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Saturday, 7 July 2012

Oil and Gas East Africa: The opportunities and the challenges



A lot has been reported about the oil and gas exploration in Eastern Africa and the region being the latest hydrocarbon frontier.

 It began a few years ago with the discoveries of large natural gas deposits offshore Tanzania and Mozambique. Recoverable reserves have today topped 100 trillion cubic feet of natural gas (Tanzania and Mozambique sharing 28 & 72 trillion cubic feet respectively). This is enough to supply the whole world with natural gas supply for a year. Also, around 2006, 2.5 billion barrels of crude oil were discovered in the Lake Albert region in western Uganda, in addition to previous finds of approximately 6 billion barrels of crude in the then Sudan.

According to studies done by the US Geological Survey, its estimated that the Eastern African region stretching from Somalia to the Seychelles in the East and down to Madagascar in the South and West to Mozambique could have as much as 441 trillion cubic feet of natural gas. This is about 50% more than what Saudi Arabia has in proven reserves to date. Hence, the frenzy to acquire exploration blocks in Eastern Africa.

With a little over 2 dozen exploration companies such as Anadarko, Mitsui & Co, Tullow Oil, Africa Oil, Cove Energy, Ophir Energy, BG already operating in the region and more established multinationals like ENI, Statoil and Total also catching up with recent forays in exploration activity. The region is a beehive in Exploration and Production (E&P) investment.

However, the region seems not to have been ready for oil and gas E&P. With tens of billion of USD dollars coming into the region to develop the sector a few challenges have cropped up.

1. Lack of established legislative and policy frameworks to manage the sector. This has led to governments awarding E&P contracts in unclear circumstances, with profit share from the oil and gas revenues not very clear to the public. This has encouraged the next challenge:

2. Corruption, because exploration contracts are awarded in an opaque manner corruption is bound to flourish as the awarding authorities could decide to privately benefit from highly demanded exploration blocks, at the expense of their countries and people.

 3. Lack of skilled manpower. Oil and gas exploration and drilling is a specialized skills set that requires highly trained engineers and technicians in addition to specialist supply chain and operational staff. These take years to train and orient.

4. Another challenge is infrastructure, as this oil and gas is being drilled offshore and in remote onshore sites, the closest major towns are ill equipped to process this bounty. In the next few years we should expect more refineries, pipelines and Liquefied Natural Gas(LNG) plants to convert natural gas into liquid form so as to transport it to markets overseas in large sea bound tankers. We should also see gas powered plants that burn the gas to produce electricity in eastern and southern African countries. This will necessitate the laying of gas pipelines to transport this product cheaply. The South African market is ripe for gas powered plants because it currently relies 88% on dirty coal fired plants that are heavy polluters. Natural gas is said to be more environmentally friendly. Airports and sea ports will also be required to transport personnel, equipment and supplies that are required in the development of oil and gas fields.

Because of the discoveries of natural gas to the South of Kenya, the Government of Kenya has been issuing exploration blocks at break neck speed since late 2011. In the past one week Kenya has issued 7 of the 12 remaining exploration blocks available.  With ENI of Italy signing on 3 blocks and the four other blocks going to Total, ERHC Energy, Rift Energy and Pacific Seaboard Investments. Of the remaining 5 blocks Statoil and a Qatar based company are in negotiations with the government.

This has led the Somalia Transitional Government (STG) to protest as some of the off shore blocks that were allocated are in disputed territorial waters between Kenya and Somalia. According to the Kenyan Government the convention of boundaries in international water is due East from the point of the on land boundary, this is the agreed convention that governs the offshore boundaries on the eastern Africa coast. However, the STG claims that the border should be perpendicular to the coastline therefore precipitating the dispute.

Disputes related to oil and gas in the Sudan’s has led to armed confrontations between the north and southern neighbors, that has led to a shutdown of the flow oil from the oil wells in the border region of Heglig (South Kordofan state). This resulted in the drying up of the South’s oil revenue that was 96% of its budget. It has since negotiated with Kenya to build an alternative pipeline through Kenya to the port town of Lamu to export its crude oil.

The North has fared slightly better with a reduced capacity of 115,000 bpd. In a bid to increase revenue Sudan(North) has signed oil E&P sharing deals with foreign companies for 9 blocks worth US$ 1 billion, in the hope of bringing on-stream production worth a minimum of 65,000 bpd by end of 2012. This is to offset economic woes that were precipitated by the country loosing three quarters of its oil revenues when the South split from it in 2011.

In Uganda after the discovery of oil through the exploration initiatives of Tullow oil in the Lake Albert region. The country is set to start production of 2.4 billion barrels of crude at a cost of US$10 billion, albeit on a small scale to begin with,  by 2014. This is after a protracted legal and policy battle between its government and Tullow Oil. An agreeable E&P production sharing agreement was finally reached in early 2012 that led to Farm out deal where Tullow sold part of its stake in the oil fields to China’s CNOOC and Total to enable the company obtain resources to produce crude while cashing in on its earlier exploration initiatives.

The Kenyan discovery in Turkana, Northern Kenya is still under validation after Tullow Oil stopped drilling at the Ngamia 1 well and is moving its rig to the Twiga 1 site in the same vicinity as it also prepares to drill in Ethiopia where it hopes to find more oil. The commercial viability of the Ngamia 1 find look promising according to Tullow’s website.

The drilling for oil the semi-autonomous region of Puntland in Somalia has been reported but the news on the on goings there are hard to come by, Africa Oil is the company drilling there.

The petro-dollar cheetah economies of Eastern Africa are on their starting blocks. If the challenges mentioned above are not adequately addressed, the resource curse, which has afflicted African countries in the west, is bound to ensue. We hope and pray for the best.