Kenya might be the largest economy in East Africa, but in some respects it lags significantly behind its neighbours. Agriculture and tourism to the country’s wildlife reserves provide a driving force behind Kenyan growth, but the dominance of these sectors makes the country vulnerable to poor harvests or shifting tourism trends, as well as leaving much of its population living in poverty.
The Kenyan Government, both before and after the March 2013 elections that brought President Uhura Kenyatta to power, has been working to develop a more diverse base for economic growth, throwing its support behind the country’s burgeoning manufacturing and financial services sectors.
The exploitation of natural resources is another important area that could create sustainable growth and lasting benefits for Kenya’s people. It’s also an area in which Kenya is playing catch-up with nearby countries such as Mozambique and Tanzania, which both have increasingly mature mining industries and are currently hosting significant hydrocarbon discoveries, both on and offshore. Recent offshore Gas discoveries in the two countries reportedly total around 100 trillion cubic feet.
Meanwhile, Kenya remains a completely unproven oil and gas destination, regardless of the impressive finds being made further south of Africa’s east coast. A January 2013 Deloitte report on East African oil and gas potential summed up the slight disappointment that has met exploration efforts in the country.
"Over the past 50 years, many other oil and gas companies have tried their luck onshore and offshore, including Exxon, Total, Chevron, Woodside and CNOOC," the report states. "Of 33 wells drilled in the country prior to 2012, 16 showed signs of hydrocarbons, but none were considered commercial. Only four had been drilled offshore prior to 2012 and of these only one (in Block L5, drilled by Woodside in 2007) was in deepwater."
Exploration in the Lamu Basin
However, the Deloitte report acknowledges the ‘hotspot’ status that has been granted to East Africa and its coastal waters after the successes seen in Tanzania and Mozambique. The report notes that ‘offshore exploration has become [the] flavour of the moment’ and that ‘extensive activity’ from the industry is expected in Kenya over the next two years.
Kenyan offshore blocks have certainly attracted significant attention from a wide range of energy companies, large and small, over the last few years. With only one of the four prospective sedimentary basins in Kenya extending offshore (the Anza, Mandera and Tertiary Rift basins are all onshore, while the Lamu Basin runs beneath Kenyan waters), the country’s onshore O&G potential has understandably been the greatest focus of industry interest and media speculation, especially in the wake of Tullow Oil‘s fifth consecutive oil discovery since beginning exploratory drilling in Turkana County in 2012.
Nevertheless, Kenya’s offshore potential, lent legitimacy by major discoveries further south, has drawn significant investment from companies looking to survey explore the Lamu basin for oil and gas. For the many companies with a stake in the 15-odd blocks off Kenya’s east coast, including the likes of Eni, Anadarko, Total, CAMAC Energy and BG Group, early indications were encouraging.
Australian company Pancontinental, which owns a 40% stake in the L6 block in partnership with operator and 60% stakeholder FAR Ltd, was certainly confident in a trading statement released in February 2013.
"The L6 area has potential to contain approximately 3.7 billion barrels of oil or 10.2 trillion cubic feet of gas prospective resources on a gross, un-risked, best-estimate basis according to an assessment by operator FAR Limited," the statement estimated, based on 2D and 3D seismic surveys in the region.
Destined to disappoint?
Despite the sustained investment the oil and gas industry is making offshore Kenya, so far the region’s potential remains unrealised. In an offshore area thought to be the next frontier of East African oil and gas, it is discouraging for industry and investors that exploratory drilling has not yielded more impressive finds.
Though the offshore drilling work being carried out by most explorers is still in the early stages, several companies have already started to scale back their presence in the area after only non-commercial discoveries. In October 2013, US-based Apache Corporation relinquished its 50% stake in the L8 block it had been developing with Pancontinental and Tullow Oil, saying the quantities of gas it had found were not commercially viable.
"We determined that other areas in our worldwide portfolio provided better opportunities for future capital investments," Bob Dye, Apache’s senior vice-president of corporate affairs told Reuters.
British oil firm Premier Oil followed suit in December, when it announced that after an exploration review, it was withdrawing from Block L10A, relinquishing its 20% stake in the license. Premier still has a 25% share in the neighbouring Block L10B, which it will continue to explore leading up to a ‘drill or drop’ decision in mid-2014.
"Whilst we remain committed to exploration in Kenya, we continue to focus our resources on projects that meet our internal corporate investment metrics and to high-grade our exploration portfolio accordingly," said Premier CEO Simon Lockett.
In fact, the best news that Kenya’s offshore explorers seem to be able to muster at the moment is that the area’s potential remains high, even if no breakthroughs have been made yet. Anadarko announced in April 2013 that it had not found commercial quantities of oil at its Kubwa well in the L7 block, but remained upbeat about future prospects.
"We are very encouraged with our first test of Kenya’s previously unexplored deepwater basin, in which mudlog and well-site evaluation of core data indicates the presence of a working petroleum system with reservoir-quality sands," said Anadarko’s senior vice-president for worldwide exploration Bob Daniels. "The Kubwa well tested multiple play concepts and provided useful data regarding the prospectivity of our six-million-acre position offshore Kenya."
Meanwhile, Pancontinental might have given Apache Corp executives reason for a slight amount of regret when it made a modest discovery of gas in the L8 block in December, but even so, the company had to add the caveat that the well would only be viable if combined with other wells in the area, continuing the uncertainty.
"The well on its own may not currently be commercially viable, but could be when aggregated with other gas discoveries which may occur in the L8 or nearby blocks," said Pancontinental’s finance director Ernest Myers.
Is Kenya’s offshore resource potential destined to disappoint? The exploration of a relatively unmapped region is a protracted process, and it’s still too early to know if the companies that have already bowed out of the area were jumping the gun. But with ten new exploration wells expected to be drilled in the country every year for the next three to five years, 40% of which will be offshore, according to National Oil Corporation of Kenya chief executive Sumayya Hassan-Athmani, it won’t be too long before the fate Kenya’s embryonic offshore industry is put beyond doubt.
War-torn Somalia has some of the largest prospective oil and gas resources in East Africa and UK company Soma Oil & Gas is investing £20m to gain first-mover advantage.
The East African offshore oil and gas industry is about to become one of the world’s biggest energy frontiers.