Was it all a mirage? Are oil and gas really available in commercial quantities in Kenya? What happened to the wealth, the jobs and the massive infrastructure developments that were heralded in media, government and business reports just three years ago? Recent developments provide a more nuanced picture and lead one to question the initial euphoria, as this article will demonstrate.
Then and Now
When the discovery of oil in northern Kenya was announced in 2012, it resulted in a frenzy of speculation and a rush by oil and other extractive multinationals to Kenya. Oil prices were sky high at over US$110 per barrel, and the discovery of commercially viable amounts of crude oil - similar to thosepreviously discovered in Uganda - led British, Chinese, Canadian and other multinational companies to descend on Kenya and stake their claims.
Flash forward three years to 2015 and the pickings no longer appear so rich. At less than US$50 per barrel, oil prices are at a record low. Indeed, big oil and other extractive companiesappear to be fleeing Kenya like rats from a sinking ship. That may be an exaggeration, but London-based energy exploration company,Tower Resources is only the latest company to pack up and leave Kenya. It joinsAustralian exploration company Pancontinental Oil & Gas, which departed Kenya earlier in 2015. Both companies are fighting record lowoil prices and no longer seem to have the appetite required to invest substantial sums of money to find, drill and extract Kenya’s oil.
These companies are following a general trend among oil and gas companies who are faced with vastly trimmed budgets because of the precipitous slump in global crude oil prices. Analysts expect the trend of low crude prices to continue through the end of 2015 and estimate that exploration for oil and gas in Kenya has been halved since last year at this time, mainly because of attempts by extractive companies to cut costs and shore up their bottom line. Yet while low crude oil prices may be the main reason oil and gas companies are closing up shop in Kenya, the absence of oil and gas in certain regions, political machinations, and attempts to keep more oil money in Kenya are also at play.
Tower Resources Exits Kenya
Following the drilling of a first well that failed to show any crude deposits, Tower Resources announced it would exit block 2B. This block,also known as the Badada licence, is located in the Anza basinin north eastern Kenya close to the border with Somalia. Tower had a 15 per cent stake in block 2B, but after drilling and failing to find oil, it was plugged and abandoned in February 2015. A few months later, and after a detailed assessment, Tower Resources decided to withdraw from the Kenya license altogether and close its East Africa office in Uganda.
The well drilled by Tower Resources in Block 2B may not have struck any black gold, but drilling was easy and relatively cheap.According to Tower’s press release, the Badada-1 well was drilled to a total depth of 3,500 metres MDBRT (Measured Depth Below the Rotary Table) and only took a total of 46 days to drill, compared to original estimates of 70 days of drilling. The drilling of the well was estimated to have been drilled under the gross amount budgeted by Tower of US$ 25.8 million.The good news from Towers’ exploratory efforts is that if the oil is there, drilling to find it may be relatively cheap, at least in north eastern Kenya.
Tower Resources reportedly withdrew from Kenya in order to focus on more lucrative assets on and offshore the African continent, such as Cameroon’s coastal waters. Yet even though Tower Resources unexpectedly saved money and the drilling was easier than estimated, the fact remains that no oil means no money and therefore no returns going into the pockets of Tower’s shareholders.
Pancontinental Oil & Gas Exits Kenya
Pancontinental Oil & Gas pulled up stakes in Kenya earlier this year and incurred big losses for doing so. Yet, unlike Tower Resources, this Australian oil company had actually struck oil. So why did they decide to leave Kenya anyway?
According to reports, after exiting Kenya, Pancontinental posted a KES 43 billion (approx. US$ 424 million) net loss for the year ending June 30, 2015. The main source of the company’s losses was the write off of Kenya L10A and Kenya L10B exploration licences. Pancontinental’sdeparture from Kenya leaves Britain’s BG Group as the sole operator of block L10B. BG Group previously controlled 75 per cent. With BG Group still working in Kenya on these and other exploration blocks, Pancontinental’s departure by no means spells the death knell ofoil exploration and drilling in Kenya. Yet it does add to a growing and worrisome trend.
Pancontinental withdrew from block L10A even though exploratory drilling led to the discovery of oil by BG Group. In early 2015,the Sunbird-1 well was drilled on block L10A that led to the discovery of 29.6 metres of natural gas deposit and 14 metres of oil, making it the first oil discovery in Kenya’s coastal region. Thus it seems that Pancontinental’s departure from East Africa was likely driven by shareholder pressure in Australia as well as the continuing slump in oil prices. This led to a corresponding loss of appetite for further drilling and the associated expenses. However, other factors were likely at play in both Tower Resources and Pancontinental’s exit from Kenya. As described below, in the world of engineering and especially in the hunt for lucrative oil and gas resources, politics always intrudes and plays a role. And this intrusion may be leading other multinational extractive companies to have second thoughts about Kenya.
Who else is having second thoughts?
Tullow Oil, headquartered in London, and its Canadian partner, Africa Oil have arguably been very successful in Kenya. Tullow and Africa Oil have estimated discoveries of 600 million barrels to the northwest of Kenya, and plan to submit their development plans to Kenya’s government by late 2015, prior to commercial production. Yet even Tullow Oil, which jointly operates blocks 10BB, 13T and 10BA with Africa Oil Corporation, has decided to downgrade exploration and appraisal activities, particularly in the Lokichar Basin of Turkana County. Previously it was accepted almost as gospel that Lokichar was rich in oil; oil that that was replete with easily extractable reserves in commercial quantities. And Tullow Oil has already found oil there. What happened?
