Low oil and gas activities open window for reforms in sector ahead of rebound

Opinion and Analysis

Tullow Oil’s Ngamia 3 exploration site in Nakukulas, Turkana South. Oil and gas sector has slowed down due to sharp drop in oil prices on the global market. PHOTO | FILE 

By GEORGE WACHIRA

In Summary

• Kenya should effect laws as well as projects to boost investor confidence.

Over the past year, low oil prices have slowed down upstream oil and gas investor activities not just in Kenya but across the world. History tells us that high and low oil price cycles persist for about five years, which means we should expect a price rebound by about 2020.

This is the time when the ongoing reduced investments, prompted by current low prices, are expected to create a net oil supply deficit that shall strengthen prices.

Many, including Organisation of the Petroleum Exporting Countries, are projecting that oil prices shall be in the region of $80 (Sh8,300) per barrel by 2020. Today prices are slightly below $50 (Sh5,196.50).

As we wait for prices to rise, Kenya should not relax as there are a number of key areas the country can be working on. These are mainly low cost items that could add value to the oil and gas sector and prepare us to speedily scale-up the sector when high prices do come back.

And this is exactly what the National Oil Company of Kenya (Nock) plans to undertake. The company recently announced that they would undertake 3D seismic surveys in the mainly gas-prone coastal blocks.

This is a proactive project that shall improve and expand the database of geological information. The information shall improve the quality of prediction on presence or absence of hydrocarbons, reducing investor risks and costs.

The 3D information improves marketability of oil blocks while making it cheaper and quicker for investors to commit investments. The Nock project is worth the cost and effort at this time when not much exploration is happening in the sector.

However, it is important that the exercise is expanded to cover most of the other potential oil and gas prospects in Kenya.

By coincidence, Mining secretary Najib Balala also plans similar surveys to map out locations of various minerals in Kenya.

Absence of this critical information has always slowed down marketing of Kenya’s mining prospects. With the surveys, the two extractive ministries (petroleum and mining) will in future be better armed with more specific information when they go out to promote sector investments.

The other critical area that the Ministry of Energy and Petroleum should focus on because it improves investor confidence is implementation of upstream legal, regulatory and institutional reforms.

Fully working regulatory systems should be in place long before the market rebounds, because good laws and regulations will always be in the investors’ check-lists.

The ongoing reduced oil and gas activity does not mean reduced urgency for upstream regulatory reforms. It gives us a less cluttered window within which to accelerate these reforms.

Once the Upstream Petroleum Bill which is currently in Parliament is enacted, there will still be a litany of regulations to be drafted and institutions to be set up.

Luckily for Kenya, a $50 million (Sh5.2 billion) World Bank loan under the Kenya Petroleum Technical Assistance Programme has already been effected to fund technical and institutional capacity building in the oil and gas sector.

Funding should, therefore, be the least of challenges in the implementation of the sector capacity and systems enhancements. The other critical area that requires fast tracking is development of relevant technical skills which are required by the oil and gas sector as early as in the next couple of years.

Crude oil production development and an export pipeline construction shall require technical skills which we should be developing by now.
By the time crude oil economics improves, Kenya and Uganda should have in place the infrastructure to commercialise the already discovered oil in Turkana and Lake Albert oilfields.

It is encouraging to note that the two governments and the investors have acknowledged the need to urgently work together to fast track the pipeline project.

The final decision on the pipeline routing has already been made. The pipeline ownership structure also appears to have been agreed with a joint venture company as the investment vehicle to carry the two governments and the private investors. The final project costs and tariffs can only be ascertained once the Front End Engineering Design studies are finalised.

In the meantime, the two governments should as early as possible begin thinking through the land acquisition process knowing quite well that this can be a lengthy process due to intrigues (and often politics) of vested local interests.

It is not as if nothing is happening on the ground in the oil and gas sector in Kenya. Investors in Turkana continue with the appraisal of their discoveries in readiness for crude oil production development planning. This shall confirm (or amend) the figure of 600 million barrels of oil in place announced a couple of years ago.

An investor by the name of ERHC that holds the northwest-most block (11A) in Turkana is understood to be planning to spend about $30 million (Sh3.1 billion) to drill an exploratory well early next year.

Other licensees are said to be undertaking limited scopes of work to at least meet their work plan obligations under their production sharing agreements.

Yes, as a country we have enough on our plates to keep us busy as we wait for the sector activity to increase, as it indeed will.

Mr Wachira is director at Petroleum Focus Consultants. Email: wachira@petroleumfocus.com