UPDATE 3-Tullow to keep Uganda stakes as scuppers Eni plan

By Tom Bergin

LONDON, Jan 18 (Reuters) - Tullow Oil has dropped a plan to sell up to half its Ugandan assets in a move analysts said was a 'material' shift in focus toward oil production and away from risky, but potentially more lucrative, exploration.

Chief Executive Aidan Heavey said that after pre-empting partner Heritage Oil's agreed sale of its half share in Blocks 1 and 3A to Italy's Eni for up to $1.5 billion, Tullow would only sell half of its 100 percent share in Block 2.

Tullow started the process to sell up to 50 percent of its Ugandan assets late last year, to attract a partner with experience of building the kind of pipelines and infrastructure needed to develop the fields.

However, the acquisition of the Heritage assets allows it to sell 50 percent shares in the three blocks bordering Lake Albert to a partner or partners of its own choosing, without reducing its overall interest significantly.

'We weren't very keen on doing it, but we needed to do it to move the project forward at a pace. Now we can keep a higher percentage interest and deliver what the government wants,' Heavey told Reuters in an interview.

Tullow shares rose 1.2 percent to trade at 1,355 pence at 1139 GMT, ahead of a 0.6 percent rise in the DJ Stoxx European oil and gas sector index. Eni shares traded down 0.1 percent at 18.33 Euros, while Heritage traded up 3.1 percent.



LESS LEVERAGED TO EXPLORATION

The historic strategy of explorers is to find an oil field, establish the extent of the discovery and then to sell the field to a larger company, such as Eni, which largely seeks to make money by efficiently producing oil, rather than by finding it.

Explorers typically return cash generated from asset sales through special dividends and retain a portion to invest in future exploration.

Tullow has grown to be Europe's largest oil explorer by market capitalisation after it struck lucky in Uganda and Ghana, and analysts had expected the company to significantly reduce its stakes in these finds in coming years.

One analyst on a conference call with Tullow said the decision to retain a larger stake in Uganda was a 'material' change in strategy.

Another analyst, Al Stanton at RBC Capital Markets in Edinburgh, said the shift in focus toward production could mean shareholders could expect dividends in future, but also slower growth.

'It has an impact on the pace of share price appreciation .. rather than a company that is highly leveraged to the drill bit, it will be driven for the outlook for the oil price and reserves growth,' he said.



ENI FRUSTRATED

Eni said it would not withdraw its bid for the Heritage assets until it received signals on the Uganda government's position on the deal.

Italy's largest company had invested considerable effort in courting Uganda, helped by representations from the Italian government.

However, Heavey said the signals he had received from the government were that they supported his move.

Whatever Kampala's decision, Heritage said it expects its sale, either to Tullow or Eni, to be completed during the first quarter of 2010.

Eni is too late to enter Tullow's process to select a partner, unless the Ugandan government insisted they be admitted, Heavey said.

Tullow plans to select one or two partners in the coming weeks and submit their names to the government for approval early next month.

Tullow and Heritage have found reserves of up to 2 billion barrels of oil in Uganda, but a pipeline must be built to move the oil to world markets, and since the oil is waxy, it must be a heated pipe to ensure fluidity.

The Ugandan government is also keen for a refinery and power generation facilities to be built.

Chief Operating Officer Paul McDade said first commercial oil from the basin was expected in late 2011, or early 2012.

This would be oil produced from the Kasamene discovery in Block 2 and supplied to local markets in advance of a pipeline being constructed for exports, he said.

(Reporting by Tom Bergin, editing by David Cowell) Keywords: TULLOW/ ([phone], [e-mail], Reuters Messaging [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.