Oil explorers retain bet on Kenya despite falling global prices

UK oil explorer Tullow will continue pumping billions of shillings into its drilling and production activities in Kenya, putting on a brave face in the wake of falling crude prices that have forced major explorers to review their operations worldwide.

Tullow, which has recently announced plans to slash its capital expenditure for 2015, said it will concentrate its activities in Kenya and Uganda as it seeks to ride out the wave of a challenging global business environment.

“Our East African projects are long-term, multi-decade projects and variations in the oil price, which are expected over the life cycle of these very long-term projects, do not fundamentally change their value,” Tullow said in an interview.

Drilling a deep offshore well can cost up to $150 million (Sh13.6 billion) while an onshore equivalent costs between $20 million (Sh1.8 billion) and $25 million (Sh2.26 billion).

The ongoing collapse of crude prices — which has nearly halved to Thursday’s average of $62 a barrel in five months — has cast dark clouds over Kenya’s hope of joining the league of oil-producing nations.

The sinking oil prices saw Tullow’s share price at the London Stock Exchange (LSE) drop to a one-year low of 350.80p on Tuesday — from a high of 909.5p,  sparking speculation of a possible takeover from an unnamed world oil major.

READ: Cheap crude dims Kenya oil exploration outlook

Tullow and its partner Africa Oil have struck commercially viable oil deposits so far totalling about 600 million barrels in Kenya’s Lokichar basin in Turkana.

“Our exploration spend would be heavily focused on Kenya,” Tullow said amid forecasts that the price of oil could dip further next year.

Aidan Heavey, the Tullow chief executive, said in a November update that the company was reviewing its capital expenditure plans for 2015 that would see the overall oil and gas exploration budget substantially slashed.

“Our overall exploration spend will be significantly reduced and will focus primarily on East Africa where we have major basin-opening potential,” Mr Heavey said in an update.

Kenyan oil fields are Tullow’s second-most valuable asset after the Jubilee oil field in Ghana.

Morningstar Inc., a Chicago-based research and investment management firm, has put the break-even price for oil from Lokichar basin at about $50 per barrel.

“These are all light oil assets that are likely to have very attractive economics relative to most new developments. We estimate these fields would break even at an average price of below $50 per barrel,” analysts at Morningstar said.

Tullow declined to comment on the figure it is working with as the break-even price per barrel in the Kenyan fields.

“We cannot comment on break-even prices as they are commercially sensitive numbers,” Tullow said.

ALSO READ: Atlas upbeat on Kenya oil prospects despite falling prices

London-listed explorer BG Group said it will cautiously continue with plans to spend Sh14.4 billion ($160 million) on drilling for oil and gas at its two offshore blocks located East of Mombasa island.

“Our current plan is to continue to carry out exploration activities in Kenya next year. We continually review our activities across all operations globally in a lower oil price environment,” the company said in a statement.

Kenya has so far licensed 44 out of its 46 oil exploration blocks and to date Tullow Oil is the only explorer to have made commercial discoveries.

The list of global explorers scouring for oil and gas in Kenya includes Texas-based CAMAC Energy, American firm ERHC Energy and Australian company Swala Energy.

Others are Canadian firm Vanoil Energy, Statoil from Norway, London-based Ophir Energy, Italian multinational Eni, Edgo from Jordan, Nigerian firm A-Z Petroleum and State-owned National Oil Corporation of Kenya (Nock).

Perth-based Swala Energy, which owns Block 12B located in the Nyanza Rift, said falling crude oil prices are likely to put the brakes on exploration but vowed on proceed with its Kenyan operations.

“What happens when oil prices fall this far is that companies pull back on their least valuable or most risky projects,” said David Ridge, CEO of Swala Energy.

“The oil prices always go up and down and our planning was never based on the high oil prices we have been seeing. In fact, we see opportunities arising for us because of the low prices and we are actively looking to pursue,” he said.

Nock, which is exploring for oil at seven blocks in the offshore Lamu Basin, also brushed off the concerns over dipping oil prices, saying it will continue the search for oil.

“Our exploration activities will proceed as per plan to facilitate leveraging of oil and gas resources for the benefit of the Kenyan people,” said Sumayya Hassan-Athmani, the CEO of Nock.

Nock hosts a data centre where information relating to petroleum exploration such as seismic data, well logs, well reports, aeromagnetic surveys, as well as gravity data is stored and supplied to explorers.

Atlas Development, a logistics firm that cross-listed on the Nairobi bourse on Wednesday, said its core business of servicing oil and gas companies will not be affected by falling prices.

“Companies are concentrating in areas where there is a higher potential. Tullow (one of our clients) has said that it will concentrate on East Africa,” said Carl Esprey, CEO of Atlas.

But amidst the fears by oil explorers over the fall in oil prices and the uncertainties of injecting further capital outlay, manufacturers and households are celebrating the cheaper oil prices.

Cheaper oil is particularly expected to bring down the cost of producing and distributing goods. A drop in the price of paraffin promises relief to poor households who rely on the fuel for cooking and lighting.

Diesel is the main fuel for machinery in the agricultural sector, which contributes 26.3 per cent of Kenya’s newly rebased gross domestic product (GDP).   

Lower diesel prices results in lower food prices, and a subsequent drop in the cost of living or inflation means consumers spend less to buy the same amount of goods.