Oil groups rush to grab slice of east Africa

By Christopher Thompson in London and Katrina Manson in Nairobi

Published: February 20 2011 18:26 | Last updated: February 20 2011 18:26

Around Christmas last year Brian Hall, chief executive of oil explorer Aminex, got a phone call from his head of operations in Tanzania.

A problem at an offshore gas field was compounding electricity shortages in Dar es Salaam, the country’s main city. The ministry of energy had been on the phone. Street lights had gone out, government officials were working in the dark, gin and tonics were being served without ice at festive parties. How fast, the ministry wanted to know, could Aminex bring its gas discoveries on stream to generate power?

“It was potentially quite a serious situation,” says Mr Hall, who estimates the company’s two offshore discoveries to hold more than 250bn cu ft of gas, or 40m-50m barrels of oil equivalent (boe), which he hopes to bring on stream this year.

“There’s more urgency in the region now because of the considerable potential there to unlock,” he added.

East Africa used to be regarded as an oil industry backwater, a poorer relative to the continent’s resource-rich north and west. That’s changed over the past 12 months as majors and independents invest hundreds of millions of dollars in exploration and compete to snap up licences on the continent’s last hydrocarbon frontier.

“It’s early days but there is big potential for growth in east Africa, even if it’s highly speculative exploration stage in nature,” says Alex von Sponeck, head of emerging markets debt at Goldman Sachs. “Investors want to diversify away from some of the more mature producing regions and there just aren’t that many [opportunities] left out there. Parts of east Africa are some of the last uncharted oil and gas regions.”

Tullow’s success shines bright

To date, east Africa’s best known success story has been Tullow Oil, writes Christopher Thompson.

Tullow has exploration projects in Tanzania, Kenya, Madagascar and Ethiopia, but it made its breakthrough in east Africa last year when it completed a $1.45bn (£890m) buy-out of Heritage Oil’s stake in Uganda’s Lake Albert oil blocks, estimated to contain substantially more than 1bn barrels of crude. The acquisition was part of a larger $10bn development of the region’s oilfields in which Tullow is joining forces with France’s Total and China’s state-owned CNOOC.

“We’ve found a billion barrels and we believe there are another billion and a half to find . . . that’s why Total and CNOOC have farmed in,” said Angus McCross, Tullow’s director of exploration.

“Thirty-six out of 37 wells in the Lake Albert Rift basin have been successful so it’s a pretty phenomenal success rate.”

But Tullow’s success in Uganda also illustrates the region’s pitfalls, namely political risk.

Since last summer the Lake Albert development andTullow’s joint venture with Total and CNOOC have been held up by Ugandan government claims it is owed $404m in capital gains tax by Heritage Oil.

Tullow has been trying to resolve the tax row, and last month chief executive Aidan Heavey said that “while negotiations with the government have taken longer than expected, they are progressing well”.

A memorandum of understanding is being prepared to pave the way for development of the Lake Albert oilfields, but Tullow said last week’s general election in Uganda “could impact the timing of a final agreement”.

The game changer came in February last year when New-York based Anadarko and Aim-quoted Cove Energy made a commercial gas discovery at their Windjammer well off the coast of Mozambique. Two more commercial gas discoveries followed, which, according to estimates from analysts at Ambrian, add up to 12,000bn cu ft of gas, or 2.1bn boe.

“Traditionally the oil industry has been apprehensive of east Africa,” says John Craven, Cove chief executive. “It was Anadarko's success that made the industry realise its mistake. Now there’s only a limited amount of acreage left.”

Together with Anadarko, Cove is spending $150m over the next two years on drilling and appraisal and also looking at expanding into offshore Kenya.

The Cove-Anadarko strikes were followed by BG Group, which made two gas discoveries in Tanzania late last year although the company declined to quantify them.

BG Group says the region “is one of the most significant exploration plays” for the company. “People are looking at the region and the run of successes is starting to gain momentum,” the company says. “Without any shadow of doubt it’s exciting. Depending on size of fields there’s potential for [liquefied natural gas] and export markets to Middle East and Asia. It’s a significant new region for us.”

Aim-quoted Dominion Petroleum, whose chief executive Andrew Cochran used to work for Anadarko, is another investor in the region. He says Dominion spent $40m last year in preparation for drilling in offshore Tanzania and Uganda.

“[When I first came here] it had all the elements that would attract the majors . . . the scale and size of what was possible more than outweighed the drilling cost. Now in Tanzania we’re sandwiched in between Exxon, Eni, Petrobras and Shell,” says Mr Cochran.

The rising number of entrants has sparked intense competition for projects. BG Group, Premier Oil and Cove are among those who are competing for three offshore blocks in Kenya as the country pursues its long tender process. Such competition – and the region’s occasionally fractious politics – led the British high commissioner in Nairobi to call the Kenya’s energy ministry this year on behalf of UK companies to “seek reassurance from the ministry that the bidding process would be transparent and fair”, according to the British embassy in Nairobi.

Not that politics has been a deterrent to oil exploration in the past. In January Afren, which paid $101m last year to acquire assets across east Africa, underlined growing investor appetite in the region with a $450m five-year bond. That will help fund data acquisition and well drilling in Kenya, Ethiopia, Madagascar and the Seychelles.

Most of the discoveries to date have been gas – bar Uganda – which analysts believe is the main reason why the region has yet to spark wider interest.

That could change soon according to Galib Virani, Afren associate director, who says that less than 500 wells have been drilled in east Africa, compared with some 20,000 in the north and 15,000 in the west of the continent. “From a geological standpoint the region is completely underexplored. All of our acreage is located on basins with proved hydrocarbons. [Coming to east Africa] was something we always wanted to do but it was just a matter of timing.”

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