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Kenya edges closer to the big league with drilling campaigns

New drilling campaigns underway will decide whether the country joins its neighbours as an East African upstream player

Kenya's plans for its nascent hydrocarbons industry are ambitious. While it remains to be seen whether the government can harness the finance needed to realise its vision of becoming a regional export hub, a series of oil discoveries suggest that domestic reserves needed to underpin it may exist.

Tullow Oil's Ekales-1 wildcat find on Block 13T, announced in September, was the company's fourth consecutive discovery in the Lokichar Basin in northwest Kenya since it started drilling there in 2012. On making its previous discovery, at its Etuko-1 well in nearby Block 10BB in July, the company declared that "basin volumes are now expected to exceed the threshold for development studies to commence". That discovery also prompted the firm to increase its resource estimate for the Lokichar Basin to 300 million barrels from a previous figure of 250m. Tullow has suggested that Kenya's Rift Valley could hold as much as 10 billion barrels of oil, though exploration remains at an early stage. 

Such news is music to the ears of the Kenyan government, which is keen to press on with a plan to turn Kenya into a regional oil-transit and export hub focused on a proposed new terminal at the port of Lamu in the north of the country (see Export hub project starts to take shape). Kenya is eager to catch up with its neighbours in East Africa, notably Uganda, Tanzania and, further south, Mozambique, whose oil or gas finds have brought the region a new reputation as a major new hydrocarbons province. Kenya's progress, though, has lagged.

The government was already keen to build pipelines to bring oil from landlocked neighbours Uganda and South Sudan to its planned hub. If Kenya can add its own reserves to that pool, then so much the better. Tullow, which is also a key player in developing oil reserves in Uganda, further down the Rift Valley, has been keen to play up those prospects. It has said Ugandan reserves alone would support a 250,000 barrels a day (b/d) pipeline to the Kenyan coast, with the first deliveries possible in 2018. Now it is suggesting a 1,400 km pipeline of 500,000 b/d or more based on both Kenyan and Ugandan reserves could be feasible and operational by that date.

Even before then, believes Tullow's chief operating officer, Paul McDade, Kenya could start exporting oil by as early as 2016, well before pipelines complete, by using road and rail to transport it to the port of Mombasa.

News of Tullow's discoveries is likely to pique interest in Kenya's other onshore hydrocarbons prospects. However, much existing activity is focused off the coast, as explorers seek to emulate the discovery of huge offshore gas finds in Tanzania and Mozambique.

Hopes of doing so surged in September 2012, when Kenya's first offshore gas find was made by Apache Corporation at its Mbawa-1 well in block L8 of the offshore portion of the Lamu Basin. The well was plugged, having failed to find commercial amounts of gas, but gave encouragement that drillers could have better luck elsewhere in the area. A big find has not materialised since, but more drilling is planned for coming months.

BG Group, already a major player in Tanzania, plans to start exploratory drilling in Kenyan offshore acreage where it is the operator - blocks L10A and L10B in the Lamu Basin - in 2014, once it has interpreted a 4,700 square km 3-D seismic survey. Anadarko Petroleum failed to find commercial quantities of oil from the Kubwa well it drilled in its offshore block L07 earlier this year, but did say it had found evidence of a working petroleum system with reservoir-quality sands there. Since then, the firm has moved on to drilling the Kiboko prospect on block L11B.  Meanwhile, UK-based Afren is assessing seismic in preparation for a two-well drilling programme on its L17 and L18 blocks, which straddle the coast, adjacent to the Tanzanian border.  

Tullow's drilling plans

Onshore, Tullow is planning to drill several further wells, building on its growing knowledge of the Lokichar Basin. Drilling and other analysis at the Ekales-1 well indicated a potential net oil pay in the Auwerwer and Upper Lokone sandstone reservoirs of 60-100 metres. The company is now carrying out future flow testing to confirm its results. Ekales-1 is located between Tullow's other discoveries, Ngamia-1 and Twiga South-1, and seems to have similar reservoir properties. 

July's discovery at Etuko-1 came after the well had been deepened to penetrate Miocene sandstones of the Lower Lokhone formation, where some 50 metres of potential net pay was encountered. That added to more than 40 metres of net pay confirmed in shallower reservoirs earlier.

