Kenya is expected to join the league of oil producing countries in Sub Saharan Africa by 2017, going by the efforts of UK-listed Tullow Oil and partner, Australia’s Africa Oil Corporation to submit a field development plan (FDP) by 2015. Although the first oil discovery in Kenya was only made 2 years ago by the two oil companies in the North-west of Kenya; a region called Turkana County, the oil explorers believe production can be started within the next three years.
Preliminary studies show that the crude oil is light sweet and waxy (25 – 35o API) with some of the wells drilled flowing between 3,000 – 5,000 barrels per day. The crude oil is to be exported through an export pipeline linking their fields in the North-Wastern part of the country to the proposed Lamu port on Kenya’s coast. Tullow Oil plans to spud at least 12 more wells as it looks to assess the size of Kenya’s oil reserves before deciding on potentially selling some of its Kenyan stake to bring in a new partner.
A recent oil discovery offshore Kenya is also likely to encourage oil explorers looking to explore Kenya’s offshore oil potential. The Sunbird-1 discovery by UK’s BG Group and Australia Independent Pancontinental Oil & Gas is the first oil column to be discovered offshore East Africa. Further discoveries would considerably de-risk the shallow water oil play offshore Kenya, boosting offshore exploration interests from other oil companies. This could potentially force other explorers such as Tullow Oil and Anadarko Petroleum Corporation, who, despite their considerable offshore expertise in West Africa, are focused almost entirely onshore in East Africa, to have a strategic re-think about offshore East Africa.
However, more discoveries are required to justify the expenditure that will be incurred to open up the offshore area.
Kenya’s regional aspirations are a major attraction
Asides its oil reserves potential, Kenya is likely to play a pivotal role in the emerging upstream oil industry in East Africa. Kenya’s Mombasa port, which is the major trade port in the East Africa region, would make it relatively easy to bring in equipment and to ship crude once development begins. Mombasa is the focal trade port for trade routes into Uganda, Rwanda, Burundi, the Democratic Republic of Congo (DRC) and South Sudan. Oil field development in Uganda, Ethiopia and even South Sudan are also likely to rely considerably on ease of getting men, materials and equipment through Kenya’s borders.
The $25 billion Lamu Port South Sudan and Ethiopia (LAPSSET) pipeline, which is expected to provide South Sudan with an alternative export route besides Sudan, is also based on the completion of the Lamu port on Kenya’s coast. Kenya’s trade relation with East Africa’s countries is significantly strengthened by its ownership of almost 60 percent of regional storage capacity. Kenya’s 1.7 million cubic metres of crude oil and petroleum product storage enables supply to the remaining East Africa countries, through a series of pipeline and road networks. The government intends to add another 740,000 cubic metres of storage at the Mombasa ports as it looks to become the major trading hub for the upstream oil industry.
From the oilfield servicing side of things, Kenya is also likely to drive the development of skilled workforce in the oil and gas industry. Although other countries such as Uganda and Tanzania are also looking to develop the requisite manpower, they are likely to adopt the approach of supporting their citizens looking to study at foreign universities.
Kenya has adopted more home-grown strategies such as enforcing the training of locals by oil companies operating in the country and establishing energy-sector courses at its domestic universities. The Petroleum Institute of East Africa (in Kenya) has also been certified by the global energy industry association, Energy Institute, as an approved training provider.
Kenya is also looking to establish the region’s first seismic data processing centre. Kenya’s National Oil Corporation (NOCK) is looking to complete the centre by July 2015. The centre would reduce the time taken to access and process seismic data on the region and could support regional exploration efforts.
Funding issues to pre-empt equity offerings and government take-over
However, all these plans by both the government of Kenya and the oil explorers looking at the country’s oil potential require large amounts of capital. The average cost of a well onshore Kenya is $25 million. Thus, the 15 or more wells planned for the next 18 months are likely to require between $375 and $400 million.
Between 2014 and 2017, explorers are likely to spend about $750 million on drilling wells. Offshore wells cost a lot higher as semisubmersible rigs attract as high as $600,000 per day offshore East Africa. Oil companies are also likely to an estimated $185 million on seismic data gathering and processing within the same period. The Lamu port portion of the LAPSSET project, which is the first phase of the project, is expected to cost about $5.5 billion.
The second phase is the pipeline linking Kenya’s oil fields in the Northern part of the country to the Lamu port, which is likely to cost about $4 billion according to Tullow’s estimates. Due to the waxy nature of the crude oil discovered in both Kenya and Uganda, the pipeline is likely to either be a heated crude oil line or have built-in flow improvers. Tullow and partners are also likely to attract some additional expenses to deploy the proper gathering infrastructure to connect multiple wells in the two blocks, 10BB and 13T.
Although Tullow Oil has revenue from crude oil production in other regions and could support its field development program with its robust borrowing base of $3.5 billion following a 7-year loan syndication concluded in 2013, the firm’s capacity to take on additional debt is likely to reduce going forward. Net debt as at 31 December 2013 had risen 113 percent to $1.8 billion, resulting in a net gearing ratio of 33 percent. Based on additional borrowings likely to be taken to fund the $4.9 billion development plan for the TEN fields in Ghana, among other development programs in Gabon, Equatorial Guinea and the Republic of Congo, Tullow’s gearing ratio could potentially be in excess of 60 percent by 2016. Thus, the independent could have little room for additional borrowing to fund exploration and development programs in Uganda and Kenya.
Tullow’s financing situation is considerably better than several other smaller firms looking to also explore Kenya’s oil potential.
Source: Ecobank Report