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Business
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Written by Jeff Mbanga
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Wednesday, 25 November 2009 19:45 |
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Many Ugandans will be able to associate Eni with one of its companies, Agip, which used to sell fuel here a couple of years ago.
Eni, the Italian oil giant that bought Heritage Oil’s stake in Uganda late last week at a mindboggling $1.35 billion, has pledged to spend money in putting up the needed infrastructure to take the country’s oil industry to the next level of commercialisation.
That pledge means the company is committed to achieving where many other firms have dillydallied, and ultimately failed. “The development of these resources will require great synergy with Uganda's infrastructure programmes in respect of which Eni intends to play a leading role in partnership with the authorities,” noted Eni in a press statement.
Production of oil is slated to start in 2011. The company is expected to take on an aggressive business model, just like the way it bought Heritage. Eni’s acquisition of Heritage Oil’s appears to have all the makings of a coup d’etat. It was a deal that appeared to have sprung out of the blue, taking the entire oil market by surprise.
A DEAL OUT OF THE BLUE
As early as last week, Heritage Oil was in advanced talks with Turkey’s Genel Energy International Limited about forming a merger. On November 17, Heritage announced just how far discussions with Genel had reached, offering a possible timeline as to when a deal could be struck.
“Discussions with Genel are continuing with the terms of the merger nearing formal agreement. Both sides remain committed to completing the proposed transaction. It is hoped that the implementation agreement can be signed and the prospectus published before the end of the year,” noted Heritage. The merger would have given Heritage Oil financial muscle to continue with its activities.
In fact, these discussions continued although it emerged that the Financial Services Authority, the United Kingdom’s financial regulator, was investigating some top officials of Genel, something that might have jeopardised the deal. However, Heritage was ready to continue with its processing and production activities in Uganda in case talks with Genel collapsed.
Then, just four days after the November 17 announcement, Eni, an Italian oil firm, bought Heritage Oil’s stake in Uganda. “As a result of entering into the LOI (Letter of Intent) with Eni, discussions with Genel Energy International Limited (“Genel”) in relation to the proposed acquisition of Genel have been terminated,” Heritage announced on Monday, November 23. Eni will take over block 1 and 3A in Western Uganda, which are said to hold up to 1 billion barrels of oil.
The deal offers Uganda an aggressive company that has the financial muscle to take the country’s oil industry to the next level.
SCARED INVESTORS
Uganda’s oil industry might have received positive reviews from international bodies such as the International Monetary Fund, and the credit rating agency, Standard & Poor, but the cost of getting the black gold to the market place is certainly scaring investors like Heritage.
There is still debate as to whether an oil refinery should be built in Uganda or not. President Museveni has said that he wants the oil refined from Uganda, and not abroad. Some of the prospecting investors believe this option does not make much business sense.
Uganda has no pipeline to the coast of Mombasa where the oil would be exported. The construction of such a pipeline would cost hundreds of millions of dollars. Heritage had recommended that the Uganda Railway line be used to get the oil to Mombasa, but the poor state of this line and wrangles over its management, make this option unlikely in the short run.
This uncertainty over the direction of the country’s oil infrastructure appears to be playing on investors’ nerves, and has ultimately stretched Heritage’s patience to the limit.
Heritage Oil leaves because the amount of money needed to develop the entire oil industry in Uganda was way beyond its measure. An uncertain future hangs over Tullow, the other company prospecting for oil in Uganda.
Heritage Oil was in fact in discussions with a number of investors seeking a solution on how to develop the infrastructure. With the Eni deal, those discussions have now been terminated.
Tony Buckingham, Heritage Chief Executive Officer, admitted that the cost of developing Uganda’s oil industry was part of the reason the company agreed to sell.
“Following a strategic review, we have decided to enter into this letter of intent with Eni as we recognise the very large multi-billion dollar investment which is required to develop the Albert Basin and the related infrastructure,” said Buckingham. Heritage had so far spent $150 million in Uganda since launching its services in 1997. Also to blame, perhaps to a lesser extent, is the global economic recession, which saw oil prices on the world market collapsing.
GAMBLE OR SWEET DEAL?
The acquisition of Heritage Oil represents a case of one company’s appetite to take on more risk and expand, and another’s resolution to cut its losses by cashing in when the time is right.
That Eni and Heritage could complete a deal – considering the mazy processes that oil deals tend to require – in a space of days indicates at least two scenarios; that Heritage was either too desperate to take the bait, or Eni offered so much money that Heritage couldn’t resist.
As the deal awaits approval from the Government of Uganda, the acquisition is also bound to raise more questions about the profitability of Uganda’s oil industry, centring on the country’s oil infrastructure and whether investor fatigue has kicked in. Tullow Oil, the other company prospecting for oil in Uganda, is also said to be scouting for an investor.
With the global economic meltdown and the continued search for alternative sources of energy, Eni might be seen as taking a gamble. But then one cannot forget the fact that normally the higher the risk, the higher the returns on investment.
ITALY’S OIL GIANT
Eni is Italy’s largest industrial company, according to Wikipedia. The company’s cash flow for the first nine months of 2009 stood at 9.6 billion Euros ($14.3 billion at the current exchange rate). This is miles away from Heritage’s cash position of $222 million as at September 2009.
Eni is present in 70 countries with more than 79,000 employees.
Many Ugandans will be able to associate Eni with one of its companies, Agip, which used to sell fuel here a couple of years ago. The company appears to take on an aggressive expansionist model. Eni, together with a consortium of other investors, have just completed the acquisition of one of Iraq’s major oil fields, the Zubair.
Nevertheless, the company has experienced a difficult third quarter of 2009. Almost all the company’s crucial ratios went down. The company’s operating profit and net profit declined by at least 50%. The company’s gas production went down slightly, although the natural gas sales rose marginally by about 11%.
However, these ratios have in no way dampened Eni’s appetite to scout for new markets. In August, Eni signed a deal with the Republic of Congo to develop the country’s oil reserves. A month later, Eni was in Ghana, winning the rights to operate a number of oil fields there too. Now it’s coming to Uganda.
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