Tullow overshoots cost recovery claim by over Sh15bn

An audit of the cost recovery bill presented by Tullow has revealed that at least Sh15 billion claimed does not qualify to be repaid by the Kenyan taxpayer.

Tullow Oil, which recently shocked the Petroleum ministry with a Sh204 billion compensation bill, maintained that the amount was reasonable.

The British oil firm said the Petroleum ministry conducted a cost recovery audit for the eight year period between 2010 and 2018.

The final audit report indicated that the disallowable expenditure is $150 million (Sh15.9 billion) of the gross expenditure of $2.04 billion.

"This represents less than eight per cent of the gross expenditure – reasonable by industry standards," Tullow Oil Kenya Managing Director Martin Mbogo said in a statement.

The cost recovery audit examined all spending by the joint venture and decided what expenditure could be claimed from production revenues. This can only be claimed when production starts.

Mr Mbogo said their partners and the Kenyan government will work together to agree on a final figure to be approved for compensation when Kenya starts commercial oil production.

"The ministry has indicated that it will call meetings to discuss these findings with intent to have complete closure on the matter. During these meetings, the contractor will clarify why some of these findings should be dropped," Mr Mbogo said in an emailed response to the Nation.

VIRUS IMPACT

A higher bill will help Tullow Oil get a better price for its shares, which are on sale.

The firm confirmed that it has called force majeure on its licences in northern Kenya, which means that it is unable to continue with its contractual obligation in Turkana oil fields. Tullow Oil is the operating partner on Blocks 10BB and 13T in Kenya

A force majeure notice is declared when a company is unable to perform its obligations in a contract due to unforeseen events, such as floods and disasters.

In contracts, this is synonymous to filing for divorce or separation. The firm has, however, maintained that the notice does not affect the group's work programme.

"Tullow and its partners have called force majeure because of the effect of restrictions caused by the coronavirus pandemic on Tullow's work programme and recent tax changes," the firm said.

"Calling force majeure will allow time for the restrictions on the work programme to lift and for the joint venture and government to discuss the best way forward for this important project," it added.

FRONT RUNNER

The move has handed China the biggest opportunity yet to snap up the operations after it emerged as the front runner to buy Project Oil Kenya from the struggling British firm.

China National Offshore Oil Corporation is one of the top favourites to buy the 32.5 per cent share of the project up for sale, which would make it a majority partner and a key decision maker in unlocking the current stalemate.

Tullow has a 50 per cent stake in the project, with Canadian firm Africa Oil holding 25 per cent and French firm Total SA holding 25 per cent.

The firm has also raised concern over the change in tax legislation in April, which removed the Special Operating Framework as the mechanism by which the agreed tax regime would be applied to the project.

"We need to discuss this with the government, calling force majeure allows for space and time to do that," the firm said.

Tullow said the process of finding a buyer of part of its stake in the venture is underway. "We have always said we would farm-down in Kenya ahead of FID (final investment decision) and this remains the case," the firm added.

The company maintained that it had no plans of exiting Kenya, adding that its board had approved the 2020 budget.

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In a previous article we erroneously referred to Mr Martin Mbogo as the former MD of Tullow. Mr Mbogo is still in charge of the company and has not left the position. We apologise for the embarrassment the error might have caused him and the company.