February 26, 2013 / 3:26 PM / 7 years ago

Election worries put new Kenya oil, gas investment on hold

* 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 (Reuters) - 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 leadership.

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 coalition.

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 negotiations.

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,” he added.

The uncertainty is affecting new money. Explorers already licensed in Kenya are locked into spending agreements and still releasing capital.

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 Kenya.

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.


“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 capacity.

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.

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