Kenya goes alone with first oil targeting 2021 - plays catch-up with Uganda

Kenya was left at the pipeline “altar” in 2016 when Uganda decided to export its crude via a Tanzanian pipeline instead. The years of work around a joint Ugandan-Kenyan pipeline went to waste as the two countries could not agree on the development with security as well as political factors hindering co-operation between the two countries.

Kenyan oil discoveries in the Lokichar Basin had been left in limbo with no export plan in sight. However, over the course of 2017, Kenya realised it had to go it alone and started evaluating plans for a standalone export pipeline. In October 2017 the Lokichar owners, Tullow, Africa Oil and Maersk, initiated a study including FEED for the proposed pipeline. The ministry announced at the time that it was planning for an 820km pipeline between Lokichar and Lamu at a cost of USD2.1 billion to be completed in 2021.

The pipeline is expected to be FID-ed in 2019 and it has been reported that significant work has been carried out on the routing which has to deal with the complications of security risk, avoiding nature reserves, population displacement, elevation as well as cost.

Tullow’s commitment to the pipeline was followed by a commitment by Total in January 2018, which appears to have been part of the deal to obtain approval for taking over Blocks 10BA, 10BB and 13T from Maersk as part of the Maersk Oil acquisition.

On 7th February, Tullow announced that it progressing Kenya further with plans for an initial small scale development of 210mmbbl with peak production of 60-80mbopd. This would be the first phase of a wider development which originally had a 560mmbbl 2C resource number and peak production of 100mbopd+.

The Tullow-led JV will develop the Amosing and Ngamia fields as an initial 210mmbbl “Foundation Stage” which will include the export pipeline to Lamu, allowing for earlier FID than a full scale project. Foundation Stage upstream capex is estimated at USD1.8 billion and pipeline capex is estimated at USD1.1 billion – this is significantly below the USD2.1 billion estimate announced last year and the USD2.7-3.0 billion a few years ago (for the Kenyan leg only).

This export infrastructure is critical for monetising the discoveries in the Lokichar and also unlock remaining exploration potential in Kenya along the pipeline route. Tullow is targeting an FID in 2019 with first oil in 2021/22.

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Africa Oil - slowly progressing

Africa Oil published its 2016 financials last night - the USD850 million company (market capitalisation) ended the year with cash-in-hand of USD463 million.

The release included few updates – G&A was down c.50% year-on-year as a result of lower equity-based payments and the impact of the weak Canadian dollar on head office salaries, and the company reported a small USD6.5 million write off on its Ethiopian assets.

Attention remains focused on the Lokichar Basin development - preparations for FEED are underway, the pipeline Joint Development Agreement is currently in the final stages of negotiation. Separately the conclusion of the Maersk carry, an additional USD75 million of development carry may become available to Africa Oil upon confirmation of existing resources.

During Q4 2016, the company elected to relinquish its 15% working interest in the South Omo Block in Ethiopia, resulting in the USD6.5 million impairment charge mentioned above. Africa Oil’s joint venture partners in the Rift Basin Area of Ethiopia and Block 9 in Kenya have provided notification of their intent to withdraw from the joint venture; the company’s working interest in the blocks will therefore increase to 100%. These licences are due to expire in February and June 2017, respectively.

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Kenya First Oil

On 9th October, a government spokesperson said that President Kenyatta had held meetings with the Lokichar Basin oil companies (Tullow, Africa Oil, Maersk) on the Early Oil Pilot Scheme (“EOPS”). The EOPS has already received FID and will produce 2,000bbl/d, starting in June 2017. The oil will be trucked from the Lokichar Basin to Mombasa. The EOPS will allow the partners to establish a production history, providing valuable dynamic reservoir data. This implementation experience will assist in the planning of the full field development.

In the run up to the launch of the EOPS, the operator commissioned two trucks for the transport of a trial batch of crude from Block 10BB to Kenya Refineries. This trial is currently in progress and will help the partners to understand how the oil behaves under different operating conditions while on transit, and will help in determining the design, cost and type of equipment needed for the EOPS.

The Government expects to sign additional agreements in due course, including the Joint Partnership Agreement (“JPA”) that deals with the work related to the transportation of the crude oil to Lamu by pipeline.

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Lundin stops funding Africa Oil

Africa Oil’s history dates back to 1983, when it was founded as Canmex Minerals with funding from the Lundin family. The company was officially renamed to Africa Oil in June 2009 to reflect its strategic and geographic focus. Since 2009, the company went through a series of acquisitions to consolidate its position in Kenya and Ethiopia.

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Battle of the routes

Significant resources have been discovered in East Africa with 1.7bnbbl lying in Uganda and 600mmbbl in Kenya. The key barrier to monetising the vast amounts of oil is an export pipeline. In 2010, when Tullow acquired Heritage’s acreage, first oil was envisaged for 2016. Over the last five years, this timing has slowly crept back with estimates now pushed back to late-2019 despite government PR continuing to promote first oil in 2016-17.

There remains a significant risk that the timeline will be delayed further as the regional governments have yet to decide on a route. There are currently two routes under consideration, a Northern Route and a Southern Route. The governments’ preference is for a Northern Route which aligns with a wider regional plan for the development of a trade corridor from South Sudan through to the Port of Lamu in Kenya. In 2010, the LAPSSET (Lamu-South Sudan-Ethiopia) study was commissioned to explore a road and railway path as part of this plan, which also considered a concurrent pipeline as part of the development. In 2014, the Northern Route for a pipeline was further advanced with the governments engaging Toyota to select the actual path for the Northern Route and to carry out pre-FEED – this work is expected to be completed in May 2015.

The upstream partners have commissioned their own study into a Southern Route, which is to run parallel to the existing Mombasa-Eldoret products pipeline. Whilst this will utilise existing rights of way and road networks which will aid accessibility and construction, the higher population density along this route vs. the Northern Route could pose its own challenges.

To date, the governments’ focus remains on the Northern Route and they have given little consideration to the alternative Southern Route. The upstream partners continue to lobby the governments on the Southern Route which is seen as logistically less challenging. However, political impetus may override any economic and logistical considerations in choosing the final route, and until one is chosen, Uganda and Kenya’s discovered resources remain stranded.

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