Tullow Oil Operations in Kenya

With the departure of CNOOC, Tullow Oil is the leading oil exploration company in Kenya. Tullow is the operator and has a 50 percent stake in Blocks 10A (in partnership with Afren and Africa Oil), 10BA (in partnership with Africa Oil), 10BB (in partnership with Africa Oil), 13T (in partnership with Africa Oil and the National Oil Corporation of Kenya (NOCK)), 12A (in partnership with Marathon Oil Corp. and the NOCK), and 12B (in partnership with Swala), all located in Kenya's north west, in or bordering Turkana County.

Block 10 BB and 13T have been major sights of oil findings. Drilling began in Block 10BB in January 2012 at Ngamia-1. On 26 March 2012 Tullow Oil and Africa Oil announced their discovery in Block 10BB, and a second followed in November 2012 in Block 13T at Twiga South-1. These finds exceeded expectations. Further drilling in Block 10BB was conducted in May 2013 on the Etuko prospect, yielding further oil findings, though of a lower quality.[5] In September 2013, a fourth consecutive discovery was made at Ekales. This is significant as Ekales lies directly between Ngamia-1 and Twiga South-1, which bodes well for further oil discoveries. Since 2012 the drilling has yielded a 100 percent success rate, earning the area the name "the string of pearls". In November 2013 Tullow announced a fifth consecutive oil discovery at the Agete-1 well in Block 13T. Tullow and Africa Oil will drill a further 12 wells over the next year, beginning with the Bahasa and Sala wells, thought to contain 700 million barrels of oil.

It is thought that Blocks 10BB and 13T contain 280 million barrels (MMbbl) and 87 MMbbl of gross contingent oil resources respectively. However, while it is widely claimed that Tullow Oil's July 2013 half-year report announces commercial viability of these findings is not clearly the case. Rather, it states that the discovery of an estimated 300 million barrels of oil equivalent resources is a crucial step towards establishing commercial viability.

=Controversy in Turkana=

As the leading company in the exploration for Kenya's oil, Tullow has come under criticism. Pastoralists in Turkana maintain that oil exploration is damaging to their livelihoods, and have rejected a Tullow proposal to carry out further drilling. Tullow denies that oil exploration destroys pastoral lands, and has complained that the process has been slowed by community interference. In response to the criticisms, Tullow released the following statement:"Tullow takes its relationships with the local communities extremely seriously and the decision to suspend exploration and appraisal operations was taken to prevent further escalation of the demonstrations while discussions to resolve this issue for the long term are ongoing."

=Terms of Production Sharing Contract for Block 10A=

Tullow Oil, Africa Oil (holding a working interest of 30 percent) and Afren signed a Production Sharing Contract (PSC) with the Kenyan government for Block 10 A. The PSC has an initial 3 year exploration period and, at the option of the contractors, two additional exploration periods, each of a duration of 1,5 years. A 25 year development period starts once oil is discovered.

An information form published by Africa Oil outlines additional information on the terms of the contract related to:
 * minimum required exploration expenditure: US$7.75 million for geological and geophysical activities and US$8.5 million for exploration well (during first exploration period); US$0.1 million for subsurface integration of well results and US$8.5 million for additional exploration well (during the first additional exploration period); US$0.1 million for subsurface integration of well results and US$8.5 million for additional exploration well (during the second additional exploration period)
 * relinquishment of contract area: at the end of the first exploration period, the contractor must relinquish 25 percent of the remaining contract area; at the end of the first additional exploration period, the contract must relinquish and additional 25 percent of the contract area
 * government interest: the government may acquire an interest of up to 13 percent of the total interest the development area
 * second tier profit oil: once the oil price exceeds a certain world oil price, the government receives a windfall profit oil payment in addition to the initial profit oil share

=Terms of Production Sharing Contract for Block 10BA=

In 2011, Africa Oil acquired Centric Oil and Gas and thereby acquired a Productions Sharing Contract (PSC) in Block 10BA of which Tullow Oil holds a 50 percent interest and is the operator. As a result of the acquisition, Centric Oil released an information circular to its shareholders containing information on the PSC for Block 10BA whose initial exploration period will expire in April 2014 according to the homepage of Africa Oil.

The circular outlines content of the 10BA PSC regarding:


 * exploration and production terms: the PSC is split into a seven-year exploration term with three periods and a 25-year production term
 * minimum exploration expenditure: US$3 million for process and study of existing data and the conduct of geophysical and geological surveys (during first exploration period from year 1 to year 3), US$17 million and US$19 million for the acquisition of 2D and 3D seismic and the drilling of exploration wells (during second and third exploration period lasting from year 4 to 5 and from year 6 to 7, respectively)
 * land rental payments: US$3 per km2 (during first exploration period from year 1 to year 3), US$10 per km2 (during second exploration period lasting from year 4 to 5) and US$20 per km2 (during the third exploration period lasting from year 6 to 7)
 * annual service rental fee: US$100 per retained km2 during the development and exploitation period
 * local annual employment contributions: annual local employment contributions of US$30,000, US$50,000 and US$75,000 during the respective exploration periods; annual local employment contributions of US$100,000 during the development and exploitation period
 * reduction of block area: upon each renewal of the contract, the block area will be reduced by at least 25 percent
 * return of licence area to government: if no discovery is made by April 2017, the licencees have to return the remaining interest to the government
 * government interest: during the exploration period the government has a 10 percent interest
 * government net profit oil share in event of commerical production of oil or gas: 50 percent for a daily oil production of up to 10,000 bbl, 55 percent for a daily oil production between 10,001 and 20,000 bbl, 60 percent for a daily oil production between 20,001 and 30,000 bbl, 63 percent for a daily oil production between 30,001 and 50,000 bbl, 68 percent for a daily oil production of between 50,001 and 100,000 bbl, and 78 percent for a daily oil production from 100,000 bbl.

