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Tullow Oil and African Development
25th April 2012
Yesterday I spent a fascinating evening in the company of Aidan Heavey, Founder and CEO of Tullow Oil plc, Africa’s leading independent oil exploration business and the top performer among FTSE-100 listed businesses on the UK stock exchange. It has approximately 100 production and exploration licenses in 22 countries.
Tullow Oil is an oil exploration business - their job is to find oil and use the latest technologies and top-level human capital both to find it, drill the wells and bring oil to the ground.
Tullow is different from the fully vertically integrated companies such as Shell or BP who explore, extract, refine, distribute and then sell oil to consumers. Their main focus is in Africa and they have become the biggest licence holder for oil exploration in a continent that many observers believe is in the early stages of a period of very strong economic growth in the years ahead.
Some basic background on Tullow:
* Operations in over 22 countries
* Employ 1,400+ people
* Explore, appraise, develop and produce oil and gas
* €1 billion+ operating profit in 2011
* No.27 in the FTSE 100
* Market value of £14 billion
* Capital spend in 2011 of $1.4 billion
Aidan Heavey discussed the history of the company - from unpromising beginnings in a small town in Ireland (a country that has no oil!) through to the most recent news of vast oil discoveries in Kenya. He focused in particular on the role that Tullow Oil has played in the economic development of Ghana and especially the investment in the Jubilee Field in a country that had no pre-existing infrastructure or deep-water technology in the oil exploration and extraction business.
The capital intensity of Tullow’s operations is breath-taking. Dropping a well in the Jubilee Field cost $100 million and it took a further $3.5 billion to get the oil flowing to the surface. The oil field was developed in a record 40 months - to put that into context, it usually takes over seven years from oil being discovered to a new field being developed. The first oil extraction took place in December 2010 and Ghana is now a world-class oil producing country with the potential for a transformational effect on their growth and development prospects. Tullow employs over 250 people in Ghana, over 85% are Ghanaian and over 1,500 contracts awarded to Ghanaian contractors.
Tullow Oil Ghana IPO Advert
The company has continued to enjoy rapid growth in recent years built around the regular discovery of new oil fields around the world. Tullow opened its thirdmajor new basin in offshore French Guiana in 2011 and just a few weeks ago Tullow made its fourthmajor new basin discovery in Kenya.
Crucial to their success is in recruiting some of the top geologists in the world - they employ over 200 of them and they are a major recruiter of geo-scientists from top universities. The quality of their human capital is absolutely essential ands they have worked closely with University College Dublin to develop industry-specific courses and build up an expertise that few other players in the industry can enjoy. Here is a wonderful example of the benefits of joint ventures with universities not just to supply highly skilled UK and other EU graduates but also to provide courses for Tullow’s African employees many of whom come to the UK to study on scholarships and who are frequently top of the class beating their Far East Asian counterparts.
Share Value and Share Prosperity
I have blogged before about the emerging idea of shared value put forward by business thinkers such as Michael Porter. Shared value is creating economic value by creating social value and it was clear to me that Tullow embraces this idea with passion and with significant financial backing. Tullow has a big commitment to social enterprise activities and to sustainability in the regions in which they operate - this short video focuses on Uganda.
How do you measure shared value?
* Economic value is still measured by profit
* Social value - measuring the social impact of business activity
* Businesses are doing lots of measuring of social impacts (e.g. CSR reports) - but are these being reported as part of the profit and loss account?
* The financial markets (investors) are still too focused on short-term
* There is an increasing blurring or “for profit” and “not-for-profit”; business models which are a hydrid of trying to earn a return which also provides a societal benefit
* Business is increasingly looking for a sense of purpose
One of their new projects is Invest in Africa and you can expect to see this logo appearing on Sunderland FC’s shirts when they step out into a new Premiership season in August 2012.
Founded by Tullow Oil, Invest in Africa is a business-to-business initiative to encourage long-term investment across the Continent. It is designed to:
- help build and develop local capacity
- boost domestic job markets
- develop skills
- stimulate economic growth
A few points from the floor discussion
Peak oil theory:
Only 3% of the world has been explored for oil, there is no shortage of oil in the world - what is keeping oil prices high is a mixture of factors including a shift in the profits of oil extraction away from oil companies towards sovereign governments, and the long-term rise in world oil demand driven by growing population and rising per capita incomes. As world oil demand rises, extracting known reserves of crude becomes harder as the marginal cost of extra oil output rises
The power and influence of modern corporations
In emerging countries, modern corporations with a total commitment to shared value and long term thinking can do more than the governments of advanced nations. Traditional models of overseas aid have become largely discredited; corporations will bring much needed investment into a lower-income country but investment will only flow when governance and institutions have improved. There are some countries in Africa that Tullow Oil will simply not deal with because of corruption and failing institutions.
The vital importance of top quality geo-science
Around the world, one in eight wells drilled find oil, Tullow’s success rate is above 70%!
Ghana - GNI per capita
Data from Timetric.
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Export Value and Export Volume Index
Data from Timetric.
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Foreign direct investment for Ghana - net inflows
Data from Timetric.
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Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.