Africa’snascentoilproducersarebothhopefulandcautiousafterplungingprices
ByAggreyMutambo
KENYA’SaridregionofTurkanaCountywasonceknownprimarilyfornear-starvingpeoplebeggingforfood,violentcattlerustlingandtracksforroads.
Thenoilwasdiscoveredin2012.Signsthatthelivelihoodsofthemorethan855,000peopleinthisnorthwesternpartofKenyacouldchangeforthebetterbecamemoretangiblewhenTullowOil,theLondonheadquarteredoilandgasmultinational,announcedanestimated300-million-barreloildiscovery.
“Thediscoveryofoilintheregionwillhavemany[trickle-down]effectsontheeconomy,”JosphatNanok,GovernorofTurkana,toldagroupofjournalistsinDecember.
Kenyahadbeenprospectingforoilsince1937withoutsuccess.In2015,theKenyanGovernmentannouncedoilproductionmaystartinlate2016.ButTullowhassaidthatitcanproducethefirstoilonlyby2020.
“Wearelikelytoseethetownshereexpandingveryfastbecauseoftheeconomicactivitiesthatwouldresultfromoilproduction,”Nanoksaid.
EastAfrica’soilboom
WiththesubsequentdiscoveryofanotherdepositinTurkanabyCanadianfirmAfricaOilandbyAustralianfirmPancontinentalontheKenyansoutherncoast,Kenya’sMinistryofEnergyandPetroleumsaidthecountryhasreservesofupto1billionbarrels,600millionofwhichisinTurkana.
ItmeansKenyahasjoinedthelistofAfricancountriesrecentlydiscoveringoilorgassuchasGhana,Tanzania,MozambiqueandUganda,withanestimatedcombined237billionbarrelsofoilandgasreserves,accordingtoa2014studybyErnstandYoung.
InUganda,therehadbeensimilarexcitementwhenoilwasdiscoveredintheAlbertineriftbasinin2006.TheUgandanMinistryofEnergyandMineralDevelopmentsaidthefindwasabout6.5billionbarrels,makingthecountrythefourthlargestoilreservehostinSub-SaharanAfrica.
In2011,Tullow,FrenchmultinationalTotal,andChineseoilgiantChinaNationalOffshoreOilCorp.(CNOOC)signedagreementswiththeUgandanGovernmenttoestablisharefineryandpipelineforthestartofcrudeoutputfrom2018.
Thenoilpricesstartedtoslump,droppingfromover$100perbarrelto$25inFebruary2016.Theoilcompaniesimmediatelyrespondedtothat.
“Somefirmssuspendedoperationsandinvestmentinthesectorwentdownoverconcernsthatwhenpricesaretoolowtheymaynotbeabletocovercosts,”saidKwameOwino,ChiefExecutiveoftheInstituteofEconomicAffairs,apublicpolicythinktankinNairobi,whenpriceshit$30inJanuary.
Whatwascausingthispriceslump?TheOrganizationofthePetroleumExportingCountries(OPEC),a13-memberVienna-headquarteredblocthatexports40percentofglobaloil,saidtherewasaglutinthemarket,causedbynon-members.
“Until2015,allofthesupplygrowthsince2008camefromnon-OPECcountries.Between2008and2014,overallnon-OPECgrowthwasmorethan6millionbarrelsaday,whileOPECactuallysawacontraction,”OPECSecretaryGeneralAbdallael-BadrisaidataconferenceonoilinLondoninFebruary.
“Itiscrucialthatallmajorproducerssitdowntocomeupwithasolutiontothis.Themarketneedstoseeinventoriescomedowntolevelsthatallowpricestorecoverandinvestmentstoreturn,”hesaid.
Notalldoomandgloom
Economists,however,argueaslumpinpriceshouldnotaffectexploration.
