The market got worked up this week when comments from Tullow Oil's Uganda country manager were construed as meaning the company might launch a counter-bid against ENI's offer for partner Heritage Oil's stake in licences there. The inference that Tullow will utilise its pre-emption rights to block Italian state oil major ENI's $1.35-$1.5bn (£810m-£900m) purchase should be taken with a pinch of salt. In reality, Tullow is unlikely to step in.
Tullow and Heritage each hold half of Blocks 1 and 3A around Lake Albert in eastern Uganda, containing prolific oil discoveries. But the oil is waxy, so the 1,300km export pipeline to Mombasa requires heating. Neither Tullow nor Heritage can lead this complex project, and Heritage's planned complete exit via the ENI sale comes as Tullow itself is considering proposals from international oil companies bidding for an unspecified share of its Ugandan footprint.
With regard to Heritage, Tullow does not have the financial resources to outbid ENI. It could secure bridge financing from another oil major with the intent of selling on to that company in due course, but this presumes that Tullow is willing to hold, however fleetingly, the risk of paying top dollar for the same Albert Basin exposure it already carries on its own books at vastly lower cost. Furthermore, the veto-holding Ugandan government might not approve Tullow's chosen partner, but already supports ENI's entrance. Finally, those predicting a counter move by Tullow miss an obvious point - large international oil companies are accustomed to working together on complex projects, and often prefer to pool risk. ENI's presence may actually encourage competition for Tullow's own sale.
The - ENI appears to be paying not just for existing discoveries, but also further exploration upside presumed as inherent across these licences. This has in turn helped underpin Tullow's valuation. But ENI taking the Heritage stakes arguably queers the pitch for Tullow's own partial stake sale. Some argue that because the successful bidder will have to work with ENI, rather than take sole charge, ENI's incipient leverage could reduce the price others are willing to pay, thus making it easier for ENI to win the Tullow farm-in rights too.
