Kenya is headed to become the first oil exporter in East Africa, moving in less than five years from being a have-not nation to the regional leader in cutting reliance on energy suppliers such as Royal Dutch Shell Plc.
After Tullow Oil Plc discovered oil last year, Kenya is set to start shipments in 2016, overtaking neighboring Uganda, where Tullow found crude more than seven years ago. The U.K. explorer plans to start pumping in Kenya as soon as next year, Chief Operating Officer Paul McDade said in an interview. Kenya’s deposits may top 10 billion barrels, according to the company, more than three times the U.K.’s remaining reserves.
Exports will underpin Kenya’s shilling currency and are being pushed by a government that wants a lead on Uganda and Democratic Republic of Congo, whose East African resources in recent years attracted explorers such as China’s Cnooc Ltd. and France’s Total SA. Most oil companies traditionally had focused on the African powerhouses of Nigeria and Angola to the west, and Libya and Egypt on the Mediterranean.
Oil will allow Kenya to “diversify export earnings and act as a catalyst for infrastructural spending, especially on the transport network,” Phumulele Mbiyo, regional head of macroeconomic research at Nairobi-based CfC Stanbic Bank Ltd., a unit of Standard Bank Group Ltd., said in an interview. “The shilling is expected to benefit from inflows of foreign exchange and reduced spending on fuel imports.”
Kenya imports all its fuel, almost 80,000 barrels of oil a day at a daily cost of more than $8 million, according to U.S. government data. It relies on exports such as coffee and tea to support the balance of trade in a $37 billion economy, East Africa’s largest.
Tullow estimates it has found more than 300 million barrels of oil equivalent resources after making three discoveries in Kenya’s South Lokichar Basin. In February, Twiga became the first well in Kenya to produce oil at a commercially viable rate and has the potential to produce 5,000 barrels a day.
“After 50 years of disappointments, Tullow’s results in the Lokichar Basin have been the key breakthrough,” Oswald Clint, an analyst at Sanford C. Bernstein & Co., wrote in an Aug. 16 report. “Of 30 wells between 1960 and 1992, prior to Tullow’s entry, 13 were dry, 12 encountered non-commercial gas shows, and five encountered signs of oil staining or oil shows.”
Vivo Energy, a Shell joint venture with Vitol Group, as well as Total and KenolKobil Ltd. are the biggest suppliers of crude and petroleum products to the nation. Kenya Petroleum Refineries Ltd., the nation’s sole refinery, half-owned by Essar Energy Plc, only refined crude from Abu Dhabi last year.
The discoveries have been made in the remote and underdeveloped Turkana region in the northwestern part of Kenya’s Rift Valley. Shipments will initially be made by truck or train for refining in Mombasa or exports. Once more fields are discovered and developed a pipeline can be built.
Kenya oil exports are “a very bullish idea, because Turkana is one of the least developed parts of Kenya,” Clare Allenson, an analyst at Eurasia Group, said in a phone interview. “This is definitely worth watching to see how” it will progress.
Tullow and partner Africa Oil Corp. plan to spend at least a year exploring for further deposits. They have two drilling rigs in Kenya and expect to secure one more later this year.
The Kenyan government wants things to go faster.
“They are not drilling enough wells,” Kenyan Petroleum Commissioner Martin Heya said in a phone interview from Nairobi. “Uganda drilled a long time ago, but it’s possible that we can produce earlier than anybody else. We shall be happy.”
Tullow is facing delays in Uganda, where the government and oil companies are negotiating the terms of production after 1.7 billion barrels of oil were discovered. Oil from landlocked Uganda will eventually be exported through Kenya.
Ugandan President Yoweri Museveni’s government has delayed the $10 billion investment planned by Tullow and its partners, Total and Cnooc, to tap the Lake Albert fields. The sides need to agree on the size of a local refinery and an export pipeline, which is likely to cross Kenya in 2018.
“Uganda missed the boat and Kenya will become the oil-sector hub,” John Small, chief executive officer of the Eastern Africa Association, said in an interview. “It only makes real commercial sense to cooperate and have linked pipeline network” in the region.
In Kenya, Tullow and Africa Oil still have to submit their field development plan to the Kenyan government. Eventually, a pipeline will be built from the fields to a terminal on the Indian Ocean coast, McDade said.
“For the Kenyan economy it’s going to be a major step forward,” Africa Oil CEO Keith Hill said in a phone interview. “Once the export pipeline is completed they will have a significant influx of capital coming in from oil export revenues.”
Uganda’s Museveni and his Kenyan and Rwandan counterparts, Uhuru Kenyatta and Paul Kagame, in June discussed plans for regional fuel and crude pipelines. Uganda needs more resources than Kenya to make its oil export pipeline viable partly because it’s further away from the Indian Ocean coast.