Directors' Report: Business review
2009 has been another landmark year for Tullow in Uganda. The discovered resource base is now in excess of 800 million barrels of oil and the first phase of development has commenced, targeting gas to power and first commercial oil production in 2011. In addition, through a series of ongoing transactions, Tullow is in the process of aligning equity interests across the basin to accelerate development.
Strong partnership to accelerate basin development
In October 2009, Tullow commenced a transparent farm-down process to sell a proportion of its interests in Blocks 1, 2 and 3A in the Lake Albert Rift Basin. The purpose of this process is to bring in experienced and like-minded partners with downstream expertise in order to deliver an accelerated basin-wide development. The process attracted strong interest from a number of major international and national oil companies who visited Tullow’s data rooms and Ugandan operations and made representations to the Government of Uganda.
On 23 November 2009 Heritage Oil Plc, Tullow’s partner in the basin and operator of Blocks 1 and 3A, announced its intention to sell its entire Ugandan interests to a third party. On 17 January 2010, Tullow chose to exercise its pre-emption rights on this deal and on 2 February 2010 a formal request was submitted to the Government to approve the transfer of the assets involved to Tullow. The acquisition price is up to $1.5 billion.
Tullow continues to work closely with the Government to gain approval for pre-emption of the Heritage deal in parallel with the farm-down process which is now at an advanced stage. Two new potential partners have been identified, CNOOC and Total, and it is expected that following completion of the deal each partner will hold a one third interest in each of the three blocks. Presentations by all parties have been made to the relevant Ugandan authorities and Tullow expects the transactions to be signed in the coming weeks. This will result in a unified partnership with considerable experience and the financial capability to enable Uganda to become a significant oil producing nation.
Drilling in Kaiso-Tonya, Uganda
Significant discoveries made during the year
In 2009, Tullow continued its exploration and appraisal campaign in Uganda in order to prove up further resources and gain a good understanding of the resource distribution across the basin. Exploration drilling activities during the year focused mainly on the Butiaba area but also included the Ngassa-2 well in Kaiso-Tonya. In 2009, the Group drilled nine wells and total contingent resources for the basin are now in excess of 800 million barrels. Tullow is confident that the basin has the potential to deliver significant additional resources with over 1.5 billion barrels awaiting discovery.
Tullow has now gained a good understanding of the Butiaba region of Blocks 1 and 2 where a high number of exploration wells and detailed seismic and gravity imaging have significantly de-risked the remaining prospectivity. Six of the seven wells drilled in this region during the year encountered oil: Giraffe-1, Karuka-2, Nsoga-1, Kigogole-3, Wahrindi-1 and Ngara-1. The Giraffe-1 well in particular proved to be transformational as it confirmed the Buffalo-Giraffe field (subsequently renamed Jobi-Rii) to be a 300 million barrel discovery. The field has significant further upside which is to be drilled in 2010. Awaka-1, the only dry well drilled in Uganda during the year, encountered a new sand fairway but was unsuccessful in finding hydrocarbons. However, it effectively delineated the edge of a key geological play in this region.
Drilling activities in the Butiaba area were supplemented by leading edge subsurface imaging technologies. The largest Full Tensor Gravity Gradiometry (FTG) survey ever carried out in Africa was acquired during the year. FTG is a specialist technology ideally suited for imaging near-basement reservoirs. This survey has been integrated with regional 2D seismic data using techniques developed by Tullow’s geoscientists and technology partners. This technology is being successfully used to improve definition of the Butiaba fields and prospects in 3D, at a fraction of the cost and time required for a regional 3D seismic survey. In addition, a low-impact weight-drop 3D seismic campaign was successfully trialled over the Kasamene and Wahrindi discoveries. The trials proved the technology to be robust, quicker and cheaper than conventional seismic equipment and with a much lower environmental impact.
In the Kaiso-Tonya area, the Mputa-5 appraisal well was drilled and successfully tested at a stable flow rate of 950 bopd in March 2009. The well results validated the state of the art seismic modelling techniques used to identify and target ‘sweet-spots’ in the reservoir. This technology will be deployed throughout the Butiaba area.
The near-shore Ngassa-2 well, located in Block 2, commenced drilling in March 2009 from an onshore location. The well reached a total depth of 3,822 metres and encountered an over-pressured interval indicating the potential for a significant oil column which could cover an area in excess of 150 sq km. This discovery has the potential to be the largest in the basin to date. Further drilling from offshore locations will be required to test multiple prospects and appraise the expansive Ngassa structure. Tullow expects to make a commitment to offshore drilling infrastructure in the first half of 2010.
Exploration and appraisal drilling recommenced in January 2010, following a planned three month break. The first well was the Kasamene appraisal well, Kasamene-2, which successfully confirmed an oil column in excess of 70 metres and a gas column of over 20 metres. The well has been suspended as a future producer and will be part of the Phase 1 Lake Albert Rift Basin development.
A programme of 10 further exploration and appraisal wells is scheduled to commence in April utilising two land rigs which will also trial development drilling techniques. Material prospectivity around the Jobi-Rii field will be targeted in Block 1 as well as key appraisal wells in Block 2 in advance of development.
Operations in Butiaba area, Uganda
Phased basin-wide development commenced
Following significant exploration success in 2009 and the progress made in forming a new aligned partnership, the focus is now on delivering an accelerated development programme. Tullow is working with the Government of Uganda on clearly defining the phases of development. Phase 1 is already under way.
Lake Albert Phase 1: This involves the development in Block 2 of the Nzizi gas field, to fuel a regional thermal power station, and the Kasamene oil field for industrial consumption within Uganda.
Tullow has embarked on FEED studies to develop the Nzizi gas field to supply gas to a new-build thermal power plant which will be built in the Hoima District.
The discovery will be appraised during the second quarter of 2010 and then developed to supply gas to the power plant. Both the field and power plant will come onstream by the end of 2011. The power plant is being designed to accept both gas and crude to ensure long-term supply.
Detailed development planning for the Kasamene field commenced in the second half of 2009 and FEED studies are currently under way. It is expected that a Plan of Development will be submitted to the Government of Uganda by mid-2010 for approval and subsequent project sanction. Production from this field is expected to commence by the end of 2011. The oil will initially be transported by truck and later by pipeline to a central gathering and distribution hub for onward transportation to domestic and regional markets. Initial production capacity is expected to be around 10,000 bopd with the facilities capable of modular expansion, as further phases of the basin development are brought onstream.
An extended well testing programme is planned to support development planning of Kasamene and subsequent fields, and to supplement the appraisal drilling planned for 2010. This programme, which is focused on gathering essential dynamic production data and testing proposed production systems, will commence in mid-2010, starting with the Kasamene field. The crude oil produced from the testing operations will be used to supply fuel to local industrial users and provide the first domestically produced oil in sub-Saharan East Africa. The appraisal drilling and well testing will be complemented by in-fill 2D and 3D seismic acquisition.
Beyond Phase 1: The first objective of the new proposed partnership will be to agree a basin-wide development plan that will encompass the production of the northern and southern fields via an integrated infrastructure. Production levels could exceed 200,000 bopd and would supply a local refinery and allow export of surplus crude to regional and international markets. The proposed Phase 1 development will provide essential subsurface and production data to support this basin-wide development plan.