=Terms of Production Sharing Contract for Block 10BB=

Tullow Oil and Africa Oil signed a Production Sharing Contract (PSC) for Block 10 BB in 2008. The PSC covers an initial exploration period of four years which can be extended with two additional exploration periods, each with a duration of two years. The first extension exploration period will expire in July 2014. A 25 year development period starts once oil is discovered.

An information form published by Africa Oil outlines some additional information on the terms of the contract related to:
 * minimum required exploration expenditure: US$7 million for geological and geophysical activities and US$6 million for the drilling of one well to a vertical depth of at least 3,000 m (during first additional exploration period); US$7.0 million for 3D seismic and US$6 per well for three exploration wells with at least 3,000 m vertical depth (during the second additional exploration period)
 * relinquishment of contract area: at the end of the first additional exploration period, the contractor must relinquish 30 percent of the remaining contract area
 * government interest: the government may acquire an interest of up to 20 percent of the total development area
 * profit oil: profit oil is available to Tullow Oil and Africa Oil and the government on a sliding scale with the portion allocated to the contractors declining as the volume increases
 * second tier profit oil: once the oil price exceeds a certain world oil price, the government receives a windfall profit oil payment in addition to the initial profit oil share

=Terms of Production Sharing Contract for Block 13T=

Tullow Oil and Africa Oil signed a Production Sharing Contract (PSC) with the Kenyan government for Block 13T in September 2009. The PSC has an initial exploration period of 3 years and two additional exploration periods, each of a duration of two years. Currently the contractors are in the first additional exploration period which will expire in September 2014. A 25 year development period starts once oil is discovered.

An information form published by Africa Oil outlines additional information on the terms of the contract related to:


 * minimum required exploration expenditure: US$6 million for 200 km2 of 3D seismic and US$15 million for drilling of one exploratory well (during first additional exploration period); US$6 million for acquisition and interpretation of an additional 200 km2 of 3D seismic and US$15 million for additional exploration well (during second additional exploration period)
 * relinquishment of contract area: at the end of the first additional exploration period, the contractor must relinquish 25 percent of the remaining contract area
 * government interest: the government may acquire an interest of up to 22.5 percent of the total interest in the development area
 * second tier profit oil: once the oil price exceeds a certain world oil price, the government receives a windfall profit oil payment in addition to the initial profit oil share

=Terms of Production Sharing Contract for Block 12A=

Tullow Oil, Africa Oil (with a working interest of 20 percent) and Marathon Oil signed a Production Sharing Contract (PSC) with the Kenyan government for Block 12A. The PSC has an initial exploration period of 3 years and two additional exploration periods, each of a duration of 2 years. The initial exploration period was extended to September 2013, therefore the contractors should be currently in the first additional exploration period. A 25 year development period starts once oil is discovered.

An information form published by Africa Oil outlines additional information on the terms of the contract related to:


 * minimum required exploration expenditure: US$3.6 million for 500 km of 2D seismic or 100 km2 of 3D seismic (during initial exploration period); US$6 million for 200 km2 3D seismic and US$15 million for drilling of one exploratory well (during first additional exploration period); US$6 million for additional 200 km2 of 3D seismic and US$15 million for drilling of additional exploratory well (during second additional exploration period)
 * relinquishment of contract area: at the end of the initial exploration period, the contractor must relinquish 25 percent of the remaining contract area; the contractor must relinquish an additional 25 percent of the remaining contract area in the first additional exploration period
 * government interest: the government may acquire an interest of up to 22.5 percent of the total interest in the development area (15 percent of which will be held by the Kenyan government and 7.5 percent which will be held by the National Oil Corporation of Kenya (NOCK))
 * second tier profit oil: once the oil price exceeds a certain world oil price, the government receives a windfall profit oil payment in addition to the initial profit oil share

=Terms of the Production Sharing Contract for Block 12B=

On March 2012, Swala Energy Limited published a prospectus for its investors, providing some of the content of the Production Sharing Contract (PSC) singed on 16 February 2012 between Tullow Oil, Swala and the government of Kenya for a license area located in Block 12B. According to this released information, both companies are authorised to conduct exploration operations in the assigned licence area (located in Block 12B) for an initial term of 2 years commencing on 16 May 2012, with two options to extend the exploration period for a further 2 years each. Both companies are also committed to a minimum exploration expenditure of US$4,250,000 and US$6,000,000 respectively, over the two years of the contract.

Further, the prospectus discloses terms of the contract with respect to:
 * confidentiality: all information in relation to the joint operations is considered confidential and with "certain exceptions" must be kept confidential and not be disclosed during the term of the PSC and for a period of 3 years thereafter
 * profit and cost oil in the event of production: 60 percent of all crude oil produced from Block 12B during the fiscal year is set aside for Swala and Tullow Oil's operation costs and not to be used in production operations; the government is entitled to between 50 and 70 percent of the remaining oil that is extracted
 * windfall profit payments: if the value of crude oil exceeds US$50 per barrel, the government is entitled to receive windfall profit payments based on the share of profit oil of both companies
 * government equity share: the government is entitled to an equity share of 10 percent in any development plan within the licence for Block 12B

=External links=

Africa Oil Corp. Annual Information Form

Replacement Prospectus by Swala containing information on PSC for Block 12B

Information Circular by Centric Oil containing information on PSC for Block 10BA

=References=