East Africa’s oil and gas sector is set for more investments in the next one year as infrastructure developments go ahead.

A flurry of activities will see the development of oil and gas production plants, export terminals, pipelines and storage facilities and drilling of several wells by prospectors.

CFC Stanbic Bank estimates that Kenya and Uganda require over $50 billion in the next five years for oil production and transport facilities while Tanzania needs $20 billion to build a gas liquefaction plant with an export terminal.

Regional parliaments will also be busy overhauling outdated energy and petroleum laws.

Because the oil industry is highly mechanised, it is not expected to generate many direct jobs. But governments are keen to ensure that local citizens still get direct benefits from the sector, with regional legislatures working on laws to ensure that a certain percentage of goods and services in the sector are sourced locally.

Last month, Tullow Oil in Kenya was forced to close its operations in Turkana after a standoff with area residents who were demanding more jobs from the company — bringing into sharp focus the need for clear rules of engagement between investors, governments and residents.

Kenya’s current oil regulation, which dates back to 1986, is woefully outdated for the current realities of the sector, and out of step with the country’s Constitution, which remodelled the country into 47 counties.

A Bill outlining Kenya’s new rules for exploration and production of oil and gas is expected to be tabled in parliament in the first quarter of 2014, to create a suitable framework that will hopefully attract investments to the sector.

“The proposed law may require foreign companies to partner with a local firm in order to operate in Kenya,” said National Oil Corporation of Kenya (NOCK) petroleum lawyer Everlister Kathure.

Uganda is also keen on securing local participation in the sector. The country’s exploration regulations now stipulate that if a prospecting firm needs goods and services that are not available in Uganda, they will be provided by a foreign company that has a local holding of 48 per cent share.

Darling of investors

East Africa is emerging as the new darling of investors, with seven out of the 10 top global discoveries of 2012 coming from the region, but further development of the sector is hindered by the lack of infrastructure.

Top on the agenda for Kenya, Uganda and South Sudan is infrastructure development such as the integrated $23 billion Lamu Port-Southern Sudan-Ethiopia-Transport Corridor (LAPSET).

According to Oscar Kang’oro, CFC Stanbic Bank’s head of oil and gas in East Africa, finding the right source of capital to match the risk profile is vital as the oil and gas sectors are likely to drive economic growth across the region with infrastructure investment projected to peak in 2015 and 2016.

It is expected that oil and gas projects will be funded through a variety of lenders. In the past, American, European and Japanese firms were major players, but Chinese companies are now increasingly active.

Oil and gas firms supported by Chinese banks have increased investments in large infrastructure projects. Tanzania, for example, is currently building a 532-kilometre long natural gas pipeline from Mtwara to Dar es Salaam using a $1.2 billion loan from China to enable the country to increase its power generation capacity to 3,000 Megawatts.

Upon completion in 2015, the pipeline will allow Mnazi Bay Concession partners and others to supply gas to large-scale electricity producers, industrial users and major towns in Tanzania.

Headquartered in Kenya and listed on the Toronto Stock Exchange, Taipan Resources Inc will in the fourth quarter of next year spend $25 million to drill a well in block 2B in northeastern Kenya.

Africa Oil Corporation, which recently raised $450 million, expects to drill at least seven wells between this year and 2014 in the Lokichar basin in northwestern Kenya, where the company has jointly discovered oil with Tullow.

Tullow, with joint venture partner Africa Oil Corporation, is expected to drill more wells to verify the volume existing in Turkana County to enable the country to move to the production stage.

But oil companies have to find a way to include local residents in their operations. Tullow was able to resolve the two week standoff by agreeing to double its social project spending to $4 million per year, and undertaking to train more Turkanas to take up high profile jobs.

Vanoil Energy Ltd of Canada has from August this year been unable to drill the Madogashe-1 well near Garissa town in north eastern Kenya after local residents staged protests, demanding a $500,000 trust fund be set up by Vanoil. The company on August 7 announced the slowing down of operations after starting drilling activities in July.

Energy and Petroleum Cabinet Secretary Davis Chirchir said the government wants to resolve disputes between the firm and residents of Garissa to allow drilling of the well to continue. He added that his ministry “will soon” meet with political leaders, county officials and residents in Garissa to seek an amicable solution to the dispute.

Kenya’s Ministry of Energy is in the final stages of drafting new petroleum regulations crafted with help of the World Bank, Hunton & Williams of the USA and Challenge Energy Ltd of Britain.

“The review was necessary as BG Group was among companies that could not drill wells in gas prone exploration areas due to the absence of fiscal and contractual terms for natural gas,” said Mr Chirchir.

He said a new regulatory framework is expected to lead to substantial investments from companies in exploration areas in Lamu Basin along Kenya’s Coast due to greater certainty of terms and markets.

Current laws

Kenya’s current production sharing contracts have profit sharing computed on the basis of the first tranche of 20,000 barrels of oil per day (bpd). The  next level of production will see 30,000 bpd, then 50,000 bpd and ultimately 100,000 bpd.

The new regulations are expected to have a revenue sharing formula on how money earned from commercial oil and gas is to be shared between the national government, county governments and local communities.

Kenya’s open door policy of awarding exploration acreage to companies will be replaced by competitive bidding. To avoid disputes, the terms of existing exploration contracts will not be changed.  

South Sudan expects to offer oil exploration areas to investors through a fresh licensing round after current work on creating a new concession map is finished before the end of the year. 

The Ministry of Petroleum and Mining said the exact number of new exploration areas will be determined and an announcement made to inform potential investors when to bid.

“We are working on a new concession map and this will lead to the first licensing round for the new annexed blocks,” said the ministry’s director general of petroleum Mohamed Lino Benjamin.

South Sudan, which produces about 220,000 barrels of oil per day, uses two export pipelines passing through Sudan to Port Sudan on the Red Sea. The agreement between the two countries will go up to October 2016.

South Sudan will be forced to renew the agreement with Sudan if alternative transport routes from Juba to Lamu port in Kenya or Djibouti through Ethiopia do not go through.

Uganda’s Ministry of Energy and Mineral Development plans to hold a licensing round next year for investors interested in exploration acreage as the country has a regulatory framework in place.

“A licensing round is likely to be held in 2014 as the Petroleum Exploration, Development and Production Act 2013 has been enacted,” said head of Midstream Petroleum Unit in the Ministry of Energy Gerald Banaga.

The ministry is in discussions with investors about the possibility of generating over 150 Megawatts of electricity using crude oil and gas from the fossil fuel rich Albertine basin in western Uganda.

Uganda and South Sudan’s crude oil is heavy and waxy in nature, heightening the need for refining facilities. Uganda wants to build a $2 billion refinery in Hoima district to process 60,000 barrels per day of crude oil.

Kenya plans to build a refinery in Isiolo with a capacity of 120,000 bpd. South Sudan has identified five refinery sites, and two of these are in the construction phase.

South Sudan’s first refinery will process 5,000 barrels a day at Bentiu and the second 11,000 bpd of crude at Thiangrial, in the oil-producing states of Unity and Upper Nile.

Additional reporting by Christine Mungai.