Kenya, April 16 -- After 13 years of turbulent operations marked by significant financial write-offs, regulatory hurdles, and unmet expectations, British oil and gas explorer Tullow Oil has finalized a deal to sell its Kenyan assets to Gulf Energy Ltd for at least Sh15.6 billion ($120 million).
The transaction, announced on Tuesday, April 15, marks the end of Tullow's ambitious but troubled venture in Kenya's Turkana oilfields, transferring full control of the Lokichar oilfield to Gulf Energy, a Nairobi-based firm.
The deal, which includes future royalty payments and a 30% participation option for Tullow in potential development phases, comes as Tullow seeks to reduce its $1.5 billion debt burden while Kenya's dream of becoming an oil-exporting nation faces fresh uncertainties.
Tullow Oil's foray into Kenya began with high hopes in 2012 when the company, alongside partners Africa Oil Corp and TotalEnergies, discovered commercially viable oil reserves in the South Lokichar Basin, Turkana County.
The discovery of an estimated 560 million barrels of proven and probable reserves sparked optimism that Kenya could join the ranks of Africa's oil-producing nations.
Early projections suggested the Turkana oilfields could produce up to 120,000 barrels of oil per day (bopd), with commercial production initially targeted for 2022.
However, the project faced a litany of setbacks. The development of the Turkana oilfields required significant infrastructure, including a proposed 895-km heated crude oil pipeline from Lokichar to the port of Lamu, estimated to cost $2.7 billion.
The absence of this pipeline, coupled with logistical challenges in transporting oil by road to Mombasa, stalled full-scale production. The Early Oil Pilot Scheme (EOPS), which ran from 2018 to 2020 and produced 2,000 bopd, was a modest success, with one cargo of 240,000 barrels sold to ChemChina in August 2019 for $13.4 million.
However, the scheme was cut short due to adverse weather and operational constraints, leaving 180,000 barrels stockpiled at the Kenya Petroleum Refineries Ltd (KPRL) in Changamwe.
Tullow's challenges were compounded by financial and regulatory obstacles. In 2023, the company became the sole owner of the Lokichar oilfield after Africa Oil Corp and TotalEnergies, each holding a 25% stake, withdrew citing "differing internal strategic reasons."
The exits left Tullow to shoulder the project's full financial burden, prompting a $145 million (Sh18.8 billion) write-off in 2024-the largest in a series of impairments totalling $242.2 million since 2020.
The Kenyan government's rejection of Tullow's revised Field Development Plan (FDP) in July 2024 further dimmed prospects. The Ministry of Energy and Petroleum cited Tullow's weak financial position and inability to secure a strategic investor to plug the funding gap for the capital-intensive project.
Despite an audit by Gaffney, Cline & Associates upgrading the oilfields' production capacity to 120,000 bopd from 70,000, delays in approving the FDP and securing financing cast doubt on the project's viability.
The agreement with Gulf Energy Ltd, a Kenyan energy company with interests in oil marketing and power generation, represents a lifeline for Tullow to exit Kenya while recouping some value from its beleaguered assets.
Under the terms of the deal, Gulf Energy will make three payments of $40 million (Sh5.186 billion) each, totalling $120 million. The first payment is contingent on the approval of Tullow's FDP by the Kenyan government, expected no later than June 2026.
The second payment will follow regulatory approval of the deal, while the third, due by June 2033, includes quarterly payments of $2 million starting in Q3 2028, provided Brent oil prices average at least $65 per barrel.
Tullow will also retain exposure to the Turkana oilfields through royalty payments tied to future production and the right to a 30% participation in subsequent development phases at no additional cost.
This structure allows Tullow to benefit from potential upside without bearing the financial risks of further investment.
"We look forward to working with Gulf Energy, who have the requisite financing to complete the transaction and are a strong and credible counterparty," said Tullow's interim CEO, Richard Miller.
