Insufficient capital locks out Kenyan banks from mega oil exploration deals

The discovery of oil in Turkana County by British global oil and gas exploration giant Tullow Oil has yielded a sharp rise in investor interest in Kenya over the past two months.

Of specific interest is the rise in fundraising activities of international upstream players in the global oil industry.

For instance, UK firm Ophir Energy kicked off its fundraising through new equity issues at the London Stock Exchange, raising $240 million (Sh20 billion) just weeks before Tullow Oil made public its oil find in Turkana.

(Read: Firm unveils plan to drill for oil off the Lamu coast)

The flurry of activity in international financial capitals brings a whole new aspect to the Turkana oil find, which mainly begs the question of whether our financial system has the capacity to finance the mega exploratory deals.

The answer is an emphatic no, for the moment. If you run a comparative analysis, of say, the Nigerian banking sector (Nigeria because it is Africa’s largest crude oil exporter) and the Kenyan banking sector, you realise Kenya still has a lot of catch-up to do.

In 2011, core capital for the Nigerian banking industry including injections from state-owned “bad bank” AMCON stood at Sh532.1 billion ($6.26 billion).

AMCON is the state-owned entity that was created to rescue troubled banks during the bad loans crisis that engulfed the country’s banking sector in 2009.

Data from the Central Bank of Kenya shows that total capital and reserves for the banking sector stand at Sh291 billion (US$3.43 billion). This is almost half of the Nigerian Banking sector. It puts into perspective the relatively small size of Kenya’s banking system, and its apparent inability to successfully finance any big oil and gas exploration activities.

Major upstream oil giants who are quite keen on the local exploration scene are likely to bypass the local financial markets as they seek to finance their ventures.

Ophir Energy’s fund raising effort raised to an excess of $518 million (Sh43 billion) the total amount of money that investors have raised for oil exploration activities in Kenya since January. This figure is set to grow exponentially and local banks might have to seek new ways to grab a part of this huge cake otherwise they are set to miss out.

A further analysis of the local banking scene shows that the top five banks-- (KCB, Barclays, Equity, Standard Chartered and the Co-operative Bank) hold core capital amounting to Sh122.46 billion or $1.44 billion.

This illustrates the inability of the top five banks to take on such huge transactions, both on an individual basis or collectively. But local banks still have some avenues to prop their capital adequacy profile going forward.

First, they have the option of going to the markets to raise cash; in fact 8 of the 10 listed banks are set to hold right issues in the next two years as they seek to match their capital profiles with their balance sheet growth plans. Secondly, they have an option of teaming up with global investment banks who are quite intent on setting up shop in Nairobi (and some already have).