Kenya: large-scale oil production moves a step closer

A consortium led by Tullow Oil has announced the drilling of another successful oil exploration well in the South Lokichar Basin, increasing the likelihood of large-scale oil production in Kenya.

The Erut 1 well lies in northwest Kenya on Block 13T, which is operated by Tullow, with a 50% stake, alongside partners Africa Oil Corporation (25%) and Maersk Oil (25%).

Tullow’s exploration director, Angus McCoss, commented: “This is an exciting discovery from a bold exploration well that proves that oil has migrated to the northern limit of the South Lokichar basin. This extends the known hydrocarbon limits of the basin beyond the successful Etom discovery into the underexplored northern part of the basin.” Two further appraisal wells, which will test the size of the discovery, are now being planned.

As in neighbouring Uganda, Anglo-Irish firm Tullow has been heavily involved in Kenyan oil exploration. It acquired 50% stakes in blocks 10BA, 10BB, 10A, 12A and 13T in 2010; and the first big discovery was made two years later, on the Ngamia 1 well on Block 10BB.

After the discovery of oil on the Etom 2 well in December 2015, Tullow said that there was likely to be 1bn barrels of oil in the South Lokichar Basin. The Basin is located in the Turkana area of the Great Rift Valley.

Plans for a Kenyan pipeline became simplified but also more expensive because of a decision made by the Ugandan government. It had been expected that Uganda would opt to build its oil export pipeline through Kenya to the Kenyan coast, probably to a new oil export terminal at Lamu.

This would have allowed Kenya to construct a pipeline from its oil fields to join the Ugandan line. However, in April 2016 Kampala decided to build its pipeline to the Tanzanian port of Tanga instead, partly because of the threat of militant attacks in parts of Kenya.

According to current estimates, the 855km pipeline will cost $2.1bn to build, equating to $12.94 a barrel in transport costs. Whether it will be developed depends partly on the size of the reserves in question but also on oil prices.

International accountancy firm KPMG estimates the breakeven price of oil in South Lokichar at $45-49 a barrel. Last August, the government approved a plan for small scale production to be transported to the coast by road. Just 2-4,000 b/d will be taken by tanker via a new road to Mombasa, hopefully by the end of this year.

Ugandan farm-down

Tullow has already sold part of its equity in its Ugandan assets. On 9 January, it announced that it had sold 21.57% of its 33.33% stake in exploration areas 1, 1A, 2 and 3A to Total for $900m. Its remaining 11.76% stake in the areas and the planned pipeline will fall to 10% once the Ugandan government takes up its option in the Lake Albert Development Project.

Development has been held up for several years because of changes of ownership in the venture, low oil prices and the failure of the consortium and Kampala to reach agreement on how to develop the reserves.

Shareholders Total, Tullow and China National Offshore Oil Corporation, plus the Ugandan government, now hope to take the final investment decision by the end of this year, with first oil three years after that. Output is expected to reach 230,000 b/d.

Tullow CEO Aidan Heavey, said: “The deal will secure future cash flow for the group from one of the industry’s few truly low cost development projects without any additional cash requirements expected.” The $900m deal with Total involves some money upfront but most will be used to fund Tullow’s share of future project costs. Developing the first 1.2bn barrels of production is expected to cost $5.2bn.

Neil Ford