Why Kenyan crude will be exported and not domestically refined

Mombasa refinery
Source: http://mygov.go.ke/national-treasury-sets-aside-funds-to-buy-essar-stake-in-refinery/

Kenya currently has no crude oil production and relies solely on imports to feed the domestic refinery in Mombasa. Aside from feedstock for the refinery, there is no other demand for crude oil in Kenya.

In 2012, domestic consumption of refined products was 73mbbl/d – this was satisfied by 20mbbl/d of domestic production from the refinery and 53mbbl/d of imports. The shortfall in domestic production has been met by imports for many years and this has steadily grown from 22mbbl/d in 2005 along with the increasing demand for refined products. The shortfall suggests that there is scope to increase throughput of the refinery and reduce the level of imports.

Kenya Refined Products Production and Consumption
Source: Kenya National Bureau of Statistics, Kenya Petroleum Refineries Limited, OGInsights

The refinery has a design capacity of 80mbbl/d, but has continually operated at c.40% of capacity. This low utilisation is due to a number of reasons including regular utility supply outages, limitation on size of cargoes it can accommodate, low profitability (some batches of processing are loss making), limitation on product slate and general inefficiency of the refinery. The refinery has a reformer and a catalytic hydro-treater, but no upgrading units; the refinery’s two complexes were commissioned in 1963 and 1974 with minimal investment since. The profitability of the refinery was further hit in 2013 when the incoming government removed the price protection previously provided to the refinery, making it uncompetitive relative to refined product imports.

The refinery’s current configuration is designed to handle heavy crude grades from the Middle East. In 2012, a refinery upgrade project was considered by the then owners (50% Essar Energy, 50% Government of Kenya). The plans included changing the configuration to handle lighter crudes and would incorporate the ability to process Lokichar crude. However, the $1.5bn cost of the upgrade was deemed to be too expensive and uneconomic; as a result the upgrade was abandoned, following which, Essar Energy decided to exit the joint venture. In December 2014, Essar Energy sold its 50% interest in the refinery to the Government of Kenya.

The refinery has been mothballed since mid-2013 and now acts as a storage facility for imported refined products. All demand for refined products are now met by imports. There are currently no plans to restart the refinery, and without further investment, it is unlikely the refinery would be able to operate profitably. Until there is a plan and willing financing to upgrade the refinery, the destination for Lokichar crude is most likely to be the export market - in its current state, the refinery configuration is not designed to process Lokichar crude.

In a scenario where the refinery was upgraded and being wholly fed by Lokichar crude, then feedstock requirements could reach c.100mbbl/d by 2020 in order to fully meet forecast domestic demand for refined products (96mbbl/d estimate by Kenya Petroleum Refineries Limited). However, this scenario is deemed to be highly unlikely in the foreseeable future.

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Colombia calling: Petroamerica acquires PetroNova

Cartagena, Colombia
Source: http://www.backtrackers.nl/colombia/

The Colombian E&P landscape is characterised by a few IOCs with 100mmbbl+ of reserves (e.g. Repsol, Chevron, Occidental) and a large number of independent E&Ps. The smaller end of the scale is dominated by many small players with more than 25 companies with less than 2.5mmboe of reserves.

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The Apache Egypt treasure map

Source: Houston Geological Society, HGS

Apache is a significant acreage holder onshore Egypt with an extensive infrastructure network which allows new discoveries to be brought onstream quickly and at relatively low cost. Its acreage can be broadly split into four areas, the most significant of these is the Western Desert Gas area which underpins the portfolio’s gas reserves and is a key supplier of gas to the domestic market.

Source: OGInsights

 The highlights from each area are below.

Western Desert Gas

This area has been a key source of growth in recent years and accounts for 80% of Apache’s Egyptian 2P reserves (Wood Mackenzie). The area comprises three sub-areas with the Khalda Area, which has been producing since the 1970s, being the most established. The Fahgur, Sushan and Matruh Areas all commenced production post 2005 and have all been a target area for exploration. Production in the Western Desert is currently constrained by lack of gas processing capacity (currently 900mmcf/d) and further investment to debottleneck the facilities is dependent on increase in gas prices.

Apache Merged Area

The blocks in this area were acquired from BP in 2010 with production underpinned by two fields: Abu Gharadig and Razzak. Both of these fields are mature and in terminal decline, although horizontal drilling and water flooding efforts have been successful in arresting declines. The area is considered as underexplored and exploration success will be important to maintain production levels in the longer term. A seismic programme in 2010/11 and subsequent simulation studies has helped Apache identify new targets for future exploration and development.

East Bahariya Area

Apache aggressively explored the East Bahariya block between 2000-2005 bringing on-stream a number of discoveries. Since 2005, Apache has implemented water flooding on all the fields in the block which has boosted production. In 2008, the Heba Ridge cluster of fields were discovered which is now a key growth area on the block. Apache acquired the nearby El Diyur and North El Diyur blocks after recognising the

extension of one of the East Bahariya reservoirs into these blocks.

Qarun

The fields on the Qarun block are mature and in decline with production expected to cease in the next few years. The East Beni Suef block is also in decline, although Apache has been able to sustain production through water flooding. Exploration success on East Beni Suef has also helped to maintain production, although discoveries have been small in size (1-5mmbbl).

