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The success story of

Tanganyika Oil Company Ltd.

Intoduction

During the last century, people have been consuming more and more oil and petroleum products. Overall the energy consumption in the world has increased tremendously during the last years. This has influenced many companies in the oil sector looking into global ventures and opportunities regarding oil production and exploration. The Calgary based Canadian company Tanganyika Oil Company Ltd. is an international oil and gas company with production and exploration interests in the Middle East, in Syria. After focusing all their energy and capital on the fields in Syria the company managed to both ramp up their production as well as oil reserves tremendously. As a result Tanganyika Oil was bought up by Sinopec, China petroleum and chemical corporation by the end of 2008.

The objective of this paper is to get an understanding about the international business activities that have been executed in Tanganyika Oil Company Ltd. and asses if they have been successful in their international operations. The aim is also to find out how they used their international experience on improving both efficiency and technology within the company and its development activities.

Hence, the purpose of this paper is to undertake an analysis of Tanganyika Oil Company Ltd. and its operations including:

·         The history of the company

·         Their international operations

·         Level of success in international operations

·         Key success factors

·         Biggest challenges

·         Future challenges

The History of the company

The Calgary based company, Tanganyika Oil Ltd. was founded in 1997[1], with the aim to become an oil producing company in Tanzania. As new opportunities arose, the company switched their operations into focusing on Egypt and Syria in 1998 only, after acquiring exploration licenses in public auctions.[2] After several years of investing in the oil fields, geological studies and various drilling programs, the company managed to upgrade their proven and probable reserves in 2006 from 42 million barrels to 421.5 million of barrels just in Syria. Even though reserves increased, the company still struggled with their oil production[3]. This would continue even in 2006 and 2007 due to some technical problems. Since management saw the underlying potential in the Syrian fields the operations in Egypt were sold for 70 million USD in 2007[4] allowing the company to entirely focus their operation on Syria. Additionally, Tanganyika Oil raised money from their shareholders in order to invest in additional steam-injectors as well as to increase their proven and probable reserves by further exploration and seismic activities. Already in November 2006, the company had raised 95.5 million CAD and an additional 75 million CAD[5] was raised in March 2008. Together the company reinvested 240.5 million CAD. With this money Tanganyika Oil introduced an aggressive plan to ramp up both oil production and their oil reserves.[6]

By the end of 2007 the first raised capital started to give a result and the production of oil more than doubled during the last quartile in 2007 and the first quartile in 2008.  By the third quartile in 2008 the production was up to 20 778 barrels a day, a number that was as low as approximately 7 000 barrels a day in the end of 2006.[7] By the third quartile of 2008 the reserves would increase to 5.5 billion barrels from previous 421.5 millions of barrels of oil (an increase of astonishing 1300% from 2006) regarding their sources in Syria.[8] In combination with constantly high oil price the company was fit for sale by the second quartile in 2008.

Their international operations

During their history Tanganyika Oil Ltd. has had operations in Tanzania, Egypt and Syria.[9] Tanzania was a short operation that was shut down after negative drilling results[10] and since new and better opportunities arrived the company changed focus into Egypt and Syria.

Tanganyika Oil’s management team has proved being capable of handling both political instability in various regions as well as the geographical instability. Even though, some might see Syria as a risky place to do business the company successfully obtained exploration and production licenses in this area.

The company background and expertise in heavy oil with a Canadian management team, gave the company excellent opportunities to implement Canadian production techniques in the Middle East regarding heavy oil production.

Level of success in their international operations

Looking into the oil business, a huge part of the success in their operations lies within the success of the exploration process. This means, that the management has to have the geological skills and capabilities to make the right decisions in acquiring licenses where it is probable that the oil can be found and extracted. At the same time the management team needs the experience to deal with various bureaucratic rules, laws and establish a good connection with the local government. Tanganyika Oil management handled Syrian government at an exceptional level. The largest single owner of Tanganyika Oil, as well as chairman of the company, emphasized the good relation with the Syrian government and administrators by stating the following to the shareholders, “We will not run into any obstacles if we at some point would like to sell our assets in Syria”[11]

They also managed to negotiate an unlimited amount of oil export from Syria as well as huge amounts of free of charge natural gas that can be used in order to increase the oil production. The company has also managed to negotiate the rights to use existing infrastructure pipelines and exporting an unlimited amount of oil from Syria.[12] All theses negotiations have made Tanganyika a very profitable company and as a result they have been able to reinvest a lot of money in their fields in order to make their production even more efficient. Their production costs per barrel were as low as 10-15 USD/barrel[13] in 2008, which is very low for heavy oil production (Shell Canada has a production level between 30 and 60 CAD at that time) [14] and is mainly due to Tanganyika’s free access of natural gas, essential in the steaming process.

