East Africa's oil explorers under pressure, but ploughing on
Relatively low operational costs should help East Africa's existing onshore oil exploration activities weather the storm caused by low oil prices
But governments may need to make the terms of future licensing rounds more attractive - and finally get a regional oil pipeline project off the ground - if they are to entice drillers to take up fresh acreage.
That East Africa still remains an attractive place for oil explorers has been underlined by the decision of struggling Tullow Oil to focus its exploration on the region. On 11 February, Tullow reported a $2 billion pretax loss and withheld its final dividend payment for the year as revenues from its global operations slumped. However, the company said it would now concentrate on finding new reserves in Kenya, as well as neighbouring Uganda, where it already is involved in an exploration joint venture in the Albertine basin with France's Total and China's China National Offshore Oil Corporation (Cnooc).
While the industry's regional focus may be on the potential offshore gas riches of Mozambique and Tanzania, and it is not a great time to be investing in oil exploration in most places at present, East Africa does at least offer some benefits.
"The initial working up of working petroleum systems has been done. These are onshore operations, which are relatively low cost and there are economies of scale, because there are already existing discoveries, so if you find new reserves, they are going to be that much cheaper to develop," says Thalia Griffiths, senior Africa oil analyst at consultancy Cross-border Information.
Last year, Uganda increased its estimate of the country's oil reserves by more than 80% to 6.5bn barrels, following a fresh study, which also indicated it may have commercial gas deposits. For Kenya, Tullow doubled the resource estimate for its acreage there to 600 million barrels in January following its most recent finds. The Kenyan government has estimated that drilling programmes will boost the country's oil resource to over 1bn barrels.
Tullow, its partners and the region's other onshore explorers, such as Africa Oil in Kenya, will be hoping that by the time any production from East African operations is possible, oil prices will have recovered and revenues will be boosted. Given the difficulties already faced in bringing oil to the production phase in Uganda, it could well take several years to bring Kenya's oil to the market.
In Uganda, Tullow, Total and Cnooc signed a memorandum of understanding with the Ugandan government in February 2014 laying out the framework for a plan to commercialise existing finds, involving the production of more than 200,000 barrels a day (b/d) of oil, an export pipeline and a refinery with an initial capacity of 30,000 b/d.
However, getting the project off the ground remains contingent on the completion of a multi-billion dollar 1300 km pipeline network designed to link landlocked Uganda and South Sudan to coastal Kenya, which is vital if Ugandan oil is to gain access to world markets. That remains at the planning stage after years of arguments over the its route and how much oil it should carry, with Uganda insisting until recently that more of its oil should be used in its own refinery - not the most lucrative option for the developers.
While compromise was reached over the size of the refinery, which can be expanded later if production warrants it, the pipeline still remains at the planning stage. As and when the pipeline does get the green light, it is likely to take around three years to build. The economics of the oil industry may look very different by then, if oil prices recover, but financiers and governments have to work in the current climate. A pledge by the World Bank's International Finance Corporation to provide $600m of loans to the project shows support from the international community, but it remains to be seen how quickly funding for the rest of a project that could cost $4-5bn can be raised in an era of low oil prices.
Although exploration already under way in Uganda and Kenya is likely to push ahead, the pace of development is far from certain. Tullow, for example, may be committed to the region, but will be funding operations from a much reduced capital expenditure pot. Of the company's 2015 capex of $1.9bn, the company has allocated $170m to pre-development activities supporting final investment decisions in Uganda and Kenya, and $100m to exploration and appraisal drilling in Kenya.
Such restrictions on spending are likely to require some serious readjustments of expectations by East African governments when trying to entice oil companies to explore in virgin acreage where there is little existing infrastructure and no previous finds close at hand to boost their attractiveness. A year ago, with oil prices over $100/b, companies may have been tempted to pay top dollar even to enter highly speculative plays. Now, they are likely to be looking for much more attractive terms in future licensing rounds.
"East African governments will need to adjust to the new realities caused by the low oil price and restricted budgets, if they want to launch successful licensing rounds," said Griffiths.
That may mean improved financial terms, but may also require governments to be more realistic about how many related infrastructure and development projects often lumped in with drilling deals they can expect oil companies to finance and construct.
Both Uganda and Kenya have plans to offer new acreage in coming months. Ugandan energy ministry sources told Petroleum Economist in January that its round was still on track to be announced in the first half of 2015. The ministry has previously said at least 13 new blocks and some relinquished licences would be on offer. Kenya has plans to hold its first ever licensing round, though this may be delayed.
Exploration programmes are also under way in both Tanzania and Ethiopia, though so far these have harvested limited success.
So, although the low oil price may well affect the pace of onshore oil developments in East Africa, government policy towards the industry is also likely to play a major role. Governments may be reluctant to forego lucrative upfront payments and commitments from oil companies, but they will also be reluctant to scare off potential investors in a sector that is likely to help up support their economies in years to come. Ugandan leader Yoweri Museveni faces presidential elections in 2016 and will be keen to convince voters that oil revenues will roll in soon, not least because the government has run up large debts on infrastructure spending recently, It has also received support for some development projects from China in anticipation that Cnooc's investment in the country will pay off, so the pressure is on to deliver.