* Commercial reserves not yet proven in Kenya
* Some explorers in wait-and-see mode
* Investors want more clarity on taxes, infrastructure
By Kelly Gilblom
TURKANA BASIN, Kenya, Feb 26 Potential investors
in exploring Kenya for oil and gas are holding back to see the
outcome of next week's presidential election, worried about the
potential for instability and for policy changes under a new
Huge discoveries in eastern Africa from Mozambique to Uganda
have attracted bids from international oil companies for
exploration and drilling rights.
Kenya's sector is the least developed, with medium-sized
companies heading the search for commercial reserves. These
firms are more vulnerable than majors to the risk of
post-election violence, which five years ago knocked the $35
billion economy flat and forced political rivals to form a rocky
With President Mwai Kibaki barred from a third term, Kenya's
forthcoming change in leadership is also creating concerns that
the government may alter contractual terms. Promising
discoveries have given east African governments an advantage in
Canada's Simba Energy estimates its block in
northeast Kenya sits atop 1 billion barrels of oil, but it needs
investors to help stump up the cash.
"I really, really want to drill in 2013. I was prepared to
commit to 2D seismic but had to consider feedback from some of
our potential farm-in partners," Hassan Hassan, Simba's chief
operating officer said in an interview.
"We've decided to wait, but believe me it pains me to wait,"
The uncertainty is affecting new money. Explorers already
licensed in Kenya are locked into spending agreements and still
In another development that raises the spectre of a trade
embargo, a front-runner in the race, former Finance Minister
Uhuru Kenyatta, faces trial for crimes against humanity linked
to the election violence in 2007/2008.
If Kenyatta is elected, western governments will face a
dilemma over how to balance a principled stance with diplomatic,
security and trade ties with Kenya.
The United States, without naming Kenyatta, cautioned
"choices have consequences". Officials in other Western capitals
have said any talk of economic sanctions is premature, but some
investors are anxious.
"You want to go in when you think there is certainty. If
sanctions were to be placed on Kenya, I don't think we would
survive two years," said Don Riaroh of Nairobi-based Bahari
Resources. The small firm, which is already exploring in the
Indian Ocean's Comoros archipelago, has targeted Kenya.
The stakes are rising. British explorer Tullow Oil
this month announced Kenya's first potentially commercial flow
rates, taking it a step closer to production.
Tullow's venture partner, Africa Oil, estimates
there are 23 billion barrels of oil beneath two onshore basins
that extend from southern Ethiopia to the southwestern tip of
If proven, that would make Kenya the 13th-largest holder of
oil reserves in the world, above the United States. At today's
oil prices the reserves would be worth $2.6 trillion, more than
60 times Kenya's 2012 gross domestic product.
Two additional basins have hardly been explored.
Kenya's next president will probably oversee multi-billion
dollar investments and new legislation to govern production
agreements and how to spend hotly anticipated petrodollars.
In his manifesto, Kenyatta says 5 percent of energy revenues
will go into local communities and another 5 percent will fund
renewable energy projects. Oil will "benefit all Kenyans", the
manifesto says, but gives no details such as tax structures.
The manifesto of his rival, Prime Minister Raila Odinga,
does not even mention oil. He has stated at campaign rallies in
Turkana that he would seek to avoid the so-called "oil curse"
that has befallen African countries, where the wealth has not
been used to fight poverty.
Some oil players are concerned that both presidential
hopefuls have not laid out more detailed plans for
infrastructure, taxation and the handling of oil proceeds.
TERMS MUST STICK
"I was surprised that oil didn't get brought up in the
debate, really surprised," Africa Oil Chief Executive Officer
Keith Hill said, referring to Kenya's first ever televised
presidential debate on Feb. 11.
If Kenya is to produce and export oil, it will need a
pipeline network stretching hundreds of kilometres to link
inland oil fields to the coast. It will need a new refinery to
supply the domestic market from its own crude. The existing
facility in Mombasa is dilapidated and runs only at partial
And while there are laws that set out how oil revenue is
spent, they are old and vague. The 13-page Petroleum Act became
law in 1986. Back then, few expected a serious oil find.
Nine oil companies operating in Kenya including Tullow,
Anadarko and Africa Oil have formed the Kenya Oil and
Gas Association. It wants the government to legislate faster.
"We're very keen on fiscal stabilization. It's very key that
investors know terms are going to be fixed. Investors and oil
companies don't like the idea that terms will be changed after
the fact," Hill said.
They point to neighbouring Uganda, where commercial
production is finally slated for 2017 after being delayed almost
a decade by rows over tax and infrastructure projects, and hope
Kenya avoids such setbacks.
The major oil companies are poised to come in once the
small-caps do the dirty work, they say.
"Barely a week goes by when I don't get a call from one of
the super-majors who say: 'How do we get in?'," Hill said.