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State reluctant to weed out ‘briefcase’ oil exploration firms

By Macharia Kamau | March 12th 2017

Before Tullow Oil announced its major oil discovery in Turkana, few companies were undertaking any meaningful exploration.

If anything, a long history of sinking investments into exploration wells and finding little  had seen many firms, including oil majors, quit the country after short stays. Those that remained did the bare minimum just to make sure that they were in good books with the Government.

It was after 2012 that there was a substantial increase in the number of companies that were prospecting for oil in the country. Inspired by the Tullow find, oil companies appeared to be trying to outdo each other in updating their stakeholders of the progress they were making in Kenya.

If it was not the commencement of a seismic surveys, it was the start of drilling an exploratory well or other activity.

However, the enthusiasm has died down and going by the pronouncements that the firms have been making recently, only a handful of the companies that are licensed to explore in Kenya have made substantial investments in their blocks over the last two years.

Work obligations

In fact, some have not been meeting certain obligations of their licences. Production Sharing Contracts (PSC) that the companies sign with Ministry of Energy and Petroleum have certain requirements, including the levels of investments in exploration works and in communities that they should make per year.

Licence renewals or extensions is ideally pegged on companies meeting their minimum work obligations. However, despite the failure to meet their obligations, the Ministry has not penalised or warned any of the companies.

Energy and Petroleum Cabinet Secretary Charles Keter confirmed that a number of firms have not been meeting their obligations within the blocks they are assigned. He added that the Ministry has so far not penalised any prospectors because it has been due to factors that are beyond their control.

The factors include the rise in insecurity in parts of the country and according to Keter, companies licensed to prospect in Lamu and Mandera were the most affected.

There was also the decline in oil prices that saw investors get jittery and reduce money going into the oil industry. This has forced exploration and production companies to substantially reduced their activities.

“Under the PSC contracts, there are work programmes that have to be fulfilled and when these companies apply for licence renewal, we usually look at what they have done against the contract requirements. The work that they have done usually determines whether or not a licence will be renewed,” said Keter.

“A number of the companies have not meet these obligations. There are some that have been able to show that they were affected by increased insecurity, especially when there were attacks by Al Shabaab. You cannot penalise somebody who has been able to demonstrate that they were not able to meet their requirements due to factors that were beyond their control.”

Keter said the companies are resuming work and the country continues to gain traction as an emerging oil province from major explorers as well as a potential market for crude oil. There have been concerns that a number of little-known firms have been getting into the country’s upstream with a view of selling their stake to oil majors once Kenya establishes the extent of its oil wealth.

Huge potential

Speculators have in the past made a pretty penny farming out their interests to fairly established companies and this has happened in some of the blocks that have showed huge potential for oil or natural gas.

Keter, however, notes that speculation has been contained by vetting companies that are granted licences to explore.

The ministry has also frozen the issuance of new exploration licences. The Energy Bill, which is currently in Parliament, is expected to offer exploration guidelines and put a further strangle on speculation.

“Speculation is not so much. This is an industry that has few players with the capacity to mobilise resources needed to explore oil and hence we are able to know who is who when licensing,” said Keter.

Other than insecurity and oil companies holding onto licences while waiting to sell their interests, another factor that saw decline in upstream activities was the decline in the price of crude oil. Prices started coming down in 2015 and hit a low of $29 per barrel in January 2016.

Most affected were oil juniors, or companies that are yet to establish themselves as major industry players, as well as markets that are yet to make a mark as oil frontiers.

Kenya suffered the duo challenge, in that most of the explorers are oil juniors and the local industry is still in its infancy stage.

Charles Wanguhu, Platform Coordinator at the Kenya Civil Society Platform on Oil and Gas (KCSPOG), noted that due to the fledgling nature of the upstream industry, the country has not yet been able to attract oil majors with capability to mobilise resources to continue working even in lean times.

“Before 2012, we had not made any major find, so we could not attract major companies and ended up attracting smaller explorers that did not have the capacity to mobilise resources,” he said.

“When the oil prices went down, we saw a lot of companies cut their exploration budgets, including Tullow that cut its budget by half. A lot of these companies were experiencing challenges, many were in a negative position and others were going out of business.”

There are three companies that have been licensed to explore in Kenya that can be said to be in the league of oil majors.

These are British Gas (BG) Group, France’s Total E&P and United States’ Anadarko Petroleum Corp. In the recent past, among the majors that have explored in Kenya with disappointing results include Chinese National Offshore Oil Company (CNOOC) that shut its operations in 2010 and went to Uganda where the prospects appeared better.

Wanguhu says the reduced activities in upstream might mean the country taking longer to actualise dreams of being an oil producer, especially the exploration and exploitation of blocks that are yet to make major discoveries.

Clearer map

He notes that continuous exploration works tend to give a clearer map of the country’s oil resources for both the government and players and in turn attract deep-pocketed companies.

“When there is little upstream work going on, it will impact on the country because we will not be able to tell the extent of the resources that we have, which in turn means that we cannot do competitive bidding... if we had good data, we would be able to attract large companies that can make substantial investments,” said Wanguhu.

Comparable to the companies unable to meet their work obligations today is the case of Canada’s Vanoil Energy whose licences to explore in Block 3A and 3B were revoked in 2013 for failure to meet minimum work obligations. The then Energy Cabinet Secretary, Mr Davis Chirchir, had said the firm failed to undertake any work, despite being given extensions on its licences for more than four times.

Vanoil had cited insecurity as well as disturbance by the local community as among the factors that that prevented it from drilling its Modogashe I exploration well in Garissa.

The firm has been trying to recover ‘not less than $150 million (Sh15 billion)’ following the revocation of its licences, which it said would be the full and proper restitution for its exploration and development work on the two blocks.

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