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Deep hopes of oil and the long road ahead

Deep hopes of oil and the long road ahead

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Published by Aamera Jiwaji
Kenya discovered oil deposits in mid 2012 but there are many questions to answer before the country joins the league of oil producing countries
Kenya discovered oil deposits in mid 2012 but there are many questions to answer before the country joins the league of oil producing countries

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| Nairobi Business Monthly MAY

COVER STORY
DEEP
HOPES
OF OIL
AND THE
LONG ROAD
AHEAD
Kenya has discovered oil
in Turkana, but will there
be enough for commercial
exploitation?
BY AAMERA JIWAJI
MAY Nairobi Business Monthly |
GREAT EXPECTATIONS
Tullow’s oil rig at
Ngamia, Turkana,
the remote area
in northern Kenya
that holds the
hopes for oil.
| Nairobi Business Monthly MAY
But the reality is that a long road lies ahead
before the oil in Kenya’s wells is declared commer-
cially viable. Kenyans will have to wait for about
three years or more before the economy can expe-
rience the positive impact of the black liquid, if
indeed it will be found in commercial quantities.
Worse, these oil discoveries may not necessarily
lead to a drop in fuel prices as many are hoping
because, according to analysts, crude prices will
be mainly controlled by international geopolitics
which currently favours a high-cost regime.
The discovery of oil deposits by the British firm,
Tullow, came after a painstaking search that had
eluded many previous explorers, giving fresh hope
to a nation that had almost given up.
The search was Tullow’s first exploration in
Kenya after they had discovered oil in Uganda,
and from experience they say the oil deposit could
be bigger than Uganda’s. Tullow began drilling at
the Ngamia-1 well in northern Kenya in January
2012 with its partner, Africa Oil Corporation, a
Canadian oil and gas company with whom it has
a 50% working interest. Tullow and Africa Oil are
partners in four exploration blocks – Block 10A,
Block 10BB, Block 13T and Block 12A – which are
spread across the Marsabit, Baringo, Malindi and
Kisumu counties.
Ngamia-1 initiated the start of a multi-well drill-
ing programme by Tullow and Africa Oil. Africa
Oil simultaneously began drilling an exploratory
well in Somalia’s Puntland region, the first well
to be sunk in the country since civil war erupted
two decades ago. Three months after the start of
drilling, Kenyan media exploded with news of
the discovery of oil in Kenya.
“There is little doubt that the discovery at
Ngamia 1 in Turkana county is an important mile-
stone in Kenya’s history,” said Tullow Country
Manager for Kenya, Martin Mbogo. “It is encourag-
ing to have found oil so early on and the result
does, to some extent, de-risk other wells in our
programme but this is an early result and there
is still some way to go.”
Unheeded, local and international media
screamed with headlines celebrating the light
consistency of the crude oil discovered, anticipat-
ing that it would yield more gasoline and diesel
per barrel than other discoveries in Africa, and
change Kenya’s fortunes from farming to mining
crude oil and processing it for exports.
Yet the guarded optimism displayed by the
explorers does not hide the possibility – yes,
Kenyans should be prepared for the bad news – that
commercial quantities may be hard to come by.
“While the results from Ngamia-1 are positive … it
is important to understand that good well results
are very different to declaring commerciality,” Mr
Mbogo said.
The caution that he advocates is well placed
judging from the history of oil in Kenya, which has
not been very impressive with some companies
digging up dry wells or hitting just water.
Kenya is categorised as a “frontier exploration
area” because there are no proven commercial
discoveries, which makes it a disincentive for
most major oil prospecting companies. Whether it
was luck that smiled once again or the success of
Tullow’s data acquisition techniques, the reality
is that oil exploration in Kenya has been ongoing
for many years in four exploration basins namely
Lamu, Anza, Mandera and Tertiary Rift.
Oil was first discovered in the Block B, where
Ngamia-1 is located, in 1992 when Shell drilled
two wells. The first well, Elliye Springs-1 was dry
while the second, Loperot-1, intercepted about
10 litres of waxy crude oil. Shell pulled out of the
block because in their assessment there were no
commercially viable deposits.
