Government ready to get its hands dirty in hunt for oil

As prospects fade after Isiolo well returned negative results, State launches its own exploration projects

By JUSTUS ONDARI jondari@ke.nationmedia.com
Posted Monday, August 30 2010 at 14:01

Smarting from a devastating setback in what looked to be a definite find of natural gas in Isiolo, the government is adopting a different strategy in its quest for oil.

It hopes taking charge of the oil search alongside private and mostly foreign explorers and pumping more funds and effort into its agency would speed efforts to strike the elusive “black gold”, buoyed by optimism after Uganda stumbled on commercial quantities recently.

This comes a few weeks after the government shattered Kenya’s sky-high hopes by announcing that traces of natural gas found by China National Offshore Oil Corporation (CNOOC) after drilling a five-kilometre deep well would not yield commercial quantities.“Time has come for us (government) to get more involved,” Energy Permanent Secretary Patrick Nyoike told Smart Company in an interview last week.

Forced back to the drawing board by the Isiolo failure, the government, among other measures, is planning to carry out more surveys in various exploration sites to build up a comprehensive database in a bid to reduce some of the risk costs to potential investors.

“We want our geologists and other technical personnel to do more besides the government facilitating National Oil (Corporation of Kenya) to play a significant role in our oil exploration programme,” he said. National Oil’s mandate includes oil and gas exploration and production besides its widely known mandate of acting as a national oil and exploration data repository.

Mr Nyoike says the government’s move was mooted after realising that whenever an exploration company strikes a dry well, interest wanes as happened with CNOOC, which is planning to reduce its shareholding in the consortium that was involved in the exploration.

This is not new for Kenya. Woodside of Australia also left in 2006 after hitting a dry well in the Lamu area. “Risk averse multinational oil companies will hardly venture into frontier areas such as Isiolo unless oil and gas has been found in large enough quantities and political risks are minimal,” Petroleum Focus Ltd director, George Wachira, wrote last week in his column in the Business Daily, noting that as much as Sh2 billion risk capital may have been spent in the Isiolo well alone.

According to the PS, the Isiolo area will feature prominently in the government-sponsored studies as it still holds promise of commercial gas deposits. “We have been informed that in some areas in China that were abandoned because of their dry wells, new drilling 30 years later saw the exploration companies discovering huge deposits of oil,” he said.

It is a view supported by industry analysts. “One fact has, however, been established; that there exists a likelihood of natural gas in commercial quantities somewhere in the vicinity of Isiolo,” said Mr Wachira. The state is not trying to re-invent the wheel by equipping the National Oil Corporation to carry out advance studies.

This is the strategy it’s currently employing in geothermal and power transmission sub-sectors. For instance, frustrated by the slow exploitation of the geothermal resources – so far 202 megawatts (MW) against a potential of 7,000MW to 10,000MW – and the fact that it could not pump money into the Nairobi Stock Exchange-listed KenGen, the government set up a special purpose vehicle, Geothermal Development Company (GDC), to fast track the process.

Similarly, in a bid to get around restrictions faced by NSE-listed Kenya Power and Lighting Company and speed up distribution of power across the country, it set up another fully state-owned entity, Kenya Electricity Transmission Company (Ketraco) for that purpose.

But the mere fact that neighbouring countries – Uganda (oil), Tanzania (natural gas) and Southern Sudan (oil) – have struck it rich, the government is under great pressure to speed up exploration both for economic reasons and to placate Kenyans whose anxiety turn into despair every time a prospective well turns out dry.

“We know Kenyans are disappointed with what happened in Isiolo. But we wish to inform them that, the world over, it (oil exploration) is an expensive and sometimes frustrating process,” said Mr Nyoike, “but we will continue searching.” He said all is not lost and gas exploration sub-sector is still vibrant going by investors it is attracting.

Tullow Oil Plc, the company behind the successful oil discoveries in Ghana and Uganda, has acquired a 50 per cent interest in an oil exploration block near Lake Turkana, owned by Centric Energy Corporation of Canada. “The acquisition is conditional upon completion of due diligence, the negotiation and settlement of definitive farm-in and joint operating agreements and the approval by the Kenyan Government and the Toronto Stock Exchange,” Centric Energy said in a statement last week.

Tullow recorded its largest ever discovery, the Jubilee offshore field in Ghana in 2007, before its Uganda success. Another company, New York Stock Exchange listed Anadarko Petroleum Corporation is conducting an oil and gas offshore exploration in five blocks – L5, L7, L11A, L11B and L12 – in the Lamu Basin.

Anadarko, one of the largest independent oil and natural gas exploration and production companies in the world, it recently struck oil in Mozambique and has operations in Sierra Leone, Algeria and Ghana. Cove Energy plc, formerly Lapp Plats, is also said to be angling for a piece of the action in the country’s exploration process by acquiring a stake in Anadarko’s Lamu operation.

All these are keeping the hope of oil alive in Kenya. Some of the exploration challenges include lack of sufficient local technical and financial capability. Oil exploration is highly capital intensive and the high risk keep off many companies, says an a analysis by the Ministry of Energy.

The government has no risk capital to engage in full scale oil exploration. “Dry wells are a major disincentive to investors and hence perceived high geological risk,” it says. Kenya has low well density – one well in every 13,000km2, compared to Uganda’s one well in every one square-kilometre and Tanzania’s one well in every 7,000 square kilometres. The Minstry says lack of drilling capability for oil and gas both in terms of personnel and equipment has been a hindrance even as procurement of drilling rigs causes delays.