A company associated with a Cabinet minister sold the block, where oil was found in Turkana, for a fortune.
In 2010, Turkana Drilling Company, associated with the Cabinet minister who was affected in Monday’s reshuffle, sold Block 10BB for $10 million (Sh840 million) to Africa Oil.
Turkana Drilling’s case is just an example of how small firms might be using influence in government to make hundreds of millions of shillings by trading in oil prospecting licences.
The whole business of acquiring blocks has been invaded by influence peddlers and well-connected middlemen, including Cabinet ministers.
More sensational is the manner in which licence holders have been making millions of shillings selling the licences to third parties.
The way the game is played is all too familiar: as a well-connected speculator, the first thing you will do is make sure that the obligations in the licence are as minimal as possible and that the terms will not require you to spend too much money.
With the licence in your hands, you make sure that you are in a position to influence government officials to vary the terms as many times as possible as you wait for the opportunity to “flip”, that is sell, the licence at a handsome profit.
Big money has been made selling these licences and trading rights to third parties. A Canadian company made Sh5 billion in this way.
The Toronto Exchange-listed Centric Corporation of Canada was given a licence for Block 10BA, adjacent to Ngamia 1, where Tullow has struck oil, in January 2010 and paid the government $615,000 (Sh52 million) mainly in training fees and signing bonuses.
Centric had outmanoeuvred bigger names, including Tullow — who had expressed interest in the same block.
With a solid track record, having made discoveries in neighbouring Uganda, Tullow was forced to lobby the Office of the Prime Minister, lamenting that it had applied for the block long before the Canadian company.
In February 2011, just over one year after acquiring Block 10BA, Centric Corporation sold its shares to another Toronto Stock Exchange company, Africa Oil Corporation, for a cool $60 million (Sh5 billion).
Block 10BA, which was the only major asset in Centric’s books, had effectively been transferred to a third party, allowing the Canadian shareholders to make profits on a prime national asset without having done any work.
Two years ago, Platform Resources, another Toronto Stock Exchange listed company, controlled by Canadian Michael Lee, sold two licences in circumstances not too dissimilar to the case of Centric and Africa Oil.
Platform Resources enjoyed the patronage of a local consultant with friends in high places.
The company owned the licences for Block 12A and 13T in the Lake Turkana basin, having signed production sharing agreements in September 2008.
Three years later, and despite having done no substantial work, the company and its local sponsors applied to the Ministry of Energy to allow them to sell the blocks to Africa Oil.
Initially, the ministry rejected the application on the grounds that Platform had not provided the bank guarantees to secure the negotiated work programme for the initial exploration period.
“Given that there is very little to show in terms of work done, your request will not be granted,” Energy permanent secretary Patrick Nyoike wrote to Mr Lee.
But a few months later, the company was allowed to sell the licence at an estimated $6 million.
The ministry has started cracking the whip on small-time explorers it blames for hoarding exploration acreages for speculative purposes.
For instance, it has threatened to cancel the exploration licence for Lion Petroleum Corporation Ltd of Canada, which owns two prime exploration blocks-namely, Block 1 (50 per cent) and Block 2B (100 per cent) in the Mandera basin, North Eastern Province.
With the Tullow oil discovery, debate is bound to rage on the manner and transparency of the system of granting exploration licences.
According to the Constitution, exploration and mining licences can only be granted with the approval of Parliament. But the regulations to effect this requirement are yet to be put in place.
With the discovery in Turkana, a rush for oil exploration blocks in Kenya is now expected.
Nearly all licences for potential onshore blocks have been given out and the competition will now shift to Lamu County where new oil blocks have been surveyed and demarcated.
The seven blocks — L21 to 28 — will be up for grabs immediately they are gazetted by the Ministry of Energy.
How does one get a block? The responsibility of giving out blocks lies with an inter-ministerial committee known as the National Advisory Fossil Fuel Committee.
It comprises representatives from the ministries of the Environment, Energy, Finance, the National Oil Corporation of Kenya and geologists. Bidders are evaluated for financial and technical capability and experience in exploration.
Apart from paying a token signing bonus and a training levy, the cost of acquiring an exploration block is not high.
But the licence comes with strict obligations on the investment to be made within the tenure of the agreement.