Turkana County oil discovery lifts Kenya’s long-term growth prospects

Visitors are welcomed to the Tullow stand at a petroleum conference and exhibition in Kampala last year.  The Britsh firm has struck oil in Kenya.
Visitors are welcomed to the Tullow stand at a petroleum conference and exhibition in Kampala last year. The Britsh firm has struck oil in Kenya. 

Monday’s announcement that Tullow Oil, the United Kingdom based petroleum explorer, has found oil in Turkana has resulted in high optimism that Kenya’s economy could diversify further and bring down the cost of doing business and living, benefitting companies in all sectors and consumers.

Initial reactions from different analysts and economic experts show that expectations are high that if the oil discovered becomes commercially viable, firms particularly in construction, power, manufacturing and financial services would be the initial beneficiaries as exploration and subsequently extraction begins in earnest.

“While it is too early to determine the size and it is likely not commercial by itself, it is the first oil discovery in East Africa post Uganda,” said analysts at Renaissance Capital in a research note Tuesday. 

The Russian based investment bank said that the hope would be that, similarly to Uganda, more discoveries would lead to a commercial development and this would see the country’s economy become less reliant on agriculture diversifying into oil and oil based products.

On Monday President Kibaki announced that the country had made a “major breakthrough” with the discovery but cautioned that it had marked the beginning of a long journey which could lead to Kenya becoming an oil producer.

Tullow Oil, which has been exploring at the Ngamia-1 well located in the Turkana County’s Block 10BB said that it had struck oil at a depth of 1,041 metres which has been successfully logged and sampled.

The oil exploration company said that the well will now be drilled to a depth of approximately 2,700 metres to explore for deeper potential.

Renaissance Capital said that if the oil is found to be commercially viable, it would reduce Kenya’s reliance on the agricultural sector not just for economic growth but also growth in household consumption.

The agricultural sector is currently contributing in excess of 25 per cent of the economy followed by transport and communication, wholesale and retail and manufacturing which are contribution approximately 14, 12 and 11 per cent respectively.

It is also employing about two-thirds of the workforce and is heavily reliant on weather patterns which impacts on the size of the harvest and consequently household consumption which makes up 75 per cent of gross domestic expenditure, the investment bank said.

Weather patterns also have a major impact on electricity, more than 50 per cent which is generated with hydropower and substituted with diesel during drought conditions.

“Overall this could massively improve the Kenyan macro environment and should ultimately lead to increased valuations of banking and consumer names,” said Renaissance Capital.

The investment bank said that listed firms such as KCB Group, Equity Bank and East Africa Breweries stand to benefit if the oil became commercially viable as consumers would have more disposable income and the cost of doing business and living in the country dropped.

Jaswinder Bedi, chairman of Kenya Association of Manufacturers said that all industries will benefit as energy costs come down adding that the country would be able to generate electricity with crude oil as opposed to heavy fuel oil which is expensive and dependent upon world prices.

“Our competitiveness is also hurt with high oil prices and the balance of payments including exchange rates affected equally,” he said.