Kenya joins the great African oil boom with latest discoveries

Kenya's oil finds may be larger than those found recently in Uganda. But what will oil revenues do to the Kenyan economy, and the political culture?

Njuwa Maina/Reuters
A general view shows an oil rig used in drilling at the Ngamia-1 well on Block 10BB, in the Lokichar basin, which is part of the East African Rift System, in Turkana County on April 5.

Kenya has announced the second profitable oil discovery in two months, a development that could give a needed boost to Kenya's economy. 

With the May 7 announcement of a large oil deposit in the remote northern Turkana region, discovered by the British oil and gas firm Tullow Oil PLC, Kenya has become the latest African country to join the great African oil boom, following recent discoveries in Ghana, Uganda, and the Democratic Republic of Congo

Kenyan Prime Minister Raila Odinga told reporters in Nairobi on May 7 that the discovery of oil was “good news” for Kenya, which spends millions of dollars in oil imports. Kenya spent US$4.1 billion on oil imports, which is equivalent to 100,000 barrels per day in 2011, according to reports.

At the same time, Odinga said the government was remaining “cautiously optimistic” over commercial viability of the latest oil find. Thirty-one wells have been drilled across the country over the past few years, all of them turning up dry, so this caution is reasonable. But after Tullow sinks the well to a deeper 2700 meters from the current 1500 meters, there is some optimism that the well could prove to be commercially viable, able to produce oil for either local consumption or for export.

"These results clearly indicate the presence of crude oil and as further information becomes available during the on-going drilling activities, it will enable a more comprehensive assessment," said Mr. Odinga.

The discovery of oil can be a mixed blessing for any country, bringing both the prosperity of increased revenues and new jobs and also the "resource curse" of high-level corruption and governmental abuse. Kenyans are hoping that they can avoid the mistakes of other African oil giants such as Nigeria and Angola and channel any future oil revenues to building a stronger and more diverse economy.

Oil companies like Tullow are hoping the country will remain politically stable enough for them to stay in Kenya long enough to recover their exploration costs and make a profit. And Kenyan civil society activists hope that the same politicians who made Kenya one of the continent's most corrupt nations during the 1990s and early 2000s won't mess up a good economic chance for Kenya.

Beyond tea, coffee, and tourism

Preliminary tests are very encouraging, ahead of the tests to determine amount and flow, says Mwendia Nyaga, a lead consultant at Oil and Energy Services Ltd. in Nairobi.

"The oil find means Kenya has a new resource apart from tea, coffee, and [tourism]," says Mr. Nyaga. "New industry will develop, that will not damage the existing ones. I can say this is a 'new jewel' for the country." 

For Tullow Oil, this is just the beginning. Tullow has a 50 percent operational interest in seven onshore licenses in the Kenya and Ethiopia Rift Basins, an area that covers 100,000 square kilometers. The basin where Ngamia-1 – where Tullow announced a separate oil discovery in late March – is located in one of the seven basins mapped in Tullow’s acreage and has projected reserves similar in size to Lake Albert Rift Basin in Uganda, where the company discovered oil in 2006.

“This ongoing wild-cat is an excellent start to our exploration campaign," Tullow said in a recent news release. "The net pay encountered in Ngamia-1 is more than double that encountered in any East African exploration wells to date. We now look forward to the drilling and evaluation of the deeper potential of this well and the acceleration of our seismic and drilling campaigns in the region." 

Cattle rustling violence

For a country like Kenya, which has relied on tourism, agriculture, low-scale mining, and occasional foreign loans in order to finance its development, it's obviously better to have oil revenues as an added income stream. While some analysts fret about frequent gun violence in the Turkana region – usually associated with cattle rustling – Nyaga says that the Tullow exploration efforts experienced no incidents of violence. 

"I see infrastructure as the biggest challenge," Nyaga says. "The area is more than 800 kilometres away from the port of Mombasa. This is a long way, given that there is no rail or pipeline or proper roads. I see how to transport the resource being the biggest challenge." 

Although official estimates of the deposits have not been announced, government and Tullow officials have been quoted in Kenyan newspapers saying that the deposits are more that than those of Uganda and Ghana, where Tullow also made discoveries.

Tullow has spent $58 million in the exploration phase. According to a production-sharing contract between the Kenya government and Tullow, Kenya will keep 55 per cent of the proceeds, while Tullow will keep 45 percent in the first five years. After that, Tullow's share will drop to 22 percent. It is hoped that by this time, the company will have recouped its initial investments.

Ghana production started in 2010 and has so far generated US$1 billion. Uganda will start refining crude in 2014, eight years after the discovery of the 2.6 billion barrels on the Albertine basin, along the border with the Democratic Republic of Congo (DRC).

Leadership is key

At the same time, the results of Kenya’s exploration are closely being monitored – within and outside the country – with analysts discussing whether this one will be another “African curse or a blessing.”

"There is no natural resource which is curse," says Nyaga. "The problem is always the leadership. When there is right leadership, there are fewer problems. Oil resource is just like tea or coffee. When poachers kill an elephant in a park, it is the same as when oil or coffee is misused." 

Even so, oil production in Nigeria has created a host of problems, from the poisoning of drinking water, fishing areas, and agricultural lands in the Niger Delta region, to the growing militancy of young Niger Delta residents about government corruption and the lack of local jobs.

In Equatorial Guinea, a small African country on the Gulf of Guinea, oil revenues provide little relief to ordinary citizens, but those in power channel those revenues to their own personal bank accounts around the world. 

Oil to fund 2030 vision

Kenya hopes it can be a leading light in managing the resource. According to Energy Minister Kiraitu Murungi the revenue will be used to boost an ongoing economic and social transformation outlined in a national vision known as 2030.

"In line with the new constitution, we will amend the Petroleum [Exploration and Production] Act of 1986 to conform to the best international standards and to include the local communities," said Mr. Murungi.

Such promises of inclusion aside, Kenya’s civil society warn that they will continue to push for greater transparency to ensure that their politicians don't follow the familiar path of personal enrichment and corruption. 

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