Tullow Oil plc

Half Yearly Results

Record half-yearly results

Continually building long-term business value

27 August 2008 - Tullow Oil plc ('Tullow'), the independent oil and gas exploration and production group, announces its half-yearly results for the six months ended 30 June 2008. 

2008 Half-yearly results summary

The first half of 2008 has been outstanding for Tullow. The Group has delivered record financial results, an excellent exploration performance and material progress towards first oil from both the Jubilee field in Ghana and the EPS in Uganda.

• Effective production management combined with very strong oil and gas pricing and profitable portfolio management generated record first half revenue, cash flow and profits;
• Exploration and appraisal success in Ghana and Uganda will materially increase the Group's resource base and has de-risked the significant upside potential of these major projects; 
• First gas was achieved from the Wissey field on 22 August and the field is now producing at approximately 70 mmscfd; and
• Sale agreements have been reached for the disposal of the Group's interests in the M'Boundi field in Congo (Brazzaville) and the Hewett-Bacton assets in the UK for a total cash consideration of £428 million, with a profit on disposal in the order of £370 million expected in fiscal 2008.

2008 Outlook

• In Ghana, Phase 1 of the Jubilee development will commercialise approximately 300 to 350 mmbo of reserves and is on track for first oil in the second half of 2010. MODEC has been selected to supply and operate the Floating Production Storage and Offloading (FPSO) vessel. Selection of the main subsea contractors is planned for September and project sanction is anticipated in late 2008;

• Four deepwater rigs contracted for an integrated Ghana exploration, appraisal and development drilling campaign, which will re-commence in the third quarter;
• In Uganda, the discovery of Kasamene and the appraisal of Kingfisher have identified substantial upside potential. Exploration and appraisal drilling in both of these regions is ongoing; and
• 2008 average working interest production is now expected to be between 68,000 and 70,000 boepd.

Commenting today, Aidan Heavey, Chief Executive, said:

"Tullow continues to make superb progress and I am delighted to report today's record results. Our Exploration, Production and Development teams delivered another excellent performance during the first half of the year, while successful portfolio management has strengthened our financial position. The next six months promise to be very exciting as our high impact exploration and appraisal campaigns in Ghana and Uganda gather momentum and we continue to build the long-term value of our business."

Presentation, Webcast and Conference Calls: In conjunction with these results, Tullow will conduct a presentation in London and a number of events for the financial community. Details are available on page 22 of this announcement and in the Results Centre on the Group's website at www.tullowoil.com.

Interim management report

Operations review

During the first half of 2008, strong progress has been made throughout the Group with record oil production, important and successful exploration and appraisal wells drilled in Ghana and Uganda and effective portfolio management to secure financial and operational flexibility. While recent production from our UK Gas business has been slightly behind expectations, a number of development activities have the potential to increase production levels. Overall production for 2008 is now expected to be within the range 68-70,000 boepd.

Operatorship of the Jubilee field in Ghana and the ongoing process of commercialisation of the Lake Albert Rift Basin will create a step change in Tullow's business over the coming years and the continued successful stewardship of these major projects are central to the longer-term growth and development of the Group. 

AFRICA: Preparing for the next phase of growth

2008 Half-yearly results highlights

• 1H 2008 production averaged 41,580 boepd, 6% above 1H 2007 levels;
• Mahogany-2 appraisal well upgrades Jubilee field resource potential to over 1 billion barrels;
• Jubilee project on track for first oil in the second half of 2010 with key contractors selected;
• Kasamene and Ngege open up new Victoria Nile delta play with significant potential in Uganda; 
• Kingfisher-2 well in Uganda confirms material discovery with further upside potential; and
• Early Production System in Uganda on track for sanction in the fourth quarter of 2008.

Ghana 

Following the discovery of the Jubilee field offshore Ghana in 2007, Tullow has had further exploration and appraisal success in the first half of 2008.

Jubilee field appraisal programme

Appraisal of the Jubilee field continued with the successful Mahogany-2 well. This well demonstrated that the field is a continuous stratigraphic accumulation stretching more than 11 km across both the Deepwater Tano and West Cape Three Points licences with reserves potential in excess of 1 billion barrels. Drill Stem Tests carried out on this well, although constrained by facilities, have demonstrated the capacity of these reservoirs to produce at commercial flow rates. 

Rig capacity

The Blackford Dolphin and Eirik Raude drilling rigs will arrive in September and November 2008 respectively, followed by the Aban Abraham and the Atwood Hunter in early 2009. These rigs will undertake an integrated programme of appraisal and development drilling on the Jubilee field and high-impact exploration and appraisal drilling within the greater West Cape Three Points and Deepwater Tano licences.

