Woodside Spuds Offshore Well; Kenya's Oil Future to Be Determined in 2007

Drilling Begins for Oil in Kenya

Offshore drilling has begun in Kenya as Australia's Woodside Petroleum spudded the Pomboo-1 exploration well in deepwater Block L5. By the end of next year, when other test wells have been drilled, analysis of initial results should tell whether the country has the commercial deposits to become an oil-producing nation.

Woodside leads a consortium of independent exploration companies and is the operator in Block L5 with a 30% stake, Dana Petroleum (30%), Repsol (20%), and Global Petroleum (20%) are the other partners (see Kenya: 10 August 2006: Dana, Woodside and Global Petroleum Get Ready to Sink Exploratory Wells in Kenya).

Woodside has said that it will spend more than US$90 million to drill a single well in Blocks L5 and L7 in the Indian Ocean. Woodside has previously stated that the Kenyan coast is "the most prospective part of East Africa with several large geological structures hosting multiple targets similar to those found on Australia's North-West Shelf". Dana Petroleum has also said that it believes that the blocks could contain over one billion barrels each. The first well is being drilled in 2,200 metres of water to a planned total depth of 5,005 metres. The drilling will be undertaken by the Japanese deepwater drilling vessel MV Chikyu.

Oil Deposits Will Not Bring Employment Opportunities

The drilling is taking place about 135 km off Lamu, but residents have already started believing that a future living off the riches of petrodollars is only a short time away. Mary M'Mukindia the managing director of Kenya's National Oil Co. (NOCK) is therefore having to calm the levels of excitement by organising seminars and public rallies to educate the local population. Even if commercial oil deposits are discovered in the Lamu basin, revenue is not expected to start rolling in until 2011-14. Another problem that the residents of Lamu are set to experience is that oil production would not increase the employment opportunities as the local workforce is largely unskilled and most jobs would be contracted out.

There is also the need for an independent environmental impact assessment as Lamu's waters represent the livelihood of its fisherman and despoliation of the environment would be a catastrophe for them and for the vital tourism sector. A National Environment Management Authority (NEMA) investigation is being carried out, but NEMA represents the government, which has a vested interest in oil being found in Lamu's deepwaters.

China to Prospect for Oil in Kenya

In April 2006, Chinese President Hu Jintao flew to Kenya to meet President Mwai Kibaki and conclude a deal for the China National Offshore Oil Corp. (CNOOC) to prospect for oil in mainly offshore areas (see Kenya: 27 April 2006: Chinese President Agrees to Offshore Oil Exploration Deal During State Visit to Kenya). Fu Chengyu chief executive of CNOOC Ltd, announced last week that the company’s subsidiary, CNOOC Africa Ltd, would take on six production-sharing contracts (PSCs) in Kenya. These six PSCs cover Blocks 1, 9, 10A, L2, L3, and L4 in three basins of Lamu, Anza, and Mandera, with a total area of 115,343 sq. km. This marks the first time that CNOOC has explored in East Africa (see Sub-Saharan Africa: 1 May 2006:China Increases Security of Supply with Energy Deals in Nigeria and Kenya). The agreement appears to be a low-risk investment for Kenya, with China taking on all exploration costs. While Kenya is seen as a highly prospective region, China's deal with Kenya can be seen as an insurance policy for its government, which is desperate to protect its investment in neighbouring Sudan, which ships the majority of its oil to Chinese markets. Most of Sudan’s oilfields are in the centre or south of the country and the Kenya Pipeline Corp. (KPC) has offered to build a pipeline transporting oil from southern Sudan to the port of Lamu. This could protect Sudanese marketing routes in the event that the south of the country decides to secede under the terms of its six-year interim peace agreement with the government in the Sudanese capital, Khartoum.

KPC managing director George Okungu told officials from southern Sudan that Kenya's position on the eastern coast of Africa and its experience in pipeline management would best enable Sudan to exploit its proven oil reserves (see Kenya: 8 April 2006: Kenya Pipeline Corporation Wants to Build Pipeline from Southern Sudan to Kenyan Coast). However, it is believed that a pipeline connecting south Sudan to the Kenyan coast would cost around US$1.4 billion, which makes the idea very much a long-term project.

Outlook and Implications

Next year will be crucial in determining whether Kenya has a future as an oil-producing country. Woodside, which has already spent 852 million Kenya shillings (US$12 million) in exploration work and seismic data since 2003, is committed to drilling at least two wells over the next 12 months, and it will sink 13 wells throughout Africa in the next year.

Kenya will be hoping the test results show hydrocarbon deposits, not least because its neighbour Uganda proved this year it has commercial amounts of oil and is set to become an oil-producing country by 2009. Ugandan President Yoweri Museveni has stated his government will launch an "Early Oil-Production Scheme" that will see the creation of a mini-refinery next year that will produce diesel, kerosene, and heavy oil by 2009. At a later date, the country will be able to produce gasoline (see Uganda: 10 October 2006:President Museveni Says Uganda Will Begin Producing Oil in 2009).

The question of whether Kenya discovers oil through its exploratory activities also has downstream implications. The Kenya Petroleum Refineries Ltd (KPRL) needs around 21 billion Kenya shillings (US$300 million) to redevelop the country's Mombasa refinery; in its current state it is a burden on the economy. The inefficient refinery costs the taxpayer 5 billion Kenya shillings a year as a result of its poor performance; any upgrade to the refinery would need to enable it to produce environmentally friendly low sulphur diesel as the current refinery does not contain a de-sulphurisation plant. Also, by modernising the Mombasa refinery, one of the government's aims—of increasing Kenya’s production of liquid petroleum gas—could be achieved. If drilling results show a future as an oil-producing nation, this could lead to a much larger expansion and investment in the Mombasa refinery.

However, if over the next 12 months no commercial oil deposits are discovered in Kenya it could lead to the refinery being shut down and transformed into a mass storage facility for imported refined products. George Wachira general manager at the Petroleum Institute of East Africa said that it cost 2-3 Kenya shillings per litre more to refine a litre of fuel compared with importing refined products from the Middle East, where large and efficient refineries take advantage of economies of scale. (see Kenya 1 November 2006: Inefficient Kenyan Refinery a Burden on Economy). With Uganda already saying that it will construct a mini refinery on the basis of its known crude reserves, this could place Uganda in control of the East Africa fuels market.

Now the first well has been spudded in Kenya—the first offshore well for 28 years—the country has stepped up its programme to determine whether Kenya has a future as an oil-producing nation. This has been accompanied by the country's Energy Minister Kiraitu Murungi publishing a gazette of 38 exploration blocks in the country, in total covering 115,242 sq. km. Kenyans and energy industry observers will gain a clearer in 2007 as to whether the country will join Sudan and Uganda in having proven hydrocarbon reserves.