Kenya’s oil dreams facing headwinds

Kenya's Turkana region has attracted crude explorers such as Tullow Oil.

Kenya’s Turkana region has attracted crude explorers such as Tullow Oil.

The discovery of oil in Kenya’s Turkana region in 2012 sparked excitement among the local population and raised hopes of newfound oil wealth. Numerous foreign oil companies began exploration activities; local communities started angling for a piece of the cake demanding more jobs and opportunities; and pundits talked of how crude would transform Kenya’s mainly agrarian economy and even eradicate poverty.

But three years later the hype is dying down. Exploration activities are slowing as budget-conscious oil companies have downsized or shut down operations in Kenya altogether. In 2012, crude oil was trading at over US$100 a barrel, but over the last year prices have declined sharply to below $50. A research note released by Standard Chartered bank last December indicated Kenya can only produce oil at a profit if the price of crude is at a minimum of $70 per barrel.

London-headquartered oil exploration and production company Tullow Oil, which made the Turkana discovery, said it would reduce its rig count in Kenya. Tullow cut its global 2015 exploration budget to $200m after spending $1bn the previous year and noted that exploration activity would be concentrated on West Africa.

Although it is continuing operations in Kenya this is being undertaken at a “modest pace”.

“The collapse in price of oil is making it very difficult for the oil companies to maintain presence here in East Africa,” says Tom James, director at Akili Mineral Services, a Nairobi-based company that provides facilitation and mineral exploration services.

Some companies have even pulled out following negative results. Tower Resources and Premier Oil, for instance, recently announced plans to exit a block in northern Kenya after drilling of the first well failed to show any crude deposits.

“We have now refocused our portfolio and resources to areas predominantly on the Atlantic margin where we are confident we can add value, even in this difficult market. Accordingly, we have withdrawn from areas where we feel there is no medium-term likelihood of commercially worthwhile success,” said Towers CEO Graeme Thomson in a statement.

Investors demand stability

Kenya is today estimated to have 600 million barrels of crude. But Kenyan oil and gas expert Mary M’Mukindia says the journey has been rocky since the first discovery, despite talk of vast opportunities. Investors have been particularly frustrated by Kenya’s business and regulatory environment.

“We are dreaming very big when in fact most of the time, investors are very frustrated,” says M’Mukindia. “I think we need to stop focusing on what are the opportunities in upstream and downstream – and really look inward, and ask: ‘What do we really need to do to get the train out of the station?’ I see a clear lack of leadership [and] a clear lack of vision.”

M’Mukindia is a former CEO of the National Oil Corporation of Kenya, a government agency involved in the import, distribution, sale, and export of energy products. She has over 30 years’ experience in the oil and gas industry working with American multinational oil and gas corporation ExxonMobil, the Petroleum Institute of East Africa, and the United Nations Environment Programme.

Speaking at the recent Eastern Afrika Mining and Energy Conference in Nairobi, M’Mukindia noted investors are concerned by the constant changes in regulations.

“From the day we found oil, the very next year, we changed our laws. We enacted more taxes [and] we enacted more detail. [And since then] every year we have had changes. Investors, local or international, want one thing: stability.

“They have to be able to focus on what is expected of them so that when they do their economics, and run their numbers, they are able to say: ‘This is a good environment for me. I will get my return, I know what my obligations are’,” said M’Mukindia.

Individual county governments have also been passing their own laws and taxes that create uncertainty. Kenya has 47 counties, which were introduced in 2013.

“Every county is coming up with taxes – so it’s very difficult for investors to predict. Taxes are good, they raise revenue, but there needs to be dialogue on the level of taxes so that there is an environment where there is enough regulation to allow you to have the infrastructure to exist as a company, but also enough for you to take home,” she explained.

Infrastructure concerns

Poor infrastructure is another hurdle for the Kenya’s oil industry. Several multi-billion dollar projects – including roads, a port and a pipeline need to be built to facilitate oil production.

Kenya and Uganda have proposed a $4bn pipeline that will run 1,500km. The pipeline will be used to export East Africa’s crude when production finally begins – expected in 2018 in Uganda’s case and in 2020 for Kenya.

However, there have been fights over the route of the pipeline with Total preferring it passes through Tanzania rather than Kenya due to insecurity in the country’s northern region. It is feared arguments over the pipeline’s route could push East Africa’s first oil production timeline beyond 2020.

M’Mukindia says the pipeline needs to be developed “sooner rather than later”.

In the meantime, she notes, the role of communities should be defined to avoid building “expectations which cannot be managed”.

“The extractive industry is a long-term industry. So there is an issue of management of expectations,” concurs Cedric Simonet, managing director of Akili Mineral Services.

“When people hear oil has been found they think the money is going to start flowing right now – but it takes many years.”