Tullow Oil Plc has been
hammered by the collapse in oil prices, but
analysts have predicted its success in 2016 will depend on the timely
completion of its West Africa developments. Tullow docked its new FPSO vessel earmarked for
the Tweneboa-Enyenra-Ntomme, or TEN, project -- more than a month after leaving
Singapore where it was constructe.
The Irish firm holds a 47.18% stake and wants to use technology to squeeze as much oil as it can out of the TEN wells.
The oil giant’s production for 2016 is projected to hit
82,500 barrels per day, up 12 percent on last year. This is
set to increase output to 100,000 barrels per day in 2017 and enable its heavy
investment in Africa to bear fruit.
With the current depression of oil companies’
share prices caused by the oil-price collapse, Tullow has forecasted US$1.1billion expenditure
for this year. CEO Aidan Heavey said in January
that starting the Tweneboa-Enyenra-Ntomme, or TEN, will allow Tullow to cut its
net debt of US$4billion.
The
world still has much more oil than it needs -- supply is outstripping demand by
about 1.5 million barrels per day, hence the fall in prices. Crude oil prices have fallen dramatically over the past two
years—from over US$100 per barrel to be hovering at around US$30. Producers are generally
seeking a recovery in the crude price to US$50 a
barrel.
Worldwide, some oil companies worldwide are keeping up
production simply to generate enough cash to make debt payments, according to
bankers and energy executives. The industry has a crushing debt load — energy
companies on average have twice as much leverage, or borrowed money, which is
having some adverse effects.
Low oil prices have a very significant impact
on firms that engage in the exploration and production of oil. Some producers are highly leveraged due to
loans taken out for expanding production during the commodity boom. Even in cases where it may not be
profitable to produce oil, it is hampered by high production costs; therefore
putting financial pressure on companies engaged in downstream operations.
While crude prices have dropped
more than 70 percent over the
last 20 months, a reckoning in the world’s vast oil industry has only just
begun. Until recently, companies were
able to ride out the slump by using hedges to sell their oil for higher than
the low market prices.
However, in recent months most of those hedges have expired --
leaving a number of oil companies low on cash and unable to pay their debt.
More broadly, energy executives and their lenders are realising that a recovery
in oil prices is at least a year away…too long for many companies to hold out
Energy executives and their bankers are bracing
for a prolonged downturn that could re - make the energy industry in a way not
seen since the turmoil of the late 1990s gave rise to mega-mergers like Exxon
Mobil.
Tullow Oil hopes that the write-downs that affected
its results for 2015 will be the last of the impairments. Aidan Heavey, speaking
in February after Tullow Oil announced a quarter drop in its annual revenues
and losses of US$1billion, admitted it may sell
some of its prize assets in the future to generate returns for shareholders.
However, he played down fears and underlined that business is
operating profitably. He said: “After the TEN project in Ghana moves into production
in July, the company from 2017 onwards will be able to extract oil for a cash
cost of US$8 per barrel. So even if oil prices go lower
for longer, we will then still be profitable”, he added.
The timing looks right,
but Heavey says: ‘Tullow oil is seen by African governments as a
long-term partner, and Africa would be horrified at the thought of
losing Tullow Oil”. He knows his outfit will also be horrified if this heavily-invested
TEN project fails
Indeed, the TEN project is a must-win for Tullow oil!
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