Key success factors

What made Tanganyika Oil an attractive and successful company where their deep understanding and knowledge in how to unlock the value of heavy oil. They had the technology available, they knew how to apply the technology and they had the financial backup to achieve their goals into making Tanganyika Oil a world class oil production company. Tanganyika Oil is also a part of the Lundin Group of Companies[15], a venture group with global working interests in various commodity projects all over the world. The group is well known for entering any country, no matter the political instability or controversies, as long as there is an opportunity to find some resources.[16] This direct connection provided Tanganyika Oil with a valuable insight of doing business in difficult business conditions.

The Tanganyika Oil success factors can be described as: the ability to managed to negotiate both an unlimited amount of oil export from Syria, free of charge natural gas and the access to Syria’s infrastructure and its pipelines. This in combination of successfully applying new technology and know-how to this region, together with excessive development of the fields, the management team increased the value of the company for a potential external buyer.

Biggest challenges

Tanganyika Oil’s biggest challenges were the political instability and bureaucracy in their regions of operation and the high risks of oil exploration and the technology that was used. Tanganyika re-negotiated with the Syrian government without any positive results for several years regarding various extensions in permits, unlimited amount of oil export from Syria and full rights to their fields.[17] However, since the war in Iraq increased the instability in the region, the Syrian government realized they had to let the companies in who were still willing and able to take the risks of operating in Syria..[18] Hence, the bureaucratic process that had delayed the development plan for the Syrian fields with several years disappeared.[19] The first re-negotiation took place in 2003 where the oil field Oudeh was promised free gas supply which was used for the extraction process and in 2004 Tishrin and Sheik Mansour got the same re-negotiation finalized.[20] They also got all their operation contracts of their Syrian interests signed by the Syrian parliament and president on February 16, 2005 which gave Tanganyika Oil a 100 % working interest as the single operator for their appointed fields.[21]

Tanganyika had stated a strategy where the company expressed that they would increase production and reserves without the use of additional external capital from its shareholders.[22] However, this turned out to be impossible, and the first extraction process experienced technical difficulties and did not increase their previous stated targets. They needed more capital in order to start to increase the steam injection process in Syria. With delays in production targets management saw no other option than to raise addition capital from its shareholders. The management raised capital at two occasions as previously mentioned. In addition their operations in Egypt were sold in order to get the capabilities and resources to succeed in Syria.

The chairman and the biggest owner of Tanganyika Oil, Lukas Lundin, communicated to the shareholders that they had experienced some difficulties regarding their production in 2006 and 2007, “we did not manage to deliver the production targets, neither in 2006 and in 2007 and as a result we are now one year behind our original plan, but we will re-establish our shareholders trust again”[23] Nevertheless, recently he also stated that they got back on track, which will result in considerable increase in future production.[24] “We have gathered the money that we need in order to finance the whole development plan for 2008 and after that we will make sure to finance additional development with own cash flows generated from our operations.”[25]

Another big challenge for the management team was the exit plan which also had been presented to the shareholders.[26] The company had an ambition to sell their operations as soon as production had reached attractive levels and the reserves were proven and increased. By the end of 2007, Lukas Lundin announced that they would not be reluctant to sell the company as soon as they would ramp up the production level. ”Sure, I will not be reluctant to sell Tanganyika Oil to a bigger company that has the capacity to build out the fields in Syria even more quickly, but we are sure that we can create additional value for our shareholders before we will make an exit. But at the right price everything is for sale!”[27]

The Sinopec offer

By the end of the summer 2008, rumours appeared indicating that something was going on. It began when Ongcindia, (Oil and Gas exploration in India) and Sinopec, (China petroleum and Chemical Corporation) started a bid war over the British company, Imperial Energy, with production and exploitation in Siberia, Russia.[28] Sinepoc had been an active part in the bidding-war, but the company was finally sold to the Indian Ongcindia[29] and as a result Sinopec started looking into Tanganyika Oil that just had increased both their production as well as reserves significantly. Tanganyika also had unlimited export rights from Syria and a very low production cost which made it an attractive purchase for a big company such as Sinopec.

After speculations and leakage in Chinese newspapers, Tanganyika Oil sent a press release in September 22, 2008, to  confirm that they were in negotiations with a potential buyer.[30] After long negotiations with China an official bid at 31.5 CAD per share was put by Sinopec’s subsidiary company, Mirror Lake Oil and Gas Co. Ltd[31] in September 25, 2008.[32] This bid was fully supported by the board of directors in Tanganyika Oil who recommended the shareholders to accept the bid.[33] The bid premium given by Sinopec was also a very good one considering the financial situation that had hit the oil sector and all the financial markets by this time. Tanganyika Oil's Canadian shares traded as low as 14.21 CAD before the Sinopec’s offer.[34] At the time of the bid the oil price had decreased to 70 dollars compared with the previous all-time high of 140 dollars per barrel that was seen in the summer of  2008.

