US oil firm earns millions from farm out of Turkana block in Kenya

ERHC Energy an American oil and natural gas company is set to earn millions from the sale of a stake in its northern Kenya exploration block.

ERHC Energy, which is a Texas-based public listed firm, has disclosed in filings with the Securities and Exchange Commission (SEC) that it has negotiated a sale (farm out) agreement with an undisclosed international oil company that will see it relinquish 55 per cent interest in its exploration block.

The American firm in June 2012 won exploration rights for oil and natural gas in block 11A, located in the Lokichar basin where British firm Tullow Oil has made discoveries of commercially viable deposits.

“In October 2013, the company entered into a farm-out agreement with an international oil and gas company,” says ERHC energy in disclosures to the American market regulator SEC.

“Under the terms of this agreement, and contingent upon the consent of the government of Kenya and other conditions, the company will assign and transfer 55 per cent of its participating interest in Block 11A to the Kenya farm-out partner for an initial consideration of $2 million (Sh172 million).” 

ERHC notes that the farm-out partner will fund future exploration costs in proportion with their stake.

The American firm also operates other exploration blocks in Chad, Nigeria and Sao Tomé and Príncipe.

The disclosures also say the company has finished surveying block 11A, a major step towards before drilling of exploratory wells.

It said completion of the Full Tensor Gravity Gradiometry (FTG) survey last week will help to identify the best spots for drilling.

“Shooting seismic is expensive and can be disruptive, so the FTG survey helps to narrow the scope of the area where seismic is acquired. All of this work (the survey and the seismic) is aimed at identifying the locations for drilling that have the highest likelihood of success (based on scientific analysis of geological and geophysical information being gathered),” Daniel Keeney, an investor relations representative with the firm told the Business Daily.

EHRC is expected to award the contract for the seismic study by March and the winning firm should begin work by the end of this year.

The SEC fillings say that part of the exploration will involve drilling one well to at least 3,000 meters depth which should cost not less than $30 million or Sh2.6 billion and before that acquire and interpret data from the seismic study.

EHRC estimates that seismic work will cost at least $10 million (Sh871 million). EHRC has a 90 per cent interest in the block and the government has the other 10 per cent but this could increase to 20 per cent should the wells prove to be commercially viable as per the production sharing agreement signed in June 2012.

Drilling is expected to show whether there is oil and gas that is commercially viable but the company is already upbeat of prospects due its block being close to other blocks that have shown viable oil deposits.

“Block 11A which encompasses approximately 11,950 square kilometres or 2.95 million acres, and is located to the northwest of the Lokichar Basin where the significant Ekales-1, Ngamia-1 and Twiga South-1 oil discoveries were drilled,” said the firm in a statement. Tullow Oil has recently found discoveries in these blocks.

Analysts also echo the view that as more drilling is done there is a high chance of Kenya becoming an oil exporter.

“Wood Mackenzie estimates over 3.5 billion barrels of yet-to-find (YTF) volumes in Kenya, and a further one billion barrels of YTF reserves in Uganda,” said a briefing by Standard Investment Bank.

Even as the country waits to confirm if Kenya will start shipping out oil, major investments have begun flowing in and are expected to continue over the next four years.

“Upstream investment in oil production, already at $1bn (Sh87 billion) a year excluding exploration, is expected to grow 60 per cent per year through 2018,” said a November 2013 country update by Oxford Business Group.

The think tank says that the Turkana discoveries have aroused interest from large multinationals like Total, China National Offshore Oil Corporation, ExxonMobil and Chevron.

Locally companies have also aligned their businesses to take advantage of the opportunities that the new industry is expected to bring.

By John Gachiri

jgachiri@ke.nationmedia.com