|On Monday, 26 March 2012 Tullow announced that
‘the Ngamia-1 exploration well in Kenya has encountered in excess of 20 metres of net oil pay. The well, located in the Turkana County of Kenya Block 10BB, was drilled to an intermediate depth of 1,041m and has been successfully logged and sampled. Moveable oil with an API greater than 30 degrees has been recovered to surface. This oil has similar properties to the light waxy crude discovered in Uganda.
The Ngamia structure is the first prospect to be tested as part of a multi-well drilling campaign in Kenya and Ethiopia. Many leads and prospects similar to Ngamia have been identified and following this discovery the outlook for further success has been significantly improved.
The well will now be drilled to a depth of approximately 2,700m to explore for deeper potential.’ (from press release)
More tests will have to be done before commercially viable reserves can be confirmed. If this is the case, it will probably take an estimated five to seven years before exploration beings. Good news or risky news? Here are a few points to consider:
- Good news for Kenya’s northern infrastructure plans, including Lamu port: If there are commercially viable oil reserves in Kenya’s north, there is even more of a reason to invest in the Northern Corridor. That, of course, doesn’t necessarily mean that these large-scale projects will be managed transparently and competently.
- East Africa needs to sit down and work this out together: There is a lot of interest in oil infrastructure and facilities, but pipelines and refineries are expensive, long-term, large-scale investments. It makes little sense to build a refinery in each country, and not everyone can have their own pipeline. The East African Community (EAC) and surrounding countries – most importantly Southern Sudan – need to work out a regional plan.
- Kenya can learn from Uganda. In principle, Kenya can learn from anyone else – Angola, Nigeria, you name it. In fact, Uganda could also learn from anyone else. But Uganda has made a couple of mistakes in the handling of the Heritage Oil asset sales, in how it dealt with the issue of capital gains tax, in its footdragging over developing the necessary legal and regulatory framework. Investors and companies in the wider exploration industry have paid attention. Kenya should take note of how not to do it. Legal issues could become a headache: Kenya’s oil legislation needs updating. As did Uganda’s.
- Kenya could have benefitted from the regional oil and gas industry anyway: It has a seaport, a refinery, and plans to construct more of both. Kenya is still a finance, transport and infrastructure hub – literally speaking, it’s difficult to get past Kenya if you’re landlocked in the EAC. Since Uganda has not exactly been a shining example of how to manage a nascent oil industry, Kenya now has an additional incentive to entice companies in oil and gas exploration to set up their regional headquarter in Kenya. And more money will be invested in Kenya’s oil and gas exploration.
- This might shift the regional power balance in the industry from Uganda to Kenya. Uganda’s president Museveni already seemed a bit disgruntled with Kenya’s much-publicised pursuit of the Lamu port project. Lamu port and the related investments – refinery, the inevitable ‘resort city’, railway, pipeline – are by no means a guaranteed success, but Kenya will now be a in a stronger position to negotiate them regionally.
- Turkana has just become a lot riskier: It is already a marginal, underdeveloped area with relatively high insecurity. If the recent clashes in Isiolo, underreported and often glossed over as inter-ethnic cattle rustling, are anything to go by, similar tensions may well surface in Turkana.
- Kenya’s land titling and overall land management regime is notoriously corrupt and unreliable and also a perennial source of conflict. This will be worse in Turkana. The implementation of the new constitution with its transition from a central to a more devolved government on country level creates more uncertainty: Not all regulations and institutions have been fully set up. Throw oil, a marginal area and informal land rights into this and you have a potentially explosive situation.
- Kenya’s political risk: The past few days, with the GEMA meeting putting the country on notice that peace and security may well depend on one individual, are just one of many reminders that the issues that pushed Kenya to the brink of a Cote d’Ivoire style scenario are far from being resolved. Oil tends to increase the premium on power. Thankfully, with production at least five to seven years off, this means that Kenya will have at least one, possibly two electoral cycles until oil revenues start flowing.