Healthy Skepticism Surrounds Kenya’s Oil Discovery

Healthy Skepticism Surrounds Kenya’s Oil Discovery

In May, the International Monetary Fund projected that Kenya will start commercial oil production in six to seven years. More recently, the Oil & Gas Journal reported that 2013’s fourth quarter will bring on the emergence of two additional shallow-depth rigs that could potentially create an oil sector for Ethiopia and Kenya.

Prospects and leads, according to the report are on the rise. However, some industry players and economists are skeptical about the commercial viability of the discoveries.

U.K. petroleum company, Tullow Oil which operates the Ngamia-1 well with 50 percent interest has through its spokesman George Cazenove, downplayed these projections as premature, according to an article published on Fox Business.

“While the exploration so far has been very successful, we have only drilled three wells so any projections of when commercial oil might flow are premature,” Cazenove said.

“Tullow’s revelations are promising,” said Lawrence Kabunyi, logistics and engineer assistant at Galana Oil.

“Tullow announced that the Twiga-1 well can produce 2,812 barrels of oil per day,” he continued. “That’s a good indicator. While this is a small number compared to, say, Nigeria’s average of 2.5 million barrels per day. The public should be reminded that this is a single well and not the entire basin.”

Kenya must be determined not to fall victim to the corruption and conflict which bedeviled other oil-rich countries, Kabunyi added.

“Kenya’s Petroleum Act has not been reviewed since 1986. There is urgent need for amendments in line with recent discoveries,” Kabunyi said. “It will be critical to make provisions that will make the proceeds from oil mining trickle down to the citizens and specifically the people of Turkana.”

Fox Business News reported that the IMF is keen on helping Kenya redraft its rules regulating the sector.

“The benefits of being an oil exporter will be felt if we manage to avoid over-dependence on oil as a means of foreign exchange which has been a cancer for Nigeria,” said Michael Koge, a senior economist with Nairobi-based Enke Investments.

“Should we become an oil exporter, our focus mustn’t take a 360 (degree) turn from tourism and agriculture,” he said.

Agriculture — especially horticulture, tea and coffee — is Kenya’s leading foreign exchange earner, supplemented by tourism. By contrast, Nigeria’s over-reliance on oil exports has caused problems, Koge said.

“For the past three decades, oil exportation has provided 90 percent of foreign exchange earnings and financed 80 percent of government revenue in Nigeria,” Koge told AFK Insider. “Such over-reliance on one sector has led to oversight of the agricultural sector resulting in inadequate food production and by extension, food importation to feed the populace.”

Dozens of wells have been sunk in Kenya since 1954 when oil exploration began in the coastal region of the East African country. Despite slight indications of oil stains in some wells, none were fully evaluated or completed for production.

Kenya’s fortune changed in March, 2012 when then-President Mwai Kibaki announced the country had struck oil in Turkana County’s Lokichar Basin, located in the country’s arid north-western region.

“This is the first time Kenya has made such a discovery and it is very good news for our country. It is however the beginning of a long journey to make our country an oil producer,” Kibaki said last year in Kenya’s leading independent paper, Daily Nation.

People were euphoric over the first oil discovery in Kenya. Most had the misconception that the discovery would immediately make Kenya an economic giant.

In November, 2012 several months after the initial announcement, Tullow Oil discovered more oil deposits 14 miles from Ngamia-1. The firm reported 100-foot-plus deep deposits of high-value light crude, raising optimism in the Lokichar Basin prospect.

Dependence and poverty have plagued Kenya since independence. Oil exportation may be its long sought-after solution. Just how much oil is underneath Turkana remains a mystery for now.

In the developing world, exploitation of hydrocarbon reserves has been referred to as a curse which results in conflicts, political instability, social and environmental degradation coupled with corruption. Classic examples include Nigeria and Angola.

Should black gold deposits be commercially viable as IMF predicts, precautionary measures must be taken to avoid the resource curse, experts say.

Turkana has, in the past, made headlines with news stories detailing hunger in the arid region. Since the oil discovery, area residents remain mostly dependent on food rations from the government of Kenya and non-governmental agencies.

What has changed for the far-flung locale, which seems viscerally like a different country altogether when compared to the Nairobi capital, is that it is making headlines for different reasons now and is on the lips of many investors in boardrooms.