Once operations at Ekales-1 are complete, the rig will move to a prospect named Amosing-1, which is south of Ngamia-1. Meanwhile, drilling at Tullow's Agete-1 well in block 13T, 6 km north of Twiga South, started in mid-September and the company is planning to bring a third rig into operation by the end of the year. Tullow's non-operator partner in all these discoveries, holding 50% of them, is UK-based Africa Oil.

The government has urged international oil companies (IOCs) to drill faster, saying it plans to introduce requirements for them. There are also plans to add seven more blocks to the country's 46 existing ones. Those existing licenses are distributed among 23 firms, with one held by the National Oil Corporation of Kenya

But how much progress is made will depend not just on what comes out of the ground or seabed, but also on the confidence drillers have in Kenya's investment and operating framework - and that is still lacking. Recognising the drag on development that such uncertainties could have, Davis Chirchir, Kenya's Energy and Petroleum Secretary, has said the country needs to speed up reform of petroleum sector legislation - last updated nearly three decades ago - as companies remain unclear about the terms of commercialisation of finds, especially in the gas sector. In July, Chirchir said the government's priority was to finish drafting new gas sector regulations and updating the existing petroleum legislation, and push them into force, though a timetable has yet to be announced.

As with similar legal revamps taking place elsewhere in the region, the IOCs are keen to see a separation of policy for upstream, midstream and downstream activities to make pricing structures clearer.

Export hub project starts to take shape  

With or without its own oil, Kenya hopes to be a key energy transit state for the region. If the financing can be found, a large export terminal at Lamu port will become the centrepiece of a multi-billion dollar project designed to bring prosperity to the largely impoverished north of Kenya and put the country itself at the heart of East African hydrocarbons and freight trade.   

The Lamu Port and South Sudan Ethiopia Transport (Lapsset) Corridor project, formally launched in March 2012, encompasses the building at Lamu of a port three times the size of that of Mombasa, capable of handling some of the world's largest tankers, as well as an oil refinery with 120,000 b/d capacity and oil pipelines linking Lamu to southern Sudan and Ethiopia. A pipeline to Uganda's oil reserves (and any oil that Kenya finds itself) is also likely to be part of the development. The cost of the whole Lapsset project, if it comes to fruition, has been estimated at more than $25bn. 

Some progress has already been made. In April, a Chinese firm, China Communications, was awarded a $480m contract to build the first three berths of 32 scheduled to be built at Lamu port by 2030. However, the speed with which funds can be raised to enable the rest of the project to be implemented remains uncertain. The port alone is estimated to require more than $5bn to complete.

Already several elements of the Lapsset project are behind the originally envisaged schedule, and doubts remain over whether South Sudan's oil will even go to Lamu. The fledgling state has not ruled out sending its oil to the coast via Ethiopia and Djibouti, rather than Kenya, and it may need to find new oil reserves to top up declines in its existing fields to make any new pipeline worthwhile. 

Another uncertainty is the security situation in the north of Kenya, given its proximity to the border with Somalia, the heartland of the al-Shabab militant group believed to have organised September's deadly attack on Nairobi's Westgate shopping mall.

However, after prolonged talks, Uganda now appears set on sending its oil to Lamu, providing a solid basis for development of the port. If Kenyan oil can be added to that, funding for the oil-related elements of the Lapsset project, at least, would be more likely to flow - and if there is enough oil, then financing the regional transport infrastructure component would be easier too.

Plans for to build a new refinery at Lamu have also benefitted from wrangles in Uganda, which have delayed plans to develop oil processing capacity and cross-border infrastructure there, leaving Kenya in pole position to assume the mantle of regional hydrocarbons hub.

The improved prospects for the Lamu refinery may have partly informed October's decision by Essar Energy to exercise a put option to sell its 50% stake in Kenya's - and East Africa's - only existing refinery, in Mombasa, to the government for $5m. Essar had planned a project, estimated to cost more than $1bn, to boost the refinery's capacity to 4m tonnes of oil a year from 1.6m tonnes, but says it now believes the upgrade is "not economically viable in the current refining environment".

The refinery has been dogged by yield losses attributed to operational inefficiencies. Essar originally bought its stake for $7m from BP, Chevron and Royal Dutch Shell. The other 50% stake is already owned by the Kenyan government. 

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