longer-term development.

Hickey said Tullow expected a final investment decision in November for the proposed early production system, leading to first production in 2009. Tullow is considering a topping plant to produce diesel and kerosene as well as heavy fuel oil to supply a 50MW power plant (AE 111/5).

The rig used for Nzizi-2 will now be moved to drill the Mputa 3 and 4 appraisal wells, and a more powerful rig, the Nabors 221, is being mobilised to Uganda to drill the Ngassa-1 exploration well in September and the Kingfisher-2 well at the end of the year.

Tullow said the presence of trapped gas in Nzizi-2 had de-risked the seals in the Ngassa prospect. “For that gas to have migrated laterally at depth implies that we have good sealing formations between the [Democratic Republic of Congo] DRC part of the kitchen and the Kaiso-Tonya area,” McCoss said. The Ngassa structure has upside potential of 900m bbls of crude at a depth of 4,000 metres, Tullow said.

Asked about higher reserve numbers given by Tullow’s partner Heritage Oil, McCoss said the Canadian firm was describing an upside case that was technically possible, but Tullow believed more exploration and appraisal work was needed to support it. “We would apply a heavier risk factor until the appraisal activity is completed,” he said.