Jubilee field development

The development plans for Jubilee are progressing rapidly, facilitated by the active participation and support of joint venture partners and the Government of Ghana. A fast-track first phase development of the core field area is expected to be sanctioned in late 2008 and Tullow, as Unit Operator of the field, recently issued a number of Letters of Intent following a rigorous tender evaluation process. These include arrangements with MODEC Inc. agreed in July 2008 for the supply and operation of a FPSO vessel. A Letter of Intent for the supply and installation of the main subsea systems is expected to be issued imminently. Both are major components of the overall project and are key to achieving the objective of first production in 2010. The facilities for this first phase of development will be capable of processing more than 120,000 bopd and 160 mmscfd of produced gas, and injecting more than 230,000 bwpd via the initial 17 production and injection wells. 

The field contains significant gas reserves and utilisation of this gas is an integral part of the long-term field development and regional energy planning. As part of Phase 1, it is anticipated that the gas will initially be split between re-injection, to enhance overall oil recovery, and export to shore for use in local power generation. 

The overall objective of Phase 1 of the development is to commercialise a reserve of approximately 300 to 350 mmbo within the core field area. While contractual arrangements and a detailed scope of the development remain subject to finalisation, it is anticipated that the overall capital expenditure for this phase of the project will be of the order of US$3.1 billion, excluding the cost of leasing the FPSO. Further phases of the development are planned based on the positive outcome of drilling to date.

Tullow is building significant capability within Ghana to manage both the development and production phases of the Jubilee Field. This includes expansion of both management and operational teams and significant infrastructure upgrades at the Port of Takoradi. 

Exploration activity

The Odum-1 well was drilled in February 2008 in the West Cape Three Points Block and resulted in a new oil discovery in the Campanian geological play. Both the Campanian play and the Turonian play, established by the Jubilee discovery, are excellent targets across Tullow's acreage in Ghana and Côte d'Ivoire. Appraisal of this discovery and neighbouring prospects will begin in September 2008 with the acquisition of 3D seismic. 

Tullow's deepwater acreage in the West Africa Transform Margin contains a number of potentially material exploration opportunities whose prospectivity has been enhanced by recent results. Tweneboa, a large fan system in the Deepwater Tano block, will be drilled in early 2009 and will be followed by the Teak prospect in the West Cape Three Points block.

In the Shallow Water Tano block, the Ebony prospect is expected to be drilled in the third quarter of 2008.

Uganda and Congo (DRC)

Tullow's exploration campaigns in Uganda over the last three years have resulted in the discovery of a major petroleum province in the Lake Albert Rift Basin. To date Tullow has drilled 14 wells and discovered substantial resources in three core onshore areas. Exploration is continuing in these areas and there are plans to expand operations offshore in 2009. In parallel, Tullow is working closely with the Ugandan government to develop part of the discovered reserves through an Early Production System (EPS) targeting first oil in 2009.

Blocks 1 and 2

During the first half of 2008, exploration activity in Block 2 has focused on the Butiaba region, in the north of the block, where a major drilling campaign commenced in April. Oil has been encountered in all four of the wells drilled to date and the Ngege-1 and Kasamene-1 discoveries have opened up a new play fairway within the basin. The Kasamene-1 well encountered over 31 metres of net oil pay in high quality sandstones, with further potential up-dip. A number of analogous structures in Blocks 1 and 2 have been substantially de-risked by this important result and the latest well in the campaign, on the Kigogole-1 prospect, commenced on 25 August. On completion the rig will move to Block 1 to drill three further wells on trend with the Kasamene discovery before returning to Block 2.

The results of the 2007 Kaiso-Tonya appraisal drilling campaign and the new 3D seismic data have now been incorporated into an integrated 3D reservoir model. The Field Development Plan for the EPS, which will include a 4,000 bopd production facility with associated topping unit and power generation facilities, is now complete and the FEED contract has been awarded to Wood Group. Sanction of the project, which is pending finalisation of commercial terms and environmental approval, is expected by year end with first oil targeted for fourth quarter 2009.

Near-shore drilling activity re-commenced in early 2008 with the drilling of the high impact Ngassa-1 well using the Nabors 221 rig. The primary objective of the well was not reached due to borehole instability and the well was suspended after discovering gas in the shallower horizons. Ngassa-2 is expected to be drilled with the same rig from an alternative onshore location later this year or in early 2009 after Kingfisher-3.

Block 3A

The second well in the Nabors 221 rig programme was Kingfisher-2 in Block 3A. This deviated near-shore appraisal well was drilled to a total depth of 3,906 metres to help delineate the accumulation discovered by Kingfisher-1 in early 2007 and to test potentially significant deeper prospectivity. The appraisal of the Kingfisher Lower Pliocene and Upper Miocene age oil reservoirs was successful and three zones are currently being production tested. Further evaluation of this discovery has suggested the potential for material increases to current resource estimates and planning has commenced for the Kingfisher-3 appraisal well, which will assess this potential from an optimal onshore location. 