Exploration activities in block B, subsequently
divided into blocks 10BA and 10BB, became
dormant until October 2007 when Turkana Drill-
ing Consortium was granted a contract for block
10BB in which Loperot-1 well is currently located.
Ngamia-1 is about 25km from Loperot-1.
At the Ngamia-1 exploration well, Tullow has
drilled to a depth of 1,500 metres and discovered
20 metres of net oil pay (which measures the thick-
ness of the oil reservoir). They will continue to
drill to 2,700 metres but are reluctant to predict
the size of the underground reservoir they have
discovered.
“More appraisal wells will need to be drilled in
order to establish the commerciality of the discov-
ery,” Mr Mbogo said. In the coming months, they
will drill another nine wells in the surrounding
area, each at a cost of between $30 million (Sh2.5
billion and $40 million (Sh3 billion).
O
n March 26, 2012, when President
Mwai Kibaki held up a jar half filled
with a sticky black liquid on national
television and announced that Kenya
had struck oil in Turkana, the eyes of most
Kenyans gleamed at the thought of their country
joining the profitable and prosperous ranks of
other oil producing countries.
COVER STORY
OIL EXPLORATION
IS A CAPITAL AND
TIME INTENSIVE
ACTIVITY AND IT COULD
TAKE IN EXCESS OF THREE
YEARS TO DETERMINE
THE COMMERCIALITY OF
THE NGAMIA DISCOVERY
MAY Nairobi Business Monthly |
GREAT EXPECTATIONS
throughout the late 1980s and into the 1990s, and
the company’s earnings from these cast-off fields
funded its exploration of new sites, particularly in
Africa, where recent oil discoveries are to be found.
In 2000, still a small player in the industry with
interests in Europe and Asia, Tullow made its first
big deal when it purchased mature gas fields from
BP in the southern North Sea. Industry giants
sneered but Tullow’s turnover jumped to nearly
15 times higher than it had been two years before.
With the price of crude oil steadily rising in the
market, Tullow bought the South African company
Energy Africa, doubled its reserves and expanded
further in the North Sea, making it the dominant
natural gas producer in the area.
The African success
Tullow’s explorations in Africa continued and
shortly after it made five oil discoveries in Uganda
on the shores of Lake Albert, the company hit its
largest ever discovery in Ghana with an offshore
field of more than a billion proven barrels. Ghana
has begun production and as oil revenues accrue,
its economy is expected to grow by 21% this year,
according to conservative estimates.
Exploration in Uganda has continued paral-
lel with a 56% success rate, and the discovery of
approximately two billion barrels from the nine
(out of 16) wells that Tullow drilled. This discovery
proved geologists right in their predictions about
the connected landmasses linking East Africa
to the world’s biggest petroleum deposits in the
Middle East, and added credence to expectations
of untapped oil reserves in Northern Kenya.
Test and evaluate
Declaring commercial oil find is no small matter.
A whole process of tests must be done, otherwise
a very promising well may empty within a short
time. So Tullow will have to analyse and evaluate
the results from the Ngamia-1 drilling, assess how
well the oil flows and conduct tests on the type of
oil, its density and sulphur content.
“Considerable additional data is required
before a meaningful assessment can be made.
THE SCENT OF OIL: Energy minister Kiraitu Murungi
smells a sample of oil from Ngamia.
“Oil exploration is a capital and time intensive
activity and it could take in excess of three years
to determine the commerciality of the Ngamia
discovery,” said Mr Mbogo. “This is an exciting well
result but must be seen in context. This is the first
result of a multi-well campaign and we’ll only be
able to talk about the prospects for commerciality
after the campaign is completed.”
The Midas touch
Tullow Oil, which started in a small Irish town in
1985, has developed a global reputation for being
lucky. Their initial investments in gas and oil fields
in Senegal and the North Sea – although catego-
rised as depleted assets worthy of discard by the
bigger players such as BP – earned them steady
revenues well beyond the period anticipated.
