Kenya’s offshore discovery of gas has shaken off some of the risks associated with the costly hydrocarbon exploration, raising hopes that firms will drill more wells in the country.

Analysts, led by Australian consulting firm Hartleys, project that drilling activity will significantly increase in offshore Kenya with up to 10 wells expected in 2013.

Dundee Capital Markets, a Canadian investment dealer, says with the increased activity, relatively smaller explorers with material acreage position in offshore Kenya are becoming targets for big companies in what could usher in fresh rounds of mergers and acquisitions in the lucrative oil exploration business.

Last week, US-based oil and gas explorer, Apache, said it had struck 50 metres of net gas pay in Block L8, operated jointly with Origin Oil and Gas, which owns 20 per cent of the block, while Tullow and Pancontinental own 15 per cent each.

READ: Possible oil find at Mbawa well

Dundee said in a research note released immediately after the announcement that the exploration milestone had only made Pancontinental more attractive to big-monied explorers.

Natural acquisition

“Should the upcoming exploration campaign meet with success, we believe Pancontinental would stand out as a natural acquisition target,” said Dundee, adding that nearly all small to mid-cap companies with a material acreage position within the region have now been acquired.

Dundee said that Pancontinental stands as one of only two remaining small-cap companies with a material acreage in offshore Kenya, the other being Australian compatriot FAR Ltd.

“The success at Mbawa, whilst not fully quantified, will most likely signify the beginning of a new wave of discoveries in offshore Kenya. If even a portion of the potential of existing leads and prospects is converted into discovery then there will be a repeat of what has already transpired in Tanzania and Mozambique,” said Hartley in a research note.

East Africa has been a hotbed of acquisition activity of late and with the remarkable success of the gas exploration programme in offshore Tanzania and Mozambique, the industry’s interest in the region stands at an all-time high.

This interest, analysts and oil executives said, explains why every bloc in offshore Kenya has now been licensed.

While Kenya’s Energy Minister Kiraitu Murungi was pessimistic about the Mbawa find being sufficient in isolation to be commercial he said more drilling could realise Kenya’s long-held dream of finding gas.

As East Africa transforms into a hotspot for oil, gas and mineral exploration, the region has in the past three years attracted multimillion dollars in foreign investments into Uganda, Tanzania, Kenya and Mozambique.

As the prospects brighten, the huge flow of foreign investment into the oil and gas sector is expected to start creating additional demand for the importation of heavy machinery needed to develop drilling sites and pipelines.

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The new gas find has reduced the risks involved in oil exploration in Kenya, which due to its poor history has always attracted a lower estimate of success. Tullow for example, placed only a 15 per cent chance of success in the Mbawa well.

The increased success ratings and the proven existence of hydrocarbon are likely to increase the valuation of oil and gas blocks in Kenya, especially given that the country has leased all its 46 blocks.

“Pancontinental is now firmly in the sights of super majors and national oil companies looking to secure energy in what is now the new hydrocarbon province. As with Cove Oil, bids may not come until more gas is discovered,” said Hartleys.

Pancontinental has interests in four oil blocks in offshore Kenya.

Though Kenya, Tanzania and Mozambique’s coast lines  share the same geological formations, oil exploration firms have tended to tread cautiously as there has been no previous hydrocarbon find in offshore Kenya — a factor that is now likely to change in view of the recent find.

“The gas discovery is very promising and is the first ever substantial hydrocarbon discovery in offshore Kenya. We are delighted to prove that there is a working hydrocarbon system off-shore. Further work continues to evaluate the size of the discovery,” said Barry Rushworth, Pancontinental Oil chief executive officer.

In 2007, Woodside petroleum drilled the last offshore well in Kenya at a cost of $100 million, which later turned out to be dry. Before that an offshore well had been sunk in 1985, underlying the risks associated with oil and gas exploration in the country.

Kenya has sunk six offshore wells in total since independence. This, compared with Tanzania and Mozambique, which over the past two years, have made 24 discoveries from the 27 wells and which between them have discovered around 100 trillion cubic feet of natural gas.

Resource estimates

The increased resource estimates by oil and gas companies operating in the region will also play a part in increasing the cost of any gas or oil acquisition or merger. 

Ophir, for example, has increased its estimates for gas contained in its Mzia Block 1 in offshore Tanzania from between two and six trillion cubic feet to between four and nine trillion cubic feet.

An independent assessment by Gaffney Cline’s increased estimates of oil contained in blocks owned by Africa Oil Corp by three times based on increased chances of oil finds following an oil discovery by Tullow at its Ngamia well.

The recent find will be a big boost to Tanzania, which unlike Kenya, has not leased all it blocks. The country plans to invite bids for nine offshore gas and oil blocks from exploration firms starting this November.