For Gulf Energy, the acquisition positions the company as a key player in Kenya's nascent oil sector. The firm, which has operated in Kenya's energy market since 2001, brings local expertise and financial backing to the Turkana project.
However, Gulf Energy faces the same challenges that plagued Tullow, including securing government approvals, attracting strategic investors, and developing the necessary infrastructure for commercial production.
Netizens reflect mixed sentiment, with some praising the transition to a Kenyan firm as a step toward local control, while others question whether Gulf Energy can succeed where Tullow faltered.
The sale comes at a critical juncture for Kenya's oil ambitions, which have been mired in delays and unmet expectations. The Turkana oilfields, first discovered in 2012, were hailed as a transformative opportunity to boost Kenya's GDP, create jobs, and generate revenue for local communities.
However, the project's repeated setbacks have fueled suspicion about its feasibility. The withdrawal of Africa Oil and TotalEnergies in 2023, coupled with failed sale talks with Indian state-run companies, underscored the challenges of attracting investment for a project requiring billions in upfront capital.
The Kenyan government now faces pressure to expedite approvals and provide clarity on fiscal terms to unlock the Turkana oilfields' potential.
The revised FDP, submitted by Tullow in March 2023, outlined plans for a larger crude oil processing facility and pipeline to accommodate the upgraded reserve estimates.
However, the Energy and Petroleum Regulatory Authority (EPRA) and Parliament have yet to ratify the plan, with some analysts arguing that the government's indecision has deterred investors.
Local communities in Turkana, who have long awaited economic benefits from the oilfields, expressed cautious optimism about Gulf Energy's takeover.
Turkana Senator James Lomenen, who has previously criticized Tullow for lack of transparency in oil sales, called for greater community involvement in the project. "The community was supposed to benefit, but we need to see how Gulf Energy will engage us moving forward," he said.
For Tullow, the sale is part of a broader strategy to reduce its $1.5 billion debt and refocus on core operations in West Africa, particularly Ghana and Cote d'Ivoire, where it has producing assets.
The company recently agreed to sell its working interests in Gabon for $300 million, signalling a shift away from high-risk exploration projects.
The Turkana write-offs, including $17.9 million in 2024 and $410 million in 2020, reflect Tullow's increasingly pessimistic outlook on the project's commercial prospects, particularly after the Kenyan government's rejection of its FDP.
Analysts view the Gulf Energy deal as a pragmatic exit strategy, allowing Tullow to salvage value from a project that has drained resources for over a decade.
"Tullow's exit is not surprising given the financial strain and lack of progress in Kenya," said Alex Kimani, a finance writer for OilPrice.com. "The royalty and participation clauses are a smart way to retain some upside while offloading the risks."
As Gulf Energy takes the helm, the future of the Turkana oilfields hinges on its ability to navigate the same challenges that stymied Tullow. The company must secure government approval for the FDP, attract a deep-pocketed strategic investor, and address infrastructure gaps to bring the oilfields to commercial production.
An alternative proposal, floated by some experts, involves building a refinery in Eldoret to process Turkana's crude locally, reducing reliance on a costly export pipeline and supplying fuel to Kenya and neighboring countries.
The Kenyan government, meanwhile, faces a delicate balancing act: supporting Gulf Energy's efforts while addressing community expectations and environmental concerns.
Tullow's exit has sparked renewed calls for a rethink of Kenya's oil strategy, with some advocating for a focus on renewable energy as global demand for fossil fuels wanes.
President William Ruto's emphasis on green energy, highlighted during the 2023 Africa Climate Summit, adds complexity to the Turkana project's long-term viability.
For now, the Sh15.6 billion deal marks a new chapter for Kenya's oil industry, with Gulf Energy tasked with turning a long-delayed dream into reality.
Whether it can succeed where Tullow faltered remains an open question, but the stakes-for Kenya's economy, Turkana's communities, and the nation's energy future-are higher than ever.
Published by HT Digital Content Services with permission from Bana Kenya.