Firms get in line to finance drilling of oil in East Africa

Tuesday February 19 2013

PHOTO | FILE An oil rig at Ngamia 1 in Turkana county.

PHOTO | FILE An oil rig at Ngamia 1 in Turkana county. NATION MEDIA GROUP

By JOHN NJIRU [email protected]

East African oil is projected to beat that of the Middle East in global markets over the next 20 years. Currently, much of the activity has centred around exploration, with huge discoveries in Kenya and Uganda. Most experts, however, say the march to outpace the Middle East in production could be hindered by lack of or poor infrastructure.

Despite this, multinationals are seeing opportunities to fund enabling infrastructural projects and explorations, buyout of oil fields, and drilling of oil in what experts term “the next trillion-dollar deal”. Insurance companies are also queuing to take up the risk, with local firms finding it almost impossible to take up the business due to the huge capital outlays involved.

Last month, an international reinsurance broker, Afro-Asian Insurance Services, opened a liaison office in Kenya to help provide regional insurers with an expanded pool of reinsurers to which they can transfer risks.

“We are bringing solutions in this market, new capacities, and international knowledge in Kenya,” the Afro-Asian Insurance Services associate director, Mr Christian Ramamonjiarisoa, said.
Afro-Asian is an accredited broker at Lloyd’s London, which means that regional insurers and reinsurers will now have direct access to the vast capacity and unique risk solutions that Lloyd’s can offer.

Mr Udai Patel, Afro-Asian’s group managing director, said the firm would offer risk services in oil exploration because of its magnitude and large capacities that cannot be adequately exhausted by the local market.

Gras Savoye, a French reinsurance broker, also set up its regional office in Upper Hill, Nairobi, within days of Afro-Asian’s announcement. The broker, in partnership with the Willis Group, is also eyeing the oil and gas market that has taken shape in the region over the past year.

“We are seeing many global companies moving towards the East African market, which gives us an opportunity to furnish them with international reinsurance services that may be absent in the Kenyan market,” said Gras Savoye’s regional director, Mr Vincent de Charnacé.

JB Boda, an Indian reinsurance broker with over 30 years presence in the country, also set up an office last month in Nairobi.

The Lloyd’s accredited firm is riding on its experience in oil and gas ventures in the mother country to penetrate the Kenyan exploration market.

“By and large, it was a very exciting time last year for Kenya following the discovery of oil in Turkana County and natural gas reserves off the coast of the Lamu Basin in the Indian Ocean. The effect has attracted underwriters from around the world,” said Mr Tom Gichuhi, the executive director of the Association of Kenya Insurers (AKI).

One of the global big names in financing, JPMorgan Chase, with a corporate loan book of over Sh121 trillion, has announced plans to set up shop in Nairobi. In its annual financial report for 2011, the firm identifies Nairobi and Accra as the two, and only Africa offices, of the eight new outlets it plans to open in the 2012/13 financial year.

“As our clients — multinational corporations, sovereign wealth funds, public or quasi-public entities — expand globally, we intend to follow them around the world,” JPMorgan Chase chairman and chief executive Jamie Dimon wrote in his notes to shareholders.

Barclays Bank is reorganising its investment bank arm in sub-Sahara Africa, centralising its operations to South Africa. Announcing the financial result of the Kenyan unit, the bank said its priority is in restructuring its investment arm by moving the function to South Africa.

“Oil and gas business is of course one of the key areas that we will be keeping our eye on,” said Barclays Africa chief administrative officer Adan Mohamed. “We intend to source the expertise to fund such projects from our South Africa unit.”

Ecobank, which is exposed to the oil and gas business in West Africa, is also revamping its investment bank arm. The West Africa-based bank has also been active in East Africa, engaging leaders by organising conferences and tours to oil-rich West African countries.

Oil exploration in Kenya hit fever pitch when Tullow Oil struck the black gold in Turkana in the northern part of the country.

“2012 was a year of major progress for Tullow. We materially enhanced the business with a basin-opening oil discovery in Kenya, adding highly prospective new licences in Africa and the Atlantic margins, refinancing our debt, and partially monetising our Ugandan assets,” said Tullow’s chief executive, Mr Aidan Heavey, last week when he released last year’s financial results.

With the successful basin-opening discovery in Kenya with Ngamia 1 and Twiga South 1 wells, Tullow is optimistic of another 40 wells in the region.

“The Jubilee Field in Ghana is now approaching its full potential and provides the base for our production profile and operational cash flow. Our financial position underpins our highly ambitious 2013 exploration programme, which has high-impact wells planned in Kenya, Ethiopia, Norway, Mauritania, Mozambique, Côte d’Ivoire, and French Guiana,” said Mr Heavey.
Interest has further been heightened by discoveries of commercially viable quantities of oil and natural gas in neighbouring Uganda and Tanzania respectively, making the East Africa region a frontier in the energy market.

Other multinational firms in the market are Total, Anardako, Swala, and Cove Energy. Total recently signed a contract with the government to start exploring for oil in Block L22 in Lamu County, an area of 10,000 square kilometres.

Oil and gas activities are categorised into upstream, middle-stream, and downstream. The first, which involves exploration and productions, carries the highest risk in the industry.

Exploration starts with the seismic phase, where firms obtain information on geological conditions to estimate oil and gas reserves in an area, followed by drilling and completion of wells, development of production facilities, and eventually the separation and purification of the coveted commodity. Investment in exploration is a risky and expensive affair. All activities require insurance because of the uncertainty of the ventures.

For example, last year Tullow Oil invested close to $1 billion (about Sh86 billion) in exploration, appraisal, and drilling of 46 wells in the country with an overall success ratio of 74 per cent.
During the same period, Australian oil explorer Swala Energy announced plans to raise $13 million (about Sh1.1 billion) through an initial public offering to expand exploration campaigns in Kenya and Tanzania, where it is also licensed to prospect.

Unfortunately, the Kenyan underwriting market does not have the capacity to insure such risky investments.

Because of the gap, international insurers have pitched camp in the country to harness the gains in the lucrative industry.

Last year, Ghana Re and Nigerian Continental Re set up liaison offices in Nairobi, which brought to six the number of reinsurance firms in Kenya. The rest are Kenya Re, African Re, Zep Re, and East African Re.

The managing director of Kenya Re, Mr Jadiah Mwarania, said he was confident that the Kenyan firms could competitively take up the task of insuring foreign explorers if they pool funds.

“We can try and form a pool and insure five per cent of the businesses and the rest we export to foreign firms. We cannot just export insurance business abroad,” said Mr Mwarania.

Also in support of the idea is AKI, which partnered with JB Boda to conduct a workshop last week on Thursday and Friday to sensitise local companies on the need to put in place the necessary structures to retain the oil and gas business and guard against capital flight.

The seminar, which brought together German’s Hannover Re and India’s GIC Re, was held at The Boma Hotel Nairobi. It guided insurers on identifying opportunities in the oil sector, create capacity, and build strategic partnerships for optimal participation.

According to Mr Birian Akwir, the local sector is yet to see more of these firms set up offices to target the exploration activities.

“The industry is robust and inexhaustible. We cannot adequately manage the covers and that is why the international firms are coming in. Look at Nigeria; they have a policy that empowers local insurers to underwrite up to 40 per cent risks in the oil and gas sector and they still cannot carry more than five per cent of such risks,” he said.