International firms searching for oil have warned that the continued fall in global crude prices could force them to scale down exploration activities in Kenya.
Toronto-listed Africa Oil, which together with Tullow Oil found more than 600 million barrels of recoverable reserves in Turkana, told Reuters that its plans in Kenya might be brought into question if the long-term outlook saw prices dropping below $70 a barrel.
Tullow reckons that “short-term variations” in oil prices would not cast a shadow over projects that may last decades while Texas-based Camac Energy, which has oil exploration rights to four Kenyan blocks, says it could not sustain current operations if crude prices continue to fall.
Oil discoveries in Uganda and Kenya by Tullow Oil and gas deposits found off Tanzania and Mozambique have turned east Africa into a frontier for hydrocarbon exploration.
But the falling crude prices, which stood at $73 after hitting five year lows, could dim exploration activities.
The cheap crude oil coupled with the introduction of a five per cent capital gains tax could discourage deal making in Kenya’s exploration business.
“We are assessing the situation very keenly. We haven’t reached a situation that requires us to review our expenditure yet but we won’t be able to sustain our present capacity if crude prices continue to fall,” Agustin Nkuba, managing director of Camac Energy, told the Business Daily on Tuesday.
“The funds that we invest in exploration projects come directly from production elsewhere. A case of dramatic drop below $65 per barrel will definitely force us to take equally dramatic cost cutting measures such as downsizing staff,” said Mr Nkuba.
Crude oil prices have fallen by nearly a quarter since July, leaving exploration firms with thin margins.
The Organisation of the Petroleum Exporting Countries had been expected, at a meeting last week, to trim output to try to rebalance the market, but could only agree to maintain existing production targets.
Analysts’ forecasts crude oil prices at an average of $65 in 2015 and and $70 for 2016.
The falling prices have left states likes Nigeria and Angola with weak currencies, setting them up for high inflation since they import nearly all their food and consumer goods.
Ghana, which became an oil producer in 2011, has already had to go the IMF route to try to stabilise a plunging cedi and pull itself out of a fiscal crisis caused in part by lower-than-expected oil receipts.
Uganda and Kenya are on track to become oil exporters by late 2018 or early 2019.
The price of petroleum products has this month fallen to its lowest level since August 2012. Kenya imported fuel last month at $87.35 per barrel, down from $97.95 the previous month.
Fuel also influences the cost of living measure in the economy that depends heavily on diesel for transport, power generation and agriculture, while kerosene is used in many households for lighting and cooking.