Their purchase of a mature gas field in Senegal
in 1987, for example, was expected to continue
producing for two more years. Instead it continued
spewing oil for 16 years before production finally
ceased in 2003.
Bolstered by this success, Tullow continued to
pick up mature oil and gas fields at modest prices
| Nairobi Business Monthly MAY
The threshold is dependent on a huge range of
factors including recoverable volumes, potential
infrastructure requirements and obviously market
prices,” said Mr Mbogo, the company’s country
manager.
The way forward is complicated by the remote
location of the discovery. “Turkana is a very remote
location and the biggest challenge for us to date
has been the lack of supporting infrastructure,” he
said. “We have invested a lot of money in rehabili-
tating roads so that we can move the huge amounts
of equipment and other supplies to the rig site and
other sites where we are expecting to explore.”
With all these tests to be conducted and invest-
ments to be made, there is a significant amount
of further work before any development options
are considered. “We are a long way from declar-
ing that anything is commercial,” he reiterated.
And he underscores that message in every forum,
avoiding to say what most people want to hear.
As the company continues evaluating its
Ngamia-1 discovery, Kenyans’ eyes flicker to
neighbouring Uganda and the contestation
surrounding Tullow’s discovery of oil there,
which also engulfed the exploration and mining
preparations. There are two sticky issues, said
Mr Mbogo. First, Tullow was accused of making
corrupt payments to ministers by a Ugandan MP in
the Ugandan Parliament. “Tullow has co-operated
fully with the UK, Ugandan and Maltese Police
and has demonstrated that these allegations were
based on crude forgeries and are entirely false,”
he said.
Sharing oil revenues
With regard to taxation, Tullow sold 66% of its
interests in Uganda to Total and CNOOC (China
National Offshore Oil Corporation) for $2.9 billion
and has been assessed for $472 million. Tullow
then paid 30% ($141 million) of this assessment
and is appealing the assessment (as it is entitled
to as a Ugandan taxpayer) in Kampala.”
Production sharing agreements that are benefi-
cial to the country have been signed in Uganda,
he said. The contracts outline cost recovery and
profit-sharing from production between the
government and oil companies. And as President
Museveni explained to his Parliament, before the
inclusion of taxes Uganda would receive 58 barrels
from 100 produced, meaning that it stands a better
chance of benefiting from the oil, running away
with 58% of the cake, compared to the companies.
In comparison, Kenya has sketchy legislation
making it an attractive market for Tullow and
other oil explorers. Although a model produc-
tion-sharing contract (PSC) is publicly available,
the percentages of revenue sharing between the
Kenyan government and Tullow are still a closely
guarded secret. Many observers fear such secrecy
can easily tempt some people in government to
cut backhand deals with Tullow at the expense
of Kenyans.
“We believe that the contract strikes a fair and
equitable balance between the government and
investors considering the risk associated with this
type of exploration campaign,” said Mr Mbogo,
without giving much detail. “This (PSC) obvi-
ously doesn’t include the percentages as these
are commercially sensitive.”
COVER STORY
Do
1. Respect the environment and the
communities in which you work
2. Work with the local community and make
sure they understand your plans
3. Be a safe and responsible operator
4. Do as much planning and preparation as
possible ... and then do some more
5. Hold your nerve – oil exploration is not for
the faint-hearted
Don’t
1. Be arrogant or dismissive of local concerns
2. Be careless in handling sensitive material,
environments or situations
3. Be cavalier about safety; make it your no. 1
priority
4. Make any assumptions; check everything,
and again
5. Make careless public statements –
manage expectations carefully
Five do’s and donts
for oil exploration
Country Manager Martin Mbogo at a site inspection
of Ngamia-1
Brent Crude OiI
$118.20
ź0.56

0.47%
7:12 AM EDT - 2012.04.23
MAY Nairobi Business Monthly |
In 2011, 26 of the 35 exploration and
appraisal wells that Tullow drilled
globally discovered hydrocarbons giving
a success ratio of 74%. Is it luck? What
would you attribute it to?
