Poll, Somali border row rattle oil explorers

Next year’s General Election and a looming dispute over a maritime border with Somalia are causing jitters among oil explorers in the country, tempering the optimism that had been growing in the industry.

Tullow’s Ngamia discovery and the potential for oil wealth could emerge as a highly politicised issue in the coming election, said investment analysts at Germany’s Deutsche Bank.

Exploration activity is expected to slow down immediately before and in the aftermath of the election slated for March next year.

“This may have an impact on plans for drilling in 2013 (both onshore and offshore),” said the analysts in their study.

Fresh optimism that Kenya could strike more oil as well as gas has been building over the past few weeks, as companies have heightened uptake of exploration blocks and activity on wells.

Last week, US oil exploration firm Apache began drilling works on the Mbawa oil block situated off the Kenyan coast, becoming the second firm to drill an offshore well in the country’s waters after Australia’s Woodside Petroleum. (READ: US firm joins hunt for oil in Kenyan coast)

A potential maritime boundary dispute between Kenya and Somalia is looming, however, creating uncertainty over offshore exploration activity.

The dispute relates to a long-running row over whether the maritime border should run directly east parallel to the line of latitude — in line with an MoU signed between Kenya and Somalia in 2009 but subsequently rejected by the Somali parliament — or perpendicular to the coastline.

The latter would, in theory, give Somalia a large swathe of offshore waters currently licensed by Kenya and affect the blocks owned by Anadarko, Total and Eni.

Apache, which owns 50 per cent of the L8 exploration block, is the lead operator of the block and is expected to conduct drilling to a depth of 3,250 metres below the sea surface over the next 60 days.

Mbawa sits in the Lamu Basin and has generated considerable interest particularly after successive gas discoveries off the coast of Tanzania and Mozambique, which share geological characteristics with the Kenyan coast.

Apache has identified the Tai prospect as an exploration follow-up if the Mbawa 1 well proves successful.

Meanwhile, fresh from its recent oil discovery in Turkana, Tullow Oil is expected to drill three more wells in Kenya in the next four months.

Analysts at Jefferies Research Group said in a note that the firm will drill Twiga South and North wells this quarter while it is expected to drill the Paipai well in the fourth quarter of the year.

A recent survey by Deloitte showed investors are optimistic regarding regional growth fundamentals, and could decide to overlook risks associated with Kenya’s upcoming polls, high inflation across the region, persistent infrastructure deficits, continued currency pressure and economic turmoil in European export markets, the lifeline of the East African Community’s international trade.

Deutsche Bank said the desire in the industry, at least based on conversations it held with executives in the exploration business, will be for “an unambiguous election result and a smooth transfer of power to the next president.”

Executives expressed fears that were instability to occur, it would be more likely to have an impact on onshore rather than offshore operations.

Nairobi and the South Rift region were the flashpoints after the 2007 election, but most exploration activity on the mainland is concentrated in the North Rift, including the Ngamia-1 well, which has produced the best results so far, lessening the chances of a major impact.

“The Ngamia discovery, and the potential for oil wealth has been a major story in Kenya and could play a prominent role in the election,” states the report.

Back to the Somalia and Kenya maritime dispute, executives are banking on projections that Eni and Total’s ultra-deep water blocks may not see any drilling until 2014.

The blocks are among seven recently awarded by Kenya, three of them to Eni and one to Total.

Last month, Somalia’s government accused Kenya of awarding offshore oil and gas exploration blocks illegally to France’s Total and Italy’s Eni because the blocks lie in waters claimed by Somalia.

Speaking to Reuters earlier this month, Somali Deputy Energy minister Abdullahi Dool said contracts awarded for four blocks in deep waters were invalid and the government planned to complain to the United Nations, which oversees maritime border laws.

“We are concerned about the lease of blocks,” Mr Dool told Reuters. “I am sure we will lodge complaints.”

But Kenya rejected the accusation that ownership of the blocks was contested, and said there was no need to hold up exploration.

Border disputes over oil exploration are heating up as the region becomes the new frontier in oil and gas — Malawian President Joyce Banda is expected to meet her Tanzanian counterpart Jakaya Kikwete over the weekend to discuss a dispute over Lake Malawi, where a British-based company is exploring for oil.

The border dispute erupted after Malawi last year issued a licence to British firm Surestream Petroleum to prospect for hydrocarbons in Lake Malawi in an area covering 20,000 square kilometres.

But Tanzania says the exploration has extended into what it claims is its half of the lake and wants exploration halted until ownership of the water body is determined.

Additional Reporting By Peterson Wanjiru