East Africa is set for an oil exploration swap following French major Total’s gaining control of the Uganda oilfields as UK explorer Tullow Oil focuses its attention on production in northern Kenya.

The acquisition, worth $900 million, will see Tullow receive reimbursement of a portion of past costs, payable in an initial tranche of $100 million once the deal gets regulatory approvals.

The approvals by the Uganda government are expected to be a matter of course, as the firms are said to have briefed President Yoweri Museveni on the deal.

“The deal builds confidence in dealing with a company with a good balance (sheet). We are now sure that lenders will be available and we will have the technical expertise,” said Robert Kasande, acting director at the Petroleum Directorate.

Total announced last week that it had reached agreement with Tullow to acquire an additional 21.57 per cent stake in the Uganda Lake Albert oil project, giving it a controlling stake of 54.9 per cent.

Previously, the two companies held a 33.3 per cent stake each in a three-way ownership with China National Offshore Oil Corporation (CNOOC).

“Following the agreement on the Tanzanian export pipeline route, this transaction gives Total a leadership position to move this project efficiently toward FID (full investment decision) in the current attractive cost environment while providing strong alignment and a pragmatic financing scheme for our partner Tullow,” said Patrick Pouyanné, Total chairman and chief executive.

Start pumping

This means that the Paris Stock Exchange listed Total, which already operates licences EA1 and EA1A, will take over licence EA2 from Tullow.

“Our increased share in the Lake Albert project will bring significant value to Total and fits with our strategy of acquiring resources for less than $3 per barrel with upside potential,” Mr Pouyanné said.

Uganda has estimated crude reserves of 6.5 billion barrels, with 1.7 billion barrels recoverable in the Lake Albert Basin. The country expects to start pumping oil by 2021, with expected earnings of $44 billion over the next 25 years.

Up to $15 billion will be required to commercialise the resources, including construction of a pipeline, a refinery and two processing facilities.

The acquisition has effectively left cash-strapped Tullow to concentrate on the Kenyan project, whose early-to-market deliveries by road are expected at the coastal port of Mombasa from March.

It also brings a resolution to the uneasy relationship between Total and Tullow that was evident in the breaking of ranks over the route of an oil pipeline and field development plans. Tullow felt hard done by the Ugandan government, which forced oil companies to pay disputed capital gains taxes of $700 million following a series of farm-downs.

In April 2016, it became clear that Total was angling for a lead role in the project after it pushed through its proposal to have the oil pipeline from the Lake Albert Basin constructed through Tanzania, as opposed to Kenya, which would have enabled Tullow to evacuate its oil through one line.

Reducing capital expenditure

As Tullow grappled with cash constraints, Total swayed political players in Tanzania and Uganda in favour of its route with a $4 billion financing pledge.

On Wednesday, Uganda and Tanzania awarded a contract for designing the $3.55 billion crude oil pipeline to US firm Gulf Interstate Engineering, which is now expected to complete the work in eight months, paving the way for selection of a contractor to build the pipeline.

READ: Uganda, Tanzania award pipeline design contract to US firm

Tullow, whose market capitalisation rebounded 89 per cent last year, making it the best performer on the 20-member Stoxx Europe 600 Oil and Gas Index, has in the past two years reduced its costs and exploration projects as oil prices plummeted.

The firm, in its latest financial filings, said it plans to reduce its capital expenditure to $500 million this year, from $900 million last year, and cut down its debt, which has ballooned to $4.8 billion.

Tullow, which is listed in London, could also be divesting from the risks associated with potential delays in the Ugandan project. A recent Bloomberg Intelligence report said that the challenges of co-ordinating the cross-border project have substantially raised the probability of a delay, making it costlier.

Kenya operation

The timing also helps Tullow save $300 million that it would have spent on the Ugandan project as per its shareholder obligations.

In its latest reporting, Tullow had indicated it would reduce its capital expenditure commitments in Uganda over the next three years, but had already committed $125 million for this year. The amount will now be offset against consideration for the farm-down.

Tullow has signed a Joint Development Agreement with Kenya and two other firms — African Oil and Maersk Companies — for the development of the Kenya pipeline.

“Tullow is committed to remaining an operator in Kenya, in fact, the Uganda transaction further cements Tullow’s commitment to East Africa and frees up resources,” said Abdul Kibuuka, Tullow’s public affairs and national content manager in Uganda.

In a trading statement and operational update, the firm said it would spend $100 million on laying the ground for oil production in Turkana in Kenya on a pilot basis and $125 million on further exploration and appraisal.

Tullow has said it may consider selling part of its Kenya operation, a decision that analysts say could be predicated on the debt exposure and risks from fluctuating oil prices.