Capital Markets

Kenya oil viability to increase with building of pipeline


An oil rig. Photo/REUTERS

The quantity of oil deposits required to make discoveries in North Eastern fields commercially viable will drop five fold if infrastructural projects being undertaken by Kenya and neighbouring countries are to begin.

Details contained in a Morgan Stanley report show that construction of infrastructure connecting the Lamu Port to South Sudan and Ethiopia or Ugandan oil export pipeline would cut back the threshold required to declare the prospective fields commercially viable.

“Management commented that on a standalone basis, a series of discoveries in the Lokichar basin will require 400-500 million barrels (mmbbl) to be commercially viable. However, were either the Ugandan export pipeline or South Sudan Lappsett’s pipeline to be built, the commercial threshold would drop substantially to 70-100mmbbl,” reads the report.

It was prepared by the team after a visit to the sites being explored by Tullow Oil and its partners as well as from presentations by the management of the companies.

But Martin Mbogo, Tullow Oil Kenya country manager, declined to comment on the report arguing that he did not know the researchers’ sources.

Other analysts have also pointed out the need for infrastructure in the area to strengthen the probability of Kenya’s find contributing to the economy.

“In our view, the lack of infrastructure in the region and high cost of development is likely to place the minimum commercial discovery at 50-300 mmbbl, largely contingent on future pipeline access,” read an analysis by Canadian-based Scotia Bank equity researchers to its clients.

The main message from the Scotia Bank is that if there is a pipeline, then even as little as 50mmbbl will be adequate for the discoveries to be commercially viable. But if there is no pipeline a minimum of 300mmbbl will be required.

The researchers have more optimism in the Uganda export pipeline or one done by Kenya than in the Lappset project since the latter could be derailed by South Sudan’s recent agreement with Khartoum on oil exportation.

Juba reached an agreement with Sudan on the pipeline transportation a few months ago after a protracted conflict whereby the former claimed the latter was stealing its oil while under transportation.

The analysts’ reports are likely to push the Kenyan government to be more aggressive in its negotiations with the neighbouring countries on their commitment to carry out the required infrastructural projects.

The analysts also expect the government to seek a larger ownership stake while entering into future exploration agreements following the higher chances of success with the discoveries by Tullow and Pancontinental of oil and gas, respectively.

Finance minister Njeru Githae has introduced a 20-per cent capital gains tax on mineral mining prospects underlining the government desire to capitalise on the revenues from the now robust sector.

Kenya first hit oil deposits in March this year in Turkana but the commercial viability of the projects is yet to be announced.

Kenya’s discovery follows that of other east African countries including Uganda, Ethiopia and South Sudan.

Owing to its strategic position on the coast there have been plans to use Kenya as an exit point of the regional exports.

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