Kenya: Oil and Gas Companies Exit Casting Doubt on Commercial Viability

A Flurry of exits by exploration firms threatens to burst oil and gas companies. In February this year, Hunting Alpha (EPZ) started the process of shutting down its Kenyan office.

The firm – a subsidiary of Hunting Plc, a UK manufacturer of equipment used in extraction – appointed Peter Kahi of PKF East Africa to undertake the voluntary winding-up process of its Kenyan operation which is based in Mombasa.

Mr Kahi’s appointment was made public in a Kenya Gazette notice a month later on March 15 this year.

Other than noting that Mr. Kahi was the liquidator, Hunting Alpha did not give reasons behind the closure of its local office.

The exit also did not catch the attention of many Kenyans, but it spoke volumes about the growing sentiments that a section of global players hold on Kenya’s fledgling oil and gas industry.

In its annual report last month, the firm’s parent company in the UK told its shareholders its exit from Kenya was due to the low level of activities in the country’s nascent upstream oil sector.

“Hunting closed its Kenyan joint venture in the year as clients pushed out drilling and capital expenditures due to generally subdued international drilling sentiment,” said the company in its annual report published last month.

“Given the modest drilling activity forecast for East Africa in the medium-term, the board (of the company) has decided to close its Kenyan joint venture in Mombasa.”

The company will not leave a major mark in Kenya, big as it is in the global petroleum industry.

Thus, while the Project Oil Kenya – the name appended to the project that will produce oil in South Lokichar spearheaded by Tullow Oil – may have inspired hopes of Kenya joining the league of oil-exporting countries, Hunting’s position could be a party pooper.

This coming on the back of other players who have exited Kenya in the recent past despite the country’s hyped emergence as an oil province.

Others include Africa Oil which is one of the critical players in the Lokichar oil project.

The firm has said it is abandoning one of the blocks that it had been licensed to explore for oil.

The company has a 25 percent stake in the Lokichar oil blocks that are set to start commercial oil production by 2022.

It is also expected to play a critical role in the full field development, including ownership in the 890km pipeline that will move crude from Turkana to Lamu.

“During the second quarter of 2018, the company submitted a notice to the government relinquishing its interest in Block 9 (Kenya), resulting in a $44.7 million (Sh4.5 billion) impairment of previously capitalized intangible exploration assets,” said Africa Oil in its annual report published last month.

Royal Dutch Shell also gave up its blocks L10A and L10B where it had been exploring and shut down its Kenyan office charged with upstream activities. Shell merged with UK oil major BG Group that held the two licenses.

The firm reported to its shareholders that relinquishing its Kenyan operations was a contributor to a reduction in its unexplored assets that it held globally last year.

Notable, however, is the fact that the company acquired new exploration licenses in other markets, an indicator that giving up on Kenya’s oil and gas companies was not a factor in scaling down its upstream activities.

“In total, the net undeveloped acreage in our exploration portfolio decreased by around 11 million acres in 2018. The largest contributions were relinquishments and divestments in Canada, Kenya, New Zealand, Indonesia, and Namibia, offset by new license entries in Brazil, Mauritania, Mexico, and the UK,” Shell said.

While most of the companies have cited low activity as their main reason to leave, casting doubt on the viability of Kenya’s oil reserves, the industry players could also be responding to other concerns, including insecurity.

Firms licensed to explore offshore Lamu have said their operations have been hampered by the region’s proximity to unstable Somalia.

Work by Australian firm Far Ltd has, on the other hand, been in limbo for some years now due to what it said were land access issues.

The firm is licensed to explore for oil in Block L6 in Lamu and covers areas on both land and sea.

It has been locked in a tussle with Kipini Conservancy in Lamu which has barred it from traversing the conservancy’s land to access the onshore sections of Block L6.

In 2017, the firm had sought an extension of its license in the block following the land access issues, to which the Petroleum Ministry gave a 12-month extension after talks with the owners of the conservancy “became untenable”.

Further negotiations with conservancy during that year did not yield meaningful results.

“Far Ltd had anticipated the extension period would allow sufficient time to work with the ministry in resolving the outstanding land access matters and to appropriately address them to conclude land access rights for the Joint Venture to carry out its intended onshore exploration work program,” said the firm in its report to shareholders last month.

“Despite the repeated attempts by the Government of Kenya to intervene, the ongoing and protracted land access dispute with the Conservancy continues to hinder exploration of the onshore Block L6. Consequently, the start of the onshore work program has been suspended.”

Last year, the firm requested a further extension from the ministry as well as a suspension of contractual obligations.

The oil and gas companies exploring for in the country are required to make certain minimum investments in exploration works as well as investments to the community, in the absence of which the Government can revoke their licenses.