Nonetheless, before the deal was completed the Chinese government had to sign an agreement of the deal. This official paper was delayed and the bid had to be extended in December 08.[35] The deal was finally completed in January 2009 and Tanganyika Oil was sold with a substantial premium to its recent share price and increasing the value of the firm up to 2.07 billion CAD.[36]

Future challenges

For the oil industry the oil prices is of great importance since it determines the return on investment. Regarding the volatile oil prices and the ongoing financial turbulence in the world Tanganyika Oil is well positioned to withstand the risks of too low oil prices in order to generate a positive cash flow from its operations. One reason is that their production costs are very low as for a heave oil company and since they now are a part of Sinopec they will have all the necessary financing available for further expansion. From being a company with a short term strategic goal, nowadays the company can apply a long term strategy due to the economic muscles and resources provided by Sinopec.

Other future challenges are the politically instable environment in the countries of their operations. There is a high risk of conflicts, which would immediately stop their whole operations. Looking from the side of new ownership there is always an operational risk of a new management-team that has taken over an existing operation. However, Mirror Lake Oil and Gas Co. Ltd (the subsidiary of Sinopec International Petroleum that has officially bought up Tanganyika Oil[37]) has even better resources and capabilities to make sure the Syrian operations will develop even more efficiently.

The old management crew from Tanganyika Oil Ltd. has now moved along to other operations and companies. Both Lukas Lundin, the chairman of Tanganyika Oil and the CEO, Gary Guidry, have moved on to an other Canadian oil and gas company also in the Lundin Group of Companies, called Pearl Exploration and Production Ltd. It is listed on the Toronto Stock Exchange in Stockholm, OMX Nasdaq[38]. The Company has a focus on unlocking the value of heavy oil in Alberta, Saskatchewan, Texas and California.[39] Their biggest challenge now is to overcome the financial instability, that has shocked the world, and the low oil prices. As a result, when the time is right, they can increase their production as well as their reserves in order to “dress up” and make an exit to an external potential buyer.

Summary

Tanganyika Oil Company Ltd. is and excellent example of a company with a management that has been able to use their international experience and expertise in order to successfully perform and develop its international business activities. They managed to use their know-how and expertise regarding production of heavy oil in Canada in order to apply it in Syria. They also managed to focus their operations on that part which seemed to have the highest return on investment. They also successfully performed within a new environment, a new business culture as well as the new type of regulations. Successfully dealing with the local businesspeople and government in Syria they managed to make Tanganyika Oil Ltd. into a world class oil production company.

The management of Tanganyika Oil Ltd. also managed to cope with their exit strategy, where their ambition to sell their operation and company was fulfilled. Conclusively, Tanganyika Oil Company Ltd, proved to succeed in doing business internationally both in the Middle East as well as in China and doing so with great success for both the company and its shareholders.

/ÖT Research

[1] Tanganyika Oil Company Ltd.

[2] Tanganyika Oil Company Ltd.

[3] Lukas Lundin, previous chairman of Tanganyika Oil Ltd.

[4] Tanganyika Oil Company Ltd.

[5] Tanganyika Oil Company Ltd.

[6] Tanganyika Oil Company Ltd.

[7] Tanganyika Oil Company Ltd.

[8] Tanganyika Oil Company Ltd..

[9] Tanganyika Oil Company Ltd.

[10] Lukas Lundin, previous chairman of Tanganyika Oil Ltd.

[11] Lukas Lundin, previous chairman of Tanganyika Oil Ltd.

[12] Tanganyika Oil Company Ltd.

[13] Ekonomi 24

[14] Shell Canada

[15] The Lundin Group of Companies

[16] Forum för Ekonomi och teknik

[17] Realtid

[18] Realtid

[19] Realtid

[20] Realtid

[21] Tanganyika Oil Company Ltd.

[22] Tanganyika Oil Company Ltd.

[23] Lukas Lundin, previous chairman of Tanganyika Oil Ltd.

[24] Dagens Industri

[25] Lukas Lundin, previous chairman of Tanganyika Oil Ltd.

[26] Dagens Industri

[27] Lukas Lundin, previous chairman of Tanganyika Oil Ltd.

[28] Reuters India

[29] Imperial Energy

[30] Tanganyika Oil Company Ltd.

[31] Oil and Gas Investor

[32] Tanganyika Oil Company Ltd.

[33] Tanganyika Oil Company Ltd.

[34] Reuters India

[35] Tanganyika Oil Company Ltd.

[36] Reuters India

[37] Oil and Gas Investor

[38] Pearl Exploration and Production

[39] Pearl Exploration and Production