In the targeted deeper section the well penetrated the anticipated basal sands comprising approximately 30 metres of reservoir overlain by a good shale top-seal. No hydrocarbons were present in the basal sands at this location which is likely to be due to a lack of charge. Based on preliminary analysis of this result the lowermost reservoirs at the Kingfisher deep location are interpreted to underlie the source rocks; Ngassa and other offshore prospects are unlikely to be similarly impacted due to the unique geological setting of Kingfisher within the basin.

Congo (DRC)

The validity of Tullow's two licences on the Congo (DRC) side of the Lake Albert Rift Basin are currently being disputed. Tullow is confident of its title and will continue to pursue all legal and governmental options to finalise the award. 

Congo (Brazzaville)Gross production from the M'Boundi field averaged 41,000 bopd in the first half of 2008 and following good reservoir management has stabilised at that rate. In January 2008, Tullow announced the sale of its 11% interest in the field to the Korea National Oil Company for a total cash consideration of US$435 million (£218 million). The deal is expected to complete later in 2008.

Equatorial Guinea 

During the first half of 2008, both the Ceiba and Okume Complex fields performed above expectations with combined gross field production averaging 108,000 bopd. Strong reservoir and well performance, particularly from the Elon and Oveng fields in the Okume Complex, were combined with good facilities uptime. Production is expected to average over 100,000 bopd for 2008.

Côte d'Ivoire

Production performance from the East and West Espoir fields has been in line with expectations year to date. Gross field production, to the end of July, averaged 30,400 boepd and is expected to average approximately 29,000 boepd for 2008. Production rates are currently restricted by facilities constraints, however an FPSO upgrade project will address this issue and will increase capacity to 70,000 bfpd and 80 mmscfd. The upgrade project is on track for completion in the second half of 2009 and will assist in sustaining oil production from the field.

Mauritania 

Gross production from the Chinguetti field averaged approximately 10,000 bopd during the first half of 2008, lower than our original expectation. During the period, three wells underwent remedial intervention work and C19, the first of two infill wells, was drilled. This well is about to come on stream and the rig will now drill the C20 well which is expected to be completed in October.

An appraisal well in the western part of the Banda discovery was drilled in April. The results of this well provided encouraging new information about the distribution and quality of reservoir sands in this oil and gas accumulation. Possibilities currently under review include a further appraisal well in the eastern part of the field and conceptual development options which include compressed natural gas.

Recent exploration activity in Mauritania has largely focused on developing a comprehensive understanding of the best geological plays whilst continuing to expose Tullow to high impact prospects. Tullow's technical evaluation work is currently highlighting the exploration potential of the under-explored Cretaceous section which contains a range of plays with an overall resource potential of up to 1 billion barrels. The Khop-1 exploration well was drilled in Block 6 in February and whilst only minor shows were encountered, the well drilled an extensive Cretaceous section, the interpretation of which will prove invaluable as the Group develops its geological understanding of the area. A significant exploration campaign is expected to commence in late 2009.

Gabon

Net production from Tullow's Gabon assets averaged 13,100 bopd in the first half of 2008 and is currently stable at approximately 13,000 bopd. The outlook for the remainder of the year is positive with solid production from the key contributors, Niungo and Tchatamba, and ongoing development drilling on the Ebouri, Tsiengui, Obangue and Onal fields where over 35 further wells are scheduled in 2008. 

On the exploration front, active portfolio management during the first half of 2008 resulted in a 4-year extension to the onshore Nziembou exploration licence, the agreed disposal of the Group's 18.75% interest in the offshore Gryphon Block and relinquishment of its interest in the Akoum licence. Exploration drilling is planned in the latter part of this year in the Etame Block in which Tullow has a 7.5% back-in right. 

Namibia 

Following delays in concluding commercial arrangements on a major gas to power development for the Kudu gas field, alternative options are also being considered. One such option involves the possibility of developing the field as a marine Compressed Natural Gas project to supply gas into the regional industrial and transport markets as a replacement for diesel, HFO and LPG. Further studies will be undertaken to assess the commercial attractiveness of such a project in the context of forecast regional energy demand and current technology.

EUROPE: Development growth and prudent portfolio management

2008 Half-yearly results highlights

• 1H 2008 production averaged 137 mmscfd, and revenue increased to £111.5 million driven by record gas prices;
• Effective portfolio management is expected to deliver £245 million of asset disposal proceeds from the mature Hewett-Bacton interests and non-core CMS exploration and development interests;
• Strong UK gas pricing has refocused capital investment towards selected development assets; 
• First gas achieved from the Wissey development on 22 August 2008; and
• Attractive exploration acreage position secured offshore Netherlands.

Thames-Hewett Area Production from the Thames-Hewett Area averaged 51 mmscfd in the first half of 2008, 27% lower than in the first half of 2007, due to a combination of natural field decline, most notably from the Orwell and Thurne fields, and poor weather impacting on production efficiency. 

