Tullow raises stakes in Kenya oil search with $34m deal

UK explorer Tullow Oil has taken a Sh2.7 billion bet on Kenya’s oil prospects through an exchange of licences with cash-strapped Canadian firm Africa Oil.

The two firms reached an agreement last week that gives UK listed Tullow Oil rights in four exploration blocks: 12A and 10BB near Isiolo and 10A and 13T in Turkana.

Under the agreement, Tullow Oil will pay $10 million (Sh800 million) to Africa Oil as compensation for half of the money so far spent on the blocks, giving it a 50 per cent stake in the venture.

“Tullow will pay to Africa Oil approximately $10 million, representing 50 per cent of Africa Oil’s past costs in the blocks, subject to a post-closing audit,” Africa Oil president Keith Hill said. The consideration also covers one exploration block in Ethiopia.

Tullow will also fund Africa Oil’s working interest share of future joint venture expenditures in these blocks up to $23.75 million (Sh1.9 billion). 

Although Kenya is yet to approve the transfer, its chances of being endorsed are high in view of Tullow’s success in discovering a combined oil reserve of two billion barrels in Uganda over the last two years.

The firm also has a track record in exploring for oil on land masses, a factor that informed Uganda’s decision to extend one of Tullow licences that expired last week.

“It is in our interest to have a company with the stature of Tullow Oil. They believe there is something in Lake Turkana,” said Energy permanent secretary Patrick Nyoike.

Kenya’s exploration laws require any change of control or operator of blocks to be approved by the Energy minister

Africa Oil entered the Kenyan market when it bought out East African assets of Lundin Petroleum in March 2009.

It is acquiring seismic data in Block 10BB in Northern Kenya with Block A in Turkana’s Loperot set to follow next year.

The Canadian firm recently raised $25 million from shareholders to strengthen its cash position.

The company is also evaluating a potential gas discovery in Bogal well within Block 9 in Isiolo area, which has revived interest in oil exploration in the country.

The interest had been dented after Woodside of Australia hit a dry well in the Lamu area.

The entry of Tullow to Kenya’s oil search follows the exit of Lion Energy from Block A and reduced stake in Block 10 BB, in exchange for $2.5 million in cash and 2.5 million shares of Africa Oil, which had bought Block 10BB from Turkana Drilling Company last year for $10 million.

Lion Energy held 25 per cent interest in Block A and will reduce its stake in Block 10 BB by half to 10 per cent.

Tullow Oil’s expenditure cap of $23.75 million will cover seismic tests in the blocks and drilling costs for at least 2 wells.

Once the expenditure cap has been met, Africa Oil will be responsible for its working interest share of future costs. 

“The transaction also means that any resultant discoveries will be operated by one of the main partners in the proposed pipeline project to export crude from this highly prospective developing region,” said Mr Hill.

Exploration activities in Kenya have been scaled up following up discoveries of oil in Uganda, natural gas in Tanzania and methane in Rwanda, all with rock structures similar to those of zones mapped for search in Kenya.

Experts say the discoveries have made it easier for smaller companies to raise funding for exploration in Eastern Africa, stretching from Ethiopia to Mozambique.

That has informed the transfer of exploration rights - known as farm ins - including the transfer of East African Petroleum (EAX) interests to Afren.

More rights

“Farm in farm outs is normal practice. Speculation will continue until oil is discovered, “added an industry expert who did not ant to be named.

Africa Oil which last year bought Block 10BB for $10 million from Turkana Oil Drilling Company and has negotiated to acquire more rights in block 12A and 13T presently held by Canada’s Platform.

This would entrench it largest owner of exploration acreage in Kenya.