Kenya is not known as a centre of African oil industry activity. While North Africa and the Gulf of Guinea attracted the giants of the global oil industry, the whole of Eastern Africa was largely overlooked. Yet sustained high oil prices triggered a reassessment of the region’s prospects and commercial volumes of hydrocarbons were discovered in Mozambique, Tanzania, Uganda and now – probably – Kenya.
Exploration efforts have discovered sizeable reserves, while the country could become an important oil export hub for neighbouring states, including Ethiopia, South Sudan and Uganda.
The most high-profile finds in Kenya to date have been made by Anglo-Irish firm Tullow Oil and its partner Africa Oil Corporation. They made their first discovery last year, when they found both crude oil and gas with the Ngamia 1 well on Block 10BB. In February, Tullow announced what it called the “first potentially commercial flow rates achieved in Kenya”, with its Twiga South 1 well, and achieved its fourth consecutive successful well in September, the Ngamia 1 discovery on Block 13T in the Lockichar Basin.
Angus McCoss, the company’s exploration director commented: “This success at the Ekales 1 is further evidence of the exceptional oil potential of our East African Rift Basin acreage. Having opened the first basin with the Ngamia 1 well last year, we are now increasing the pace of exploration in Kenya aiming for 12 wells over the next 12 months.” Apart from further wells in the Lockichar Basin, the partners plan to drill in new areas to see how far the reserves extend.
Tullow has yet to say that the reserves identified so far are definitely commercially viable but it seems more optimistic with every discovery that it makes. In addition, after talks with government officials in April, the IMF did feel sufficiently confident to state that the reserves were “commercially viable”. The Fund reported: “Big oil discoveries in the northern Turkana region have now made Kenya a major venue for oil exploration in East Africa. Kenya expects to start producing oil in six to seven years”.
The chief executive of Africa Oil Corporation, Keith Hill, says that the partners would require oil reserves of 300-500m barrels to justify the construction of a pipeline. Hill added: “With the drilling programme we have got this year, it’s possible we will start getting close to those thresholds by the end of the year … But it’s really hard to predict: it would depend on the success of the upcoming wells.”
A total of 22 foreign oil companies are now active in Kenya, including several that are also working further south in Tanzania and Mozambique, such as Cove, Anadarko and Total. Indeed, the string of finds that has been made on its Eastern African acreage saw Cove bought by PTT of Thailand last year.
The finds made thus far have not been restricted to the Tullow-Africa Oil blocks. Last September, a consortium of Apache Corporation (50%), Origin Energy (20%), Tullow Oil (15%) and Pancontinental Oil & Gas (15%) discovered natural gas offshore on Block L8.
The managing director of Apache Kenya, Tim Gilblom, said: “The fact that we’ve proven that there is a hydrocarbon source below these basins gives us and others exploring for oil off the Kenyan cost hopes that there are higher chances of success. The key to remember is that we’ve proven that there is a hydrocarbon source below the Lamu Basin offshore Kenya and now all we have to do is further characterise it to figure out where the best next place to drill is.”
In comparison with established areas of oil production in Africa, such as Nigeria and Algeria, oil and gas exploration is at a very early stage in Kenya and relatively few wells have been drilled. Yet the recent finds could see that change in the near future. The government has offered 46 blocks for exploration and 45 of these have already been licensed. The operators of these blocks are likely to speed up their exploration programmes in the light of the successes achieved over the past couple of years. Kenya is now widely considered highly prospective rather than an outside bet.
Patrick Nyoike, the Permanent Secretary for Energy, alluded to this change of perception in March, when he announced that a new “auction style format” would be used in the next licensing round for eight new blocks. He said: “Things were different a year ago than now … Kenya can demand more now.” In the past, companies were able to bid for any block at any time that suited them.
It will be interesting to see what impact regional oil industry plans will have on oil refining plans in the region. In September, Indian firm Essar Energy announced that it plans to sell its 50% stake in Kenya Petroleum Refineries Ltd, which operates the Mombasa oil refinery.
The decision was made after the completion of a feasibility study into the upgrade of the refinery. Essar does not consider that the upgrade project would be economically viable. The Indian company bought its stake in 2009 from a consortium of BP, Shell and Chevron for just $7m but the deal included an option to sell its stake for $5m to the government of Kenya, which already holds the other 50% equity.
Potential as an oil hub
Tullow now operates seven onshore licences in the Kenyan and Ethiopian rift basins covering more than 100,000 square kilometres. McCoss of Tullow said: “Having significantly expanded our plans in Kenya and Ethiopia, there is much to look forward to as the exploration campaign and testing programme move ahead.”
Ethiopia is landlocked and so any commercial discoveries in that country are likely to be developed in conjunction with Kenyan fields for export via the Kenyan coast.
The big question is whether it would be exported via Mombasa or the planned new port of Lamu. The latter lies further north and so would require a shorter pipeline from Ethiopia. However, two other countries are also likely to export oil via the Kenyan coast and so any new oil terminal is likely to be located to take advantage of all four.
Uganda already has proven oil reserves of 2.5bn barrels, some of which will be used to supply a domestic refinery but most of which is expected to be exported by the consortium of Tullow, Total and China National Offshore Oil Corporation (CNOOC) via pipeline through Kenya.
At the same time, the government of South Sudan wants to oversee the construction of a new pipeline to Kenya. The country currently relies on a single export pipeline through Sudan to Port Sudan but disagreement over the costs and revenues involved – plus wider enmity between Sudan and South Sudan – mean that the South Sudan-Kenya pipeline is almost certain to be developed.
Despite Eastern Africa’s lack of a track record in oil production, it is likely that at least three major oil pipelines will fan out from either Mombasa or Lamu across the region.
Combined transport capacity would probably exceed 500,000 b/d, as South Sudan already has production capacity of 350,000 b/d, with the potential to yield significantly more. Although grand schemes such as the multibillion-dollar Lamu project usually fail to materialise, Lamu has several other advantages over Mombasa.
The most direct route for pipelines from Uganda and Sudan to Mombasa would pass through several of Kenya’s most well known national parks and so construction would generate a great deal of opposition. At the same time, the new port of Lamu would be developed on Manda Bay, which is far less developed than the city of Mombasa and so any pipelines would not have to pass through heavily built-up areas.