Kenya is seeking to buy crude oil and natural gas from Nigeria at concessionary prices.

This will give the East African country access to cheap hydrocarbons to help it fire up proposed electricity generating plants that are expected to reduce the overall cost of power and therefore of doing business.

Documents seen by The EastAfrican show that Kenya made the request for preferential treatment by Abuja three weeks ago in a deal that could see Nairobi cede oil blocks to Nigeria.

It was part of the discussions between President Uhuru Kenyatta and his Nigerian counterpart, Goodluck Jonathan, during the former’s state visit to Abuja this year that saw the two governments sign deals on technology transfer and capacity building in oil- and gas-related skills.

Nigeria sought investment opportunities in areas of petrochemicals, oil exploration and production, including acquisition of interest in oil and gas acreages.

While details of the deal have not been firmed up, the two countries have signed a memorandum of understanding, setting the tone for negotiations that could see Kenya offer vacant oil blocks — with at least six due for auction.

“The MoU gives us a starting point... We are now trying to agree on terms like pricing, duration of the concession...” Amina Mohamed, Kenya’s Cabinet Secretary for Foreign Affairs and International Trade, told The EastAfrican.

Kenya and Nigeria also signed a trade and immigration agreement, which provides for protection of investment and removes visa requirements for prominent businessmen visiting either country.

They also sealed agreements covering areas deemed to be of mutual interest — such as trade, tourism, education, technical co-operation and high-level diplomatic engagements.

READ: Kenya, Nigeria in MoU to stop double-taxation

The concessionary crude oil would help Kenya rein in its import bill given that petroleum products are its single largest import item. Fuel imports account for at least a quarter of Kenya’s total imports.

Over the past six years, landing prices for Murban Crude at the Mombasa port have doubled from $62 per barrel to around $113.

Moreover, the growing economy is expected to fuel a steep jump in consumption, with the government estimating that the country will be using six million tonnes annually by 2016, up from the current 4.5 million.

Ruffled feathers

Last September, Nigeria’s Minister for Petroleum Resources Diezani Alison-Madueke ruffled the Kenya government’s feathers when he told his country’s media that Nairobi had allocated oil blocks to Nigerian investors when President Jonathan visited the country. The Kenyan government has denied doing so.

The six blocks due to be auctioned fell vacant following the announcement in 2012 of new rules requiring exploration firms to cede 25 per cent of their licensed acreage if they failed to work on the sites in the stipulated time. Once auctioned, the blocks will increase Kenya’s exploration areas to 52 from 46.

The auction is also expected to trigger a fresh scramble by oil exploration majors keen on tapping into Kenya’s nascent oil and gas sector, which has in the past two years attracted huge interest following finds by Tullow Oil in at least seven wells in the county.

With the government having earlier announced the rights to the vacant blocks would be sold to the highest bidder, it is still not clear whether Nigeria will have to use this route or its bidders will be given preferential terms.

Mwendia Nyagah, a Nairobi-based petroleum expert, argued that the biggest challenge in the oil and gas deal would be shipping costs because the crude will have to travel from West Africa to Cape Town before landing at the Kenya coast.

He noted that the concession will have to be big enough to cover the shipping costs. However, Ms Mohamed said Kenya was seeking exactly such concessionary terms.

Kenya has recently been courting foreign investors for big-ticket projects, with President Kenyatta shuttling from one country to another. This year, he has also visited Turkey, Qatar and Ethiopia and signed far-reaching deals.

READ: Uhuru globetrots in bid to cement Kenya’s diplomatic, trade standing

The country is working on modalities of implementing a Special Status Agreement it signed with Addis Ababa on March 11 that, among other things, allows locally owned Kenyan banks to open representative offices in Ethiopia.

President Kenyatta has also hosted several government and business delegations in Nairobi, the biggest game changer being Chinese Prime Minister Li Keqiang’s visit in early May. Last year, the President met a delegation of Nigerian businessmen who showed interest in a variety of sectors.

Aliko Dangote, Africa’s richest man, announced plans to build a $400 million cement factory in Kenya, in what would be the biggest foreign investment in recent years. The plant, to be set up in limestone-rich Kitui County, east of Nairobi, will have a capacity of about 5,500 tonnes per day.

READ: Time, money and Aliko Dangote

In January, President Kenyatta met Jeffrey Immelt, the chairman and chief executive officer of General Electric. The company is involved in several investments in the power sector that could add about 1,000MW to the Kenyan grid over the next five years.

The Nigeria deal is crucial to Kenya’s plans to build a 700MW natural gas-fired power plant in 30 months as part of an ambitious plan to add an estimated 5,000MW of capacity — triple the current capacity — over the next three years.

Kenyan manufacturers have long complained of the high cost of power, which is estimated to be double the rate in Egypt, arguing that it is eroding Kenya’s competitiveness.

On average, Kenyan consumers pay $0.18 per kilowatt hour, and manufacturers want this brought down to $0.08 per kilowatt hour to enable them to have a fighting chance against companies in South Africa and Egypt.

Raises questions

The deal however raises questions since Kenya has shut down its sole refinery, opting to convert it into a storage depot on the grounds that it was inefficient and was pushing up the cost of fuel.

Oil marketers had complained that processing crude at the 50-year-old refinery was more expensive than importing fuel and cost the economy at least $18.8 million a month.

Similarly, Nigeria, which produces 2.5 million barrels of crude per day, does not have efficient refineries despite being the biggest oil producer in Africa. The three refineries under the control of the government at Port Harcourt, Warri and Kaduna only work at 18 per cent capacity.

In April last year, Mr Dangote announced his plans to build a $9 billion oil refinery in the Olokola Liquefied Natural Gas Free Trade Zone on the Gulf of Guinea by 2016 that will produce about 400,000 barrels of petroleum products per day.