In the Thames Area, first gas was achieved from the Tullow-operated Wissey development on 22 August 2008 and the field is now producing at a rate of approximately 70 mmscfd. A development well is planned on the Bure field and a rig has been secured to pursue this opportunity in the first quarter of 2009.

In the first half of 2008 Tullow continued to pursue opportunities to extend the economic life of the mature Hewett facilities. The project to fully de-man the Hewett Complex was completed yielding significant cost savings and an appraisal-development well, targeting a deep Rotliegendes reservoir in the Hewett main field, is scheduled to spud in September 2008.

As part of these initiatives Tullow completed a major technical and commercial study, on behalf of the joint venture, to investigate the viability of using Hewett as a gas storage hub. Subsequent to this, Tullow has signed a Sale and Purchase Agreement with Eni for the sale of its entire 51.68% interest in the Hewett-Bacton Complex, including the substantial abandonment liability, for a consideration of £210 million. The sale is expected to complete by year end.

The Doris exploration well was drilled in early 2008. Whilst gas was found, pressure data indicated that the reservoir was depleted and the well was abandoned. 

CMS Area Production from the CMS Area averaged 86 mmscfd in the first half of 2008. This was 6% lower than for the same period in 2007, reflecting the impact of lower capital allocation to our Southern North Sea gas business. However, recent material rises in gas prices have increased the attractiveness of new projects and Tullow is well placed to continue to invest in the long-term development of the area.

The Schooner and Ketch fields continue to produce strongly and a further development well in the Ketch field is planned for the second quarter of 2009. Infill wells have also been approved for the Murdoch and Boulton fields and the Operator is pursuing a rig programme to drill these in early 2009. 

While most fields have performed in line with expectations, the performance of the Kelvin field has shown a more rapid decline than predicted. Further data gathering will be carried out on this field in the September maintenance shutdown with the objective of developing a remedial action plan.

UK exploration activity is centred on the core CMS Area and Tullow continues to seek viable opportunities in the Carboniferous play. Other projects under review include the appraisal potential of the 2006 K4 discovery and development options for the 2007 Harrison discovery. 

During the period, Tullow has also completed the sale of non-core CMS exploration and development assets to Venture Production Plc for a consideration of £35 million.

Netherlands Tullow now has a strong exploration position in the offshore Carboniferous province following the award of five further blocks in the Carboniferous fairway to complement the two blocks awarded in 2007. The Group now plans to apply the extensive knowledge gained from successful exploration campaigns in the CMS Area over the last six years and is currently reprocessing over 1,000 sq km of 3D seismic data and conducting a detailed analysis of all wells in our Netherlands acreage. These projects will help refine the current prospect inventory ahead of potential drilling and seismic campaigns in 2009 and 2010. 

Portugal

The principal project in 2008 is the acquisition of 3,500 km of 2D seismic data across Tullow's offshore acreage. The programme commenced in August, and should complete by mid-September. The survey is focusing on a central fairway, where several stratigraphic trap leads have been identified, as well as providing infill coverage.

SOUTH ASIA: Continued production growth and high impact exploration potential

2008 Half-yearly results highlights

• Production averaged 5,390 boepd, 57% above 2007 levels;
• Multi-well exploration campaign in India commenced in June 2008; and
• Bangora development work nearing completion to increase production capacity to 120 mmscfd.

India A multi-well drilling programme commenced on block CB-ON/1 in June 2008 following completion of an extensive seismic programme the previous year. The first well, C1, was drilled in a basin margin location in the east of the block to a target depth (TD) of 1,916 metres. Logging determined that the target sands were water bearing and the well was plugged and abandoned. The second well in the drilling programme is on the G1 prospect which is targeting a separate geological play in the northern part of the block. This well commenced drilling on 13 August and is expected to take 30 days to reach TD.

Bangladesh Production from the Bangora field has been steady at 70 mmscfd during 2008 to date. The second phase of development to increase production capacity to 120 mmscfd and to tie-back the Bangora-3 well is expected to be completed in September 2008. Average production is then expected to increase to over 100 mmscfd. 

Tullow participated in the recent Bangladesh offshore bid round and currently awaits notification from Petrobangla on its application for Block SS-08-05.

Pakistan Production in Pakistan is from the Chachar and Sara/Suri fields and in the first half of 2008 was 11 mmscfd net to Tullow. Plans are under way to drill the Kohat East well in the fourth quarter of 2008.

SOUTH AMERICA: Prolific but underexplored oil and gas province

2008 Half-yearly results highlights

In South America Tullow has interests in, or applications under consideration, in respect of five licences across French Guiana, Suriname, and Trinidad & Tobago. Negotiations are also in progress in relation to a number of number of potentially attractive new venture opportunities in the region.

French GuianaIn