Acquisition and merger deals sweep Kenya oil industry

Saturday August 03 2013

Search for oil in northern Kenya. Junior exploration firms are excepted to become prime targets for multinationals seeking a foothold in the country before commercial production of crude oil and natural gas starts. Photo/FILE

Kenya’s recent successes in oil exploration are triggering a new round of mergers and acquisitions in the lucrative but high-risk business as the new finds reshape company strategies.

Junior exploration firms — companies that do exploration in the hope that a positive find will tempt shareholders to invest more in them or make them an acquisition target — are excepted to become prime targets for multinationals seeking a foothold in the country before commercial production of crude oil and natural gas starts.

Over the past three months, at least four deals have been closed and another three are expected in the coming months, making this the busiest year in Kenya’s exploration business.

The country’s risk profile has been greatly reduced by last week’s announcement by Tullow Oil and partner Africa Oil that their find was commercially viable as well as the discovery of gas by Apache Corporation in offshore exploration area L 8 in September last year.

READ: Tullow to start negotiations on Kenya's oil production

Tullow estimates it has discovered about 300 million barrels of oil.


Elsewhere in Kenya, in the Anza Basin in Block 10A, the Paipai-1 well was drilled in March and encountered light hydrocarbon shows while drilling. The well has been suspended and will be tested in the future.

Interest in offshore Kenya is likely to be raised as Anadarko Petroleum Corporation has high expectations of making a discovery in the Kiboko well being drilled in exploration area L11B in the Lamu basin.

READ: Prospectors to sink two oil and gas wells in 2013

The discoveries confirm the existence of hydrocarbon deposits and offer a deeper understanding of the region’s geological features as well as reducing the risks of hitting dry wells by multinationals.

“A new wave of mergers and acquisitions is in the offing as relatively smaller explorers with large acreage in Kenya are becoming targets for financially well-endowed firms. They have to sell part of their exploration rights to raise funds to expedite well drilling to comply with work programmes agreed on with the Ministry of Energy,” said Robert Shisoka, a consultant at Hydrocarbons Management Ltd.

IFC investment

Early July, the International Finance Corporation, the private investment arm of the World Bank, said it was investing $60 million in a new UK-based company, Delonex Energy, as part of a $600 million equity line to be used for oil and gas exploration in the East African region.

First Oil Plc has acquired a 30 per cent interest of Bowleven’s exploration rights in onshore exploration area 11B in north-western Kenya jointly owned by Adamantine Energy.

Simba Energy in May signed a memorandum of understanding for Ajax Exploration to acquire 66 per cent in area 2A near Mandera town in north-eastern Kenya.

ERHC Energy Inc has signed a letter of intent for a multinational to acquire part of the firm’s interest in area 11A near Lodwar town to expedite exploration work that requires a well to be drilled by 2015.

FAR Ltd and Pancontinental Oil and Gas are seeking to sell part of their exploration rights to a block offshore area L6 to raise funds for well drilling by 2014.

To illustrate the risk, considering that in 2007, Woodside spent $100 million to drill Kenya’s first offshore well on the L5 block situated in the Lamu basin, but the well turned out to be dry.

Apache found gas on the block adjacent to Woodside’s.

Kenya has for a long time been seen as a frontier exploration field as there was no commercial discovery of oil, which made oil companies wary.

For example, Citigroup estimates that the discovery of oil in the Ngamia and Twiga South wells doubled the chances of striking oil in the Lokichar basin from 15-20 per cent to approximately 40-50 per cent.

Interest in Kenya’s offshore areas is likely to be raised by Anadarko Petroleum Corporation making a discovery of either oil or gas in Kiboko well, currently being drilled in acreage L11B in the expansive Lamu basin.

“We are drilling Kiboko prospect, designed to test multiple cretaceous sands. While we are early in our exploration programme, we remain very optimistic about the potential this area holds,” said Anadarko’s spokesman Brian Cain.

Anadarko started on April 19 sinking on Kiboko prospect a well expected to reach a depth of 3,000 metres in acreage L11B. The firm had encountered non-commercial oil shows in Kubwa well in area L 7.

Anadarko’s capital expenditure on the two wells is over $250 million.

Tullow and Africa Oil’s announcement marks yet another milestone for Kenya, which is emerging as a hot spot for oil and gas exploration, as well as other minerals like gold and rare earths.

On July 19, mineral explorer Cortec announced it had found rare earths deposits worth $62.4 billion, raising Kenya’s profile as a potential producer.

Mrima Hill, in the coastal county of Kwale, has one of the top five rare earth deposits in the world. The area also has niobium deposits estimated to be worth $35 billion, Cortec said.

READ: Kenya hits $100bn rare earth jackpot

The main challenge for Tullow and other oil marketers will be how to evacuate the oil, considering that the country lacks the requisite infrastructure required to lift the oil to the country’s port for export.

Tullow has indicated that it would look at lifting the oil and gas through rail and roads as it awaits an agreement with the government on building a pipeline.

“Resources discovered to date are of a scale that the partnership will initiate discussions with the government of Kenya and other relevant stakeholders to consider development options. These discussions include consideration of a ‘start-up phase’ oil production system with potential to deliver significant production rates with oil export via road or rail in advance of a full-scale pipeline development,” said Tullow in its 2013 half year results.

At least 15 wells will be drilled in Kenya in the next 12 to 18 months, which could further “de-risk” the country and increase its appeal among oil majors.

Taipan Resources Corporation, which wholly owns exploration area 2B, is among junior exploration firms in Kenya that are likely to form joint ventures with international companies, according to industry players.

Others are A-Z Petroleum, which has a 100 per cent stake in exploration area L1A and L3 as well as Imara Energy Corporation, and Rift Energy Corporation that wholly owns acreage L19 and L20.

“We welcome First Oil as a strategic partner in our early stage exploration activities in East Africa and look forward to working with the team in this exciting emerging area,” said Bowleven’s chief executive Kevin Hart.

First Oil, which has since inception in April 2001 developed into the largest private company producing oil and gas in the North Sea in Britain, may also contribute up to $3.6 million to Bowleven’s new investments in East Africa.

ERHC’s chief executive Peter Ntephe said negotiations are currently being held with the integrated company involved in exploration and refining as well as distribution and marketing of petroleum products.

Any agreement reached on sale and acquisition of a portion of exploration rights of acreage 11A near Lodwar town will be subject to approvals of the boards of the two firms and the Kenyan government.

The Simba Energy and Ajax deal requires Ajax to commit to fund exploration work including drilling one well, representing gross investment of up to $36.5 million and pay Simba up to $3.1 million for past expenses incurred on the acreage.

Simba’s managing director for operations, Hassan Hassan, said the MOU with Ajax provides an attractive valuation marker for the asset and delivers required funding for the upcoming exploration campaign.

Simba anticipates it will receive government approval later this year.

Ajax’s associate, GeoDynamics Worldwide, in 2012 conducted a seismic survey that identified potential areas with deposits for oil and gas in acreage 2A.

“We now intend to apply our suite of technologies with the aim of speeding up the exploration phase, and drill our first well in late 2014,” said Ajax chairman Andrew Shrager.

Pancontinental has a 15 per cent interest in offshore acreage L8 owned by Apache among others. Pancontinental’s interest in area L8 may reduce to 10 per cent if Tullow acquires a five per cent stake from the Australian firm.

Kennedy Senelwa and Peterson Thiong’o