Potential oil wealth brings its own set of challenges for Kenya

LONDON // A string of impressive oil and gas finds in East Africa have made the region one of the most promising exploration frontiers in the world.

While about 12 trillion cubic feet (tcf) of gas has been found in Tanzania, the waters off Mozambique have proved even more fruitful, with an estimated 60 tcf in potential resources.

East African gas finds over the past three years have exceeded expectations. The same was not true of oil until last year, when Tullow Oil and its partner Africa Oil successfully found oil in Kenya.

The finds proved to be a game changer for Kenya as they significantly boosted investor interest in the country’s hydrocarbons potential.

But while there are great opportunities, there are also significant risks such as regulatory and legislative changes.

The government is yet to finalise its energy bill that will govern the sector. According to the ministry, the legislative bill is about 95 per cent completed and will be passed in the first quarter of next year.

However, questions about the infrastructure requirements to refine and transport the oil remain.

The government is under pressure to balance the interests of private companies on the one hand and its people on the other. “We are looking for mutually beneficial investments,” said Davis Chirchir, Kenya’s cabinet secretary for energy and petroleum.

This is becoming increasingly difficult as public expectations have been elevated by the country’s oil and gas finds.

Rising tensions between the oil companies and local communities have already led to protests. Late last month, protesters gathered at a site in Turkana, forcing Tullow and Africa Oil to temporarily suspend their operations.

The demonstrators complained that the oil companies had not hired a sufficiently large number of workers from the local community.

Meanwhile, exploration activities are under way in earnest in Kenya. The country and its offshore waters have been carved up into blocks, and licences have been awarded to explore almost every block in the country.

Kenya’s National Oil Corporation will be granted a stake in each oil-producing block. Meanwhile, it is conducting its own seismic studies both on and offshore, some in partnership with the oil and gas company Schlumberger.

The country’s first offshore gas find was made in September last year in Mbawa-1 by Apache, Origin Energy, Pancontinental Oil & Gas, and Tullow Oil. However, the discovery was small and oil finds continue to eclipse Kenya’s natural gas potential.

Afren, the Africa-focused oil exploration company, undertook a two-dimensional seismic study crossing 1,900 kilometres in Block 1 last year, as well as studies in Blocks L17/18. Afren is the sole operator in these blocks. Evidence of oil at the nearby L19 block has raised Afren’s expectations of significant finds.

But not all explorations in Kenya have been successful. For instance, work on Paipai-1 in Marsabit County of Block 10A was suspended after several attempts to sample the initial reservoir fluids were unsuccessful. The asset is 50 per cent owned by Tullow, with the rest held by Africa Oil and Afren.

The true extent of Kenya’s natural resources remains unknown. Understanding the scale of the reserves is a priority for the government and investors. “We need to encourage exploration companies to find out what there is out there,” said Max Birley, the chief executive of Taipan Resources, the fourth largest onshore acreage holder in Kenya. “I think that there’s a good chance of finding a 200-million-barrel oilfield.”

If finding oil is tough, ensuring that all Kenyans benefit from it is even more difficult, and the government is feeling pressure from the electorate.

“We are determined to ensure that our natural resources benefit all of us,” said Martin Heya, the commissioner for petroleum at the energy ministry in Kenya, adding that the ministry planned to conduct a study on how best to use the resources.

The interests of international oil companies and Kenyans are not always easily aligned. The operators of Blocks 10BB and 13T were last month forced to suspend their work following “demonstrations by local people regarding concerns around employment”, said Tullow Oil, a major partner in the Turkana blocks.

Tullow has denied claims that it does not employ enough local workers. It says it has hired more than 800 people from the Turkana region out of the 1,400 people currently employed on Tullow’s Kenyan operations.

On its part, the government wasted no time in reassuring the private companies. “We take our investors very seriously and this matter will be resolved very soon,” said Mr Heya.

To be sure, Kenya needs to tap its natural resources so that the government can afford to spend, according to Mr Chirchir. “We need the revenues [from oil] very quickly for economic development,” he said.

Employment aside, Kenyans are keen to benefit from direct public spending through taxation on oil finds. Under the current draft of the new energy law, the national government will receive 80 per cent of profits from oil and gas production, while 15 per cent will be allocated to the county level and 5 per cent to the local community.

However, practical considerations associated with administering the funds have yet to be resolved. For instance, “if you think of nomadic tribes – for instance, the Maasai – that cross borders, then which county will they be entitled to benefit from?” said Sonal Sejpal, a senior legal consultant at the law firm Anjarwalla & Khanna.

From the private companies’ perspective, there is additional uncertainty in the form of hidden costs. The Kenyan government has taken the unusual decision to tax exploration companies for farm-in agreements, whereby one company buys a stake in a block and shares the cost of exploration.

Exploration companies are lobbying Kenya’s treasury to abandon the tax because they have yet to profit from their exploration blocks in the absence of oil production.

Another headache for international oil companies is the lack of sufficient downstream infrastructure to refine the oil and transport it to market. The Lamu Port-South Sudan-Ethiopia transport corridor project, a multi-government plan, aims to resolve all these issues under a single scheme.

However, there are many components to the plan and each must succeed for it to work as a whole. The scheme requires cooperation between countries and large amounts of investment.

The governments have insufficient resources to pay for it themselves, while the private sector is unlikely to want to invest. Over the past 10 years, almost every oil refinery in the region has either been mothballed or privatised.

Indeed, investors in Kenya’s oil and gas sector face many challenges in realising the potential profits that drew them to the country. Furthermore, each oil discovery elevates Kenyans’ expectations, which cannot be met for several years at least.