Kenya oil uncertainty hits Canadian firm’s Sh21.7bn assets
A truck loaded with crude oil spotted at Ortum on the Kainuk-Kapenguria road heading to Mombasa under the Early Oil Pilot System on October 5, 2018.
Canadian oil and gas company, Africa Oil has booked a non-cash impairment charge of Sh21.69 billion ($ 170.6 million) on its Kenyan assets following uncertainties over oil production in the country.
An impairment charge is a process used by businesses to write off assets whose value drops or is lost completely, rendering them worthless. These charges can be used to determine the financial health of a company.
“Africa Oil recognised a non-cash impairment to its Kenyan intangible exploration assets of $170.6 million (Sh21.69billion) (2021: nil) due to continuing delays and uncertainties to the farm out process and the path to the final investment decision ("FID") for project oil Kenya” Africa Oil said when it released its fourth-quarter financial results for 2022.
Africa Oil and its joint venture partners, including British explorer Tullow Oil, Tullow are seeking to develop commercial production of oil in Block 10BB and 13T in Turkana. The country first announced the discovery of oil in March 2012.
Gas asset
In 2021, the Canadian company and its partners initiated a farm-out process for the Lokichar basin project oil Kenya. A farm-out agreement is whereby a third party agrees to acquire an interest in an upstream oil and gas asset (licence or other forms of concession) from one or more of the current owners in return for performing certain work obligations, such as the acquisition of seismic, the drilling of a well or wells, the reimbursement for past costs or a mix of any of these.
A successful farm-out is viewed by the company as a critical step toward the FID for project oil Kenya.
“Discussions with the interested parties have taken longer than expected and there is no guarantee that the company can successfully conclude a farm out to new strategic partner(s) on favourable terms. As a result of this delay the Company has recognised an impairment to its carrying value for project oil Kenya” Africa Oil said.
Tullow and its joint venture partners presented their long-awaited revised development plan for oil production in Kenya for approval in December 2021 even though approval of the deal has been delayed.
Investment plan
Kenya had set a December 2021 deadline for Tullow to present a comprehensive investment plan for oil production in Turkana or risk losing concession on two exploration fields in the area.
In its plan, Tullow said it expects to recover 585 million barrels of oil from the project over the full life of the field.
Approval of the plan will see Tullow start construction of a pipeline, which is estimated to take three years. The firm said it expects to produce up to 120,000 barrels per day once production starts.
Tullow has previously attributed production delays to several factors, including unfavourable global oil prices, approval delays for land and water rights, a tax dispute, and the Covid-19 menace.
Tullow in March last year said it could book an impairment charge of Sh32.41 billion ($255 million) on its Kenya assets if uncertainties over oil production in the country are not resolved.
