So Kenya struck oil?

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But the fruits of the discovery may be long in coming

Kenya finally found oil in Turkana after years of fruitless searching. While the commercial viability of the deposits is yet to be determined, the discovery, dropped like a bombshell by former President Kibaki, created excitement in the country and raised hopes of better economic fortunes ahead.

This optimism was reinforced by the fact that British drilling company, Tullow Oil, which struck the oil, had only gone around 1000m into the ground before encountering the 20m layer of oil at Ngamia Well, the company’s very first exploration dig at Turkana. The well was expected to be sunk further to 2700m and there was hope that more oil would be found in the expansive concession that Tullow holds jointly with Canadian firm, Africa Oil Corporation.

Tullow Oil dug more than 3,000ft into the sand and rock of the country’s northern Turkana region, hitting viable “light crude” samples that suggest Kenya’s oil is of a similar geological provenance as Uganda’s recent find. Uganda found large deposits, also identified first by Tullow, in 2006 and is expected to begin refining and exports soon.

The discovery in Kenya followed more than a decade of exploration across the north stretching from the Somali border in the east to the lands around Lake Turkana in the west, where some of the oldest bones of early hominids were found.
British, Chinese, Italian and French companies are understood to have been in the race to strike crude first. Tullow Oil was the most recent operator to join the search.

Angus McCoss, Tullow’s exploration director, said it was “beyond expectations” to source oil at the first dig his team had made in Kenya. “This is an excellent start to our major exploration campaign in the East African rift basins of Kenya and Ethiopia,” he said.

“To make a good oil discovery in our first well is beyond our expectations and bodes well for the material programme ahead of us. Tullow is working closely with the government and people of Kenya as a committed long term partner to unlock the oil potential of the region.
“We look forward to further success as seismic and drilling activities continue to gather pace.”

However, as this is going on, analysts say Kenya risks similar delays in producing crude oil that neighbouring Uganda has faced due to lack of a regulatory framework for the sector. The Kenya government acknowledges there are some hazy parts of the law surrounding oil production, but they say they are confident Kenya is ready.

The industry, though, is sceptical, with much at stake due to high costs and scant laws for recovering and marketing oil found. The oil firms are discouraged by the example of Uganda where oil finds lay stagnant for a long time.

A story by Reuters quotes James Phillips, chief operating officer of Canada’s Africa Oil Corp., the company which discovered gas in Block 9, as saying the company won’t spend any money or move ahead with its plans in the area until Kenya’s energy ministry develops rules that would determine how that gas could be produced and sold.

“The government here is good and they’re very easy to work with, but they’re still finding their way,” Phillips told Reuters at an oil, gas and energy conference in Nairobi.

“If you don’t have reserves, then you don’t have the expertise and knowledge that comes with experience.”East Africa has become a hot spot for oil and gas exploration in recent years, spurred by new finds, but has yet to come to terms with a legal framework for the sector.
Analysts say the current rules in Kenya are insufficient and do not account for the vast complications such as environmental concerns, production rates and revenue sharing agreements.

For now, the oil and gas production and exploration process in Kenya is regulated by the Kenya Petroleum Act, a 13-page law passed around 1986, decades before its first oil find, and government officials say this needs to be revamped.Analysts said because Kenyan officials are inexperienced contracts can be skewed toward commercial interests, a risk factor from inadequate regulation.

Its regulations will fall short in handling environmental disasters such as oil spills, and in protecting property rights of oil companies negotiating with one another.In some cases, reservoirs of hydrocarbons can extend into multiple blocks, each with a different licensed owner. Regulations usually dictate how companies extract the deposits without infringing one another’s property rights. Kenyan law is unclear on how to handle such a situation if it arises.

“They’re not well prepared because there’s been no production in the past,” said Mwendia Nyaga, lead consultant at Oil & Energy Ltd., a consultant with the energy ministry.“The existing regulatory system needs to be improved as the issues they’re dealing with become more complex.”

Commercial hydrocarbon deposits were discovered in Uganda in 2006 by Tullow, but a tax dispute between Kampala and Heritage Oil, Tullow’s former partner in the oilfields, and wrangling over the production sharing agreements, resulted in delays to oil production.
In a similar tax dispute over unclear rules, Cove Energy said it was seeking clarity from Mozambique on a possible levy related to the sale of the British gas explorer, raising the prospect of a tax battle and potential delay to the $1.8 billion deal.

Martin Heya, Kenya’s petroleum commissioner, says the country will not fall into the same pitfalls as its neighbours.“We think we have learned a lot from those who have discovered oil earlier than us,” Heya said, days before the Tullow discovery was made public.
“We are preparing (regulations), but we don’t put these things in the paper (newspapers) because you don’t want to up the expectations of the people so much … so someone who you talk to might think we are unprepared,” he said.

In the meantime, it would be prudent to put a hold on the celebrations and counting of oil dllars. The former President Kibaki, while making the announcement, cautioned that it would take some time for Kenya to refine or export its first barrels of oil.“This is the first time Kenya has made such a discovery and it is very good news for our country,” he said. “It is, however, the beginning of a long journey to make our country an oil producer, which typically takes in excess of three years.”

There is no way yet to judge the extent of Kenya’s deposits. Its neighbours Uganda and South Sudan both have significant supplies, and exploration in both Ethiopia and northern Somalia is in its early stages.Kenya currently imports all of its crude and refined oil, some of which is used to run electricity generation during drought periods when its main hydroelectric plants lose capacity.

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