Apache exports its production via an extensive network of oil and gas pipelines and facilities. A schematic of the network is shown below.

Source: OGInsights

Source: Apache Egypt EIA
https://www.miga.org/documents/Apache_Egypt_2004_Egyptian_Oil_and_Gas_Activities_EIA.pdf

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Apache exits LNG business through sale to Woodside

Source: OGInsights

On 15 December 2014, Apache announced the sale of its interests in the Wheatstone and Kitimat LNG projects to Woodside for USD2.75bn. The move was widely anticipated with Apache announcing in its Q2 2014 results its intention to completely exit LNG; this message was reinforced in the company’s Q3 results on 7 November 2014.

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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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Vetra: A Colombian story

Vetra Energia is a private Colombian based E&P with a sole focus on Colombia.

Its main asset is a 69.5% operated interest in the Sur Oriente block; Petroamerica is the partner on the block with 30.5% WI which it acquired through the merger with Suroco in 2014. Vetra Energia also has a 100% WI in the La Punta block and a 60% operated interest in VMM2 (40% Canacol) which contains the Mono Araña field.

In July 2013, Vetra Energia was acquired by a consortium led by ACON Investments and Capital International. The Vetra management team, along with private investors including oil & gas veteran Atul Gupta also participated in the acquisition. The Vetra management team and private investors participated through a vehicle called New VEG.

Vetra Holdings SARL was incorporated for the acquisition of Vetra Energia and is owned by the consortium members. Based on the company’s filings, the acquisition consideration is estimated to be c.USD440mm. This has largely been funded through pseudo-debt with USD265mm of Preferred Equity Certificates (“PECs”) issued to the consortium members and USD187mm of promissory notes issued to Vetra’s selling shareholders. The PECs carry no interest whereas the promissory notes carry a rate of 10% per annum.

In 2013, Vetra produced 5.6mmbbl or 15.4mbbl/d. However, latest filings with the ANH show that production had plummeted to 6mbbl/d in2014 suggesting that the consortium may have significantly overpaid for the acquisition. This view is supported by the valuation of the assets from public sources:

• Broker consensus read-through valuations of $92mm for Sur Oriente and <$1mm for the other assets
• Wood Mackenzie valuation of $63mm for Sur Oriente and <$1mm for the other assets
• Furthermore, Petroamerica recorded a write-down of $30.4mm on Sur Oriente in 2014

Sur Oriente is Vetra’s main asset and is located in the Putumayo Basin. It is owned through Consorcio Colombia Energy (“CCE”) in which Vetra holds a 69.5% interest and Petroamerica 30.5% interest. CCE holds a Crude Incremental Production Contract with Ecopetrol on Sur Oriente which entitles Ecopetrol a share of the block’s production which is determined by an R-factor. Petroamerica’s disclosure notes that Ecopetrol is entitled to 52% of production; the remaining 48% of production is shared between Vetra and Petroamerica per their interests in CCE. The block produces from three fields (Pinuna-Quillacinga, Cohembi and Quinde) and in 2014, gross production was c.14.3mbbl/d from six wells.

Production from Sur Oriente was historically trucked to the nearby Orito facilities and then exported via the Trans-Andean Pipeline (“OTA”) to the port of Tumaco on the Pacific coast where it is sold as the Colombian South Blend. In November 2014, a new export route was established for the Cohembi and Quinde fields with crude trucked to the Amazonas Station in Ecuador and transported through the Oleoducto de Crudos Pesados (“OCP”) pipeline which is expected to result in $8-10/bbl improvement in netbacks over time.

Pipeline export routes from Putumayo
Source: Petroamerica January 2015 corporate presentation

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Apache's Egyptian Jewel

Apache entered Egypt in 1994 and has since built up a dominant onshore position through a series of acquisitions and an aggressive exploration campaign. It is the largest acreage holder in the Western Desert and operates 24 licences. In 2010, Apache expanded its position through the acquisition of BP’s entire Western Desert portfolio as part of a wider transaction involving BP’s North American assets. In 2013, Apache divested 33.3% of its Egyptian portfolio to Sinopec for USD3.1bn in an effort to refocus on its North American business.

Apache’s Egyptian portfolio contains c.594mmboe of 2P reserves (Wood Mackenzie) as at the end of 2014 with about half of these reserves being gas. Gas production is an important part of Apache’s business, which is a material supplier of gas to the domestic market with a 12% market share (excluding Sinopec’s interest in the portfolio). All gas is sold to EGPC.

One of the biggest concerns for Egyptian operators over the past couple of years is the receivables balance due from the EGPC. To date, EGPC have not defaulted (to Apache or any other operator); in fact, EGPC have been aggressively paying down the balance since the beginning of 2015. To manage payment default risk, Apache has insurance with USD300mm of cover from the Overseas Private Investment Corporation  and this is in place until 2024.

Egypt has been one of Apache’s success stories, where production and cash flow have grown strongly with each USD1mm of investment generating USD2mm. This has be driven by strong and consistent exploration success – success rate has averaged above 80%. The company holds a large acreage position with 72% still undeveloped which will provide significant opportunities for the future.

Historical production

Cash flow growth

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