Elections Jitters in Kenya affecting oil and gas investments

With next week’s elections on 4th March just days away, international investors in Kenya's burgeoning oil and gas sector are holding back investments for exploration. They are waiting to see the outcome of next week's presidential election, worried about the potential for violence and possible policy changes under a new government.

Huge petrochemical discoveries in eastern Africa from southern Sudan all the way down to Mozambique have attracted bids from international oil companies for exploration and drilling rights.

Kenya's sector is the least mature, with medium-sized companies heading the search for commercial reserves. These firms are more vulnerable than majors to the risk such as political instability and violence, which five years ago strangled the Kenyan economy and forced political rivals to form a shaky coalition government.

With President Mwai Kibaki leaving the political stage after a career of over 50years, Kenya's forthcoming change in leadership is also creating concerns that the government may alter contractual terms.

Companies such as Canada’s Simba Energy were prepared to begin drilling in 2013 but had to consider feedback from some potential farm-in partners, said Hassan Hassan, Simba's Chief Operating Officer. So they have decided to wait and see.

The uncertainty is affecting new money. Explorers already licensed in Kenya are locked into strict investment agreements and are still releasing capital towards operations. It takes on average US$30m to drill a well. If they do not do so then there are penalties to be inflicted upon them.

The main concern making investors jittery is possibility of a trade sanctions, a one of the leading front-runners in the race, former Finance Minister Uhuru Kenyatta, faces trial for crimes against humanity related to the election violence in 2007/2008.

If Mr. Kenyatta is elected, western governments will face a dilemma over how to balance a principled stance against strategic interests such as security and trade ties with Kenya. The petrochemical story in the region has made Kenya even more strategic due to its location and level of economic advancement in comparison to its neighbours.   

The United States has cautioned that "choices have consequences" as relating to electing leaders that have been indicted for crimes against humanity. Officials in other Western capitals have said any talk of economic sanctions is premature, but some investors are anxious either way.

The stakes are rising. British explorer Tullow Oil this month announced Kenya's first potentially commercial flow rates, taking it a step closer to production.

Tullow's venture partner, Africa Oil, estimates there are 23 billion barrels of oil beneath two onshore basins that extend from southern Ethiopia to the southwestern tip of Kenya.

Kenya's next president will most probably oversee multi-billion dollar investments and new legislation to govern production agreements and how to spend hotly anticipated petrodollars.

Some oil players are concerned that the leading presidential hopefuls have not laid out more detailed plans for infrastructure, taxation and the handling of oil proceeds.

If Kenya is to produce and export oil and help its landlocked neighbours export too, it will need a pipeline network stretching hundreds of kilometres to link inland oil fields to the coast. It will need a new refinery to supply the domestic market from its own crude. The existing facility in Mombasa is dilapidated and runs only at partial capacity.

And while there are laws that set out how oil revenue is spent, they are old and vague. The 13-page Petroleum Act became law in 1986. Back then, few expected a serious oil find.

Nine oil companies operating in Kenya including Tullow, Anadarko and Africa Oil have formed the Kenya Oil and Gas Association. It wants the government to legislate faster.

They point to neighbouring Uganda; where commercial production is finally slated for 2017 after being delayed almost a decade by rows over tax and infrastructure projects, and hope Kenya avoids such setbacks.

The major oil companies are poised to come in once the small-caps have done the dirty work. With days to go to the polls, it’s now a wait and see game.