This success is a result of our bold exploration-
led growth strategy. Through investing in years
of careful geological evaluation, we have devel-
oped numerous high-equity, high-quality oppor-
tunities that have met our stringent criteria for
entry into our current prospect inventory.
By investing in a great team of people and
looking towards a long-term horizon, we have
been able to seek out success in frontier areas
and deliver consistent multi-basin exploration
success, which is now being leveraged through
multi-basin developments.
26 years after starting the company you
are seeing the rewards. What are the
take-homes from the experience?
It has been a long journey but the reward for me
is in building a successful business that has a
long-term future. I have also loved working in
Africa for the past 26 years and, I hope, I am
making a difference in the lives of the people
that work for and with Tullow.
With every new discovery of oil, what are
the lessons you have learnt which you
carry forward, and in particular which
you have applied to Kenya - especially
drawing on the Ghanaian and the Ugan-
dan experiences?
The biggest lesson is to take things carefully and
cautiously and to manage expectations accord-
ingly. People get very, very excited about oil and
gas and I understand that but it is critical that
discoveries and their ramifications are kept in
perspective at all times. I think, with regards to
Kenya, we do draw parallels with Uganda in the
sense that we are very excited about the wells
that we are going to drill but it will take a long
time to be sure of exactly what the size of the
resource is.
You have been described as a company
that eats left-overs. Is this a deliberate
strategy or was it the way to start? Has
that strategy changed as you have experi-
enced more success?
I don’t think we eat leftovers. What we do is
concentrate on certain geologies and geogra-
phies that we know and like; this does mean that
we’re exploring in regions where other compa-
nies have failed in the past but they didn’t have
the technological benefits that we have now.
They also didn’t have the superb geologists and
engineers that we have.
Having discovered the Jubilee fields in
Ghana and become one of the bigger
names in oil, will you go the way of other
large oil producers and chase bigger and
riskier bets going forward?
We have a consistent strategy and business
model that is working very well. We create value
in two ways. We find oil through successful
exploration and strategic acquisitions. We sell
oil, by developing to produce or farming down
to enhance our portfolio of assets and skills,
both of which generate cash flow for reinvest-
ment in the business and support a well funded
balance sheet.
This way, we are establishing a distinctive
competitive advantage and evolving into the
leading global independent exploration and
production company with a solid financial
foundation, differentiated from our Energy &
Petroleum peers by high-impact exploration-
led growth.
What advantages has your small size
given you, compared to the larger play-
ers? How will you retain these advan-
tages as you grow?
Tullow has a number of key attributes that form
the bedrock of our success. While assets and
licences come and go, we have consistently
invested in having a great team of people and
ensuring we put relationships ahead of short-
term gains. This long-term approach has enabled
us to be successful in seeking out frontier areas
and finding new basins.
Over the years, Tullow has developed a wide
range of skills and competencies that will
ensure that we maintain the core foundations
of our business while building a base that will
support the rapid growth we are experiencing.
These include managing mature assets, becom-
ing one of the best dealmakers in the sector,
building a track record as a world class explorer
and developing superior operating capability.
Tullow has deliberately chosen to focus
on oil and not gas. Why?
We’re better at finding oil and we see greater
long-term value in oil than in gas. That said,
we’re perfectly happy to find gas; we’d just prefer
to find oil.
Any mistakes you have made as a
company in exploration in the past?
I don’t think we’ve made many mistakes - that’s
the nature of oil exploration. The key is to learn
from those mistakes. Even wells that find noth-
ing but water are still useful in terms of lessons
learnt.
FOUNDER AND CHIEF EXECUTIVE
OFFICER OF TULLOW OIL, AIDAN
HEAVEY
1978: qualified as a chartered accountant
1974–79: auditor at RJ Kidney & Co
(accounting firm)
1979–81: financial controller at Aer Lingus
(airline)
1981-1985: financial controller at Tullow
Engineering (agricultural machinery
manufacturer with a small oil distribution
arm)
1985: bought out the oil business from Tullow
Engineering and founded Tullow Oil
1985 to present: CEO of Tullow Oil
GREAT EXPECTATIONS
Q&A
‘We see long-term
value in oil, not gas’

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