The Politics of Oil Drilling
Politics may be global, but what really matters in politicsis local. In Tullow’s case, it has reportedly experienced fraught relations with locals in Turkana County, with some communities citing the lack and quality of jobs,as well as insufficient local development initiatives, as sources of concern. Yet with expectations running high, crude oil prices at an all-time low, and Kenya’s oil being found in smaller quantities than originally estimated, Tullow Oil finds itself between the proverbial rock and a hard place. Adding to this, storm clouds are forming on the horizon in Kenya in the form of politics.
Politics plays a major role in Kenya’s desire to develop its arid and sparsely populated northern regions. However, recent decisions made regarding this matter by Kenya’s government have rained on the proverbial parade as far as some multinationals are concerned. Namely, they are concerned by Kenya’s and Uganda’s joint decision to construct the Uganda-Kenya Crude Oil Pipeline (UKCOP) via a northern route stretching from Hoima on Lake Albert in Uganda to Lokichar and terminating at the proposed Lamu Port on Kenya’s Indian Ocean coast. In particular, Tullow Oil has expressed strong reservations about the decision and made it clear that it favours a southern route through Nairobi and Mombasa that would follow existing infrastructure. Tullow has cited security concerns, stating that the northern crude oil pipeline route would be more vulnerable to terrorist attacks and experience the effects of regional instability. Added to this, French multinational oil and gas company Total and its various subsidiaries have gone so far as to suggest an alternative route for the proposed pipeline between Uganda and Lamu. This route would stretch from Hoima in Uganda via central Tanzania to the port of Tanga on the Indian Ocean, bypassing Kenya completely. Both Kenya and Uganda have ignoredtheproposal by Total E&P Uganda to scout the Tanga route as an alternative cheaper route for the proposed UKCOP.
All of this is occurring as Uganda and Kenya await a decision by big oil companies on financing for the proposed UKCOP. Tullow Oil, Total, China National Offshore Oil Corporation (CNOOC Group, Ltd.), Africa Oil and Ugandan oil companies are expected to mull over the proposed northern route, possibly ask for concessions, and make a final decision by October 2017. Yet Tullow Oil is sending worrisome signals.
Soon after voicing its reservations about the planned northern route, Tullow Oil also announced it would reduce its exploration budget by KES 9.1 billion (approx. US$ 896 million) worldwide. Despite offering verbal assurances that its operations in Kenya will not be affected by the cutbacks, it does make one wonder if Tullow’s announcement was a veiled indication that Tullow is getting cold feet vis-à-vis oil and gas exploration in Kenya. Furthermore, it is not just the UKCOP that worries Tullow Oil and others.
Politics in Kenya’s Corridors of Power: Where is our Share?
What is happening in Kenya’s corridors of power in Nairobi? Are oil companies feeling the pinch not only from staggeringly low oil prices but also from decisions and announcements made by the Kenyan government? The fact is that oil companies are now faced with decreasing returns for their exploratory efforts and investments in Kenya based on low global oil prices. Added to this – the icing on the cake, if you will – is the fact that Kenya has proposed new rules that will require oil exploration firms to give local investors a 5 percent stake in any project. Oil firms are also expected to utilize local staff and suppliers for their services. This is reportedly to allow locals a bigger slice of the oil earnings. It should also give them a stake in the outcome and longevity of the projects. According to reports, the Government of Kenya and the Ministry of Petroleum and Energy will also require oil companies to source 60 to 90 per cent of goods and services locally. Companies will also be required to employ locals to fill 70 to 80 per cent of their management staff and the same proportion of technical staff. These laws will not go into effect immediately, but will be implemented within a 10 year time period.
At first glance, these are laudable goals even though they may be the cause of slight indigestion for extractive companies. The new lawsarguably mean jobs and other crucial benefits will be accrued by local, Kenyan companies and Kenyan workers. However, there are concerns that qualified Kenyan management staff, engineers and other employees simply do not exist in the numbers required by the new law. As such, the government will need to work with the oil firms to develop the capacity of Kenyans so they have the ability to fully partake and participate in what appears to be an increasingly elusive oil bonanza.
It is too early to tell whether the new laws are making oil and gas companies squeamish at the prospect of continued well drilling, surveying and other extractive efforts. These activities cost billions of shillings all the time, but are exacerbated at times of incredibly low oil prices. It is safe to assume that if or when oil prices rise to levels seen just one year ago that these same companies will find it much easier to swallow exploratory and drilling costs as well as outsourcing jobs and services to locals.
The Importance of Investing in Kenya’s Future
The fact is that Kenya’s oil, based on the majority of estimates and studies, is there. Just because Tower Resources struck empty does not mean this is the case elsewhere, as Tullow’s and BG’s exploratory efforts have shown. So what should be done if oil and gas companies stay in Kenya (as the majority should), prices rise and Kenya’s estimated resources are successfully located, drilled and tapped?
In the future, Kenya’s government should possibly demand that local investors are given more than a 5 per cent stake so even more money flows into the local and national economy. In doing so they should be prepared for loud whining on the part of rich multinational oil and gas players no matter if a barrel of crude is fetching $US 50 or $US 150 on the market.
But Kenya’s government has responsibilities, too. It should meet the oil and gas companies halfway by putting in place education and training regimens that will help ensure Kenyan management, staff, engineers and other employees are not only available but qualified. Perhaps by re-investing some of the returns it receives from licensing blocks and exporting oil, Kenya can put these proactive measures into practice. Investing in Kenya’s human capital and the expertise of its engineers, managers and labourers is never, ever a bad idea.