“Thefallinpricesisnotareasonforfirmstofreezeexploration.InthenewoilfrontierslikeEastAfrica,wherecountrieslikeKenyaandUgandahavediscoveredmassiveoildeposits,thediscoverymeansthatregardlessoffallingprices,explorationcompaniesmustinvestintheinitialassociatedinfrastructure,”BernardAyieko,aneconomistandAfricaninvestmentscommentator,toldChinAfrica.
Whiletheoilpricedropisgoodnewsforconsumers,whataboutthosedreamingofjoiningtheleagueofbigoilproducers,suchasKenya,UgandaandGhana?WhatwoulditmeantothesurvivalofthoseinthebigleaguewhodependonoilrevenuestoruntheireconomiessuchasEquatorialGuineaandAngola?InAfrica,19countriesaresignificantproducersofoilandtheireconomiesrelyonoilexports.
InbothKenyaandUganda,ifthenewexplorationventuresaretosucceed,oilmustbe$50abarrel.InSouthSudan,wheretheWorldBankreportsadailyproductionof165,000barrels,Jubawouldbenefitonlyifitexportedoilmuchabovethemandatorytransportationfeeof$25perbarrelforusingthepipelinerunningthroughSudan.
“Marketingoilandgasgloballywillremainchallenginguntiloverproductioniscontainedandpricesstrengthened,”saidGeorgeWachira,adirectoratPetroleumFocusConsultants,aNairobi-basedconsultancy.Wachirabelievescurrentpricesmakeitdifficultformanyoilandgasprojectsworldwidetobeviable.
Makingproductionadjustments
Economistsadvisethatbothgovernmentsandoilcompaniesadjustincertainways.Onewayishaltingextractionactivities.
CNOOC’s2016StrategicReview,publishedinJanuary,saysthecompanywill“continuetolowercostsandincreaseefficiencyandfocusonreturnsbybalancingshort-termbenefitandlong-termdevelopment.”CNOOCbasesitsanalysisonaprojectedoilpriceindexbyBrentandWTIwhichassessesoilmayreach$70perbarrelby2019.TheChinesecompany,whichruns51percentofitsbudgetoverseas,saysithasreduceditsexploration,developmentandproductionbudgetfrom107billionyuan($16.47billion)in2014tolessthan57.4billionyuan($8.8billion)in2016.
AsimilartactichasbeenemployedbyTullow,CNOOC’spartnerinUganda.InKenya,however,Tullowhasexplorationcontractswiththegovernmentwhichitmustcompletewithinthegiventime.Itsaysthisyearitwillfocusonsavingdrillingcostsasitwaitsforoilpricestoimprove.
“In2016,ourmainfocuswillbetocontinuetoselectivelyreplenishandhighgradetheexplorationopportunitiesforfuturegrowth,”TullowsaidinitsoperationalupdateinJanuary.
However,accordingtoAyieko,oilpricingshouldnotaffectsetoilproductionschedulessincepricefluctuationsdon’tlastlong.“Theshort-termforecastlooksbleakbutacloserlookatthetimelinespointstoanincreaseinactivitiesinthenext10years-aperiodthatisgoodenoughtochangeoilsectorfortunes,”AyiekotoldChinAfrica.“That’sthetimewhenthesecountrieswillstarttoreapthefullbenefitsofinvestinginoilproduction.”
Anotheroptionistorenegotiatedeals.Forinstance,SouthSudanhastheoilwhileSudanhasthepipeline.In2012,anagreementwasstrucktopegthetransportationfeeat$25perbarrelofoilmovedfromSouthSudantoPortSudanintheeasternpartofSudan.TheoilslumpmeantSouthSudanoperatedatalosseverytimeitsentoilthroughPortSudan.InFebruary,however,anagreementwasreachedfortransitfeestobeapercentageofprevailingmarketpricesratherthanbefixed.
WithapipelineproposedfromHoimainthewestofUgandathroughKenya’sTurkanaCounty,UgandaandKenyatooarediscussingasimilarflexiblearrangementforoiltransportation.CA(ReportingfromKenya)