WHY INVESTING IN EAST AFRICA OIL MAKES SENSE RIGHT NOW

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African oil and gas trade aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your risk in the weeks ahead. Let’s see what’s happening out there.

Basin Openers lead off 2015 for Tullow & Africa

Although the great oil price slump of 2014 continues, it looks like at a least one major African frontier region will continue to see activity in 2015: Kenya.

In recent market updates, London-based Tullow Oil and Vancouver-based Africa Oil — the companies that did the most to open up the new oil and gas discoveries — said they plan to drill six basin openers in 2015 including four during the first quarter.

These will include one each in Kenya’s North Kerio and North Turkana basins, where drilling is already under way. Meanwhile, Kenya’s North Samaki and Tausi wells in the North Turkana and North Lokichar basins are both set to start drilling later in the quarter.

The final two basin openers are expected to spud in the South Kerio and the Kerio Valley sometime by mid-2015 and the third quarter, respectively. Additionally, more than a dozen additional wells, including exploration wildcats and appraisals, are expected to be dug this year at worksites all over Blocks 10BA, 10BB and 13T.

All this activity is notable given the near simultaneous announcement that Tullow will be gutting its global exploration efforts to just $200 million, down 80 percent from the $1 billion it spent looking for oil and gas in 2014.

This is $100 million lower than the number Tullow announced in November and reinforces the notion that many in the oil patch are running scared in the face of oil prices staying below the $50 per barrel level for some time to come. But, this raises an important question. As Tullow pulls back elsewhere, what exactly is drawing the company’s remaining exploration spending to Kenya?

A conventional onshore oil play

Mostly of what Tullow is cutting involves its various offshore programs. Although these can be incredibly lucrative under the right conditions – just look at Tullow’s cash cow, Jubilee Field, off Ghana, discovered in 2007. Production began in 2010 but offshore plays can be hugely expensive and risky endeavors. Not only is finding oil still pretty much a crap shoot in the deep water offshore, but once it is found, billions of dollars and many years are required to bring it into production — and that’s under ideal conditions.

Onshore conventional plays, however, are a different kettle of fish. Unlike offshore oil, onshore is much easier to find using modern geophysical techniques and contemporary 3D seismic imaging. Although there is still some risk involved, proper data acquisition over an onshore position is much cheaper than offshore data acquisition while exploration drilling is less expensive. All this makes onshore plays like Kenya’s much more attractive than offshore plays. Given the size of the finds in Kenya and onshore East Africa — 600 million barrels and 3 billion barrels — it’s a no brainer to focus where exploration and extraction is cheap and relatively certain compared to where it is expensive and more prone to risk.

Second, Kenya and East Africa are generally positioned well in terms of investment dollars. The region is relatively stable, hosts some of the fastest-growing economies on Earth and, is situated relatively close to India and China — both of which are huge importers and will jump at the chance to diversify away from the Middle East. Once in production, therefore, Kenya’s oil should find ready buyers, even in the face of low global prices for oil.

Finally, third, the drop off in prices actually makes it a good time to begin the hard development work that will be required to bring Kenya’s oil to market. That’s because the fall in prices has pushed every other oil and gas company in the world to back off from exploration and development projects. That means it  should be a much less expensive to contract with oilfield services and infrastructure companies that oil and gas firms typically work with to actually build out fields and bring them to market. Being one of the few games in town, Kenyan oil field development should therefore get cheaper as pipeline providers and others compete to supply Tullow and Africa Oil’s project in what has become a global oil patch recession.

East Africa makes sense

Tullow’s continuing emphasis on Kenya makes sense. It’s a relatively cheap, relatively riskless play that, once developed, will find ready buyers. Development, too, is likely to get cheaper as others bow out of projects elsewhere due to cost. All this should make Kenya’s oilfields profitable even in a low-price environment, making investing even more attractive given current market conditions.  That’s good news not just for Tullow, but for East Africa’s potential to become a major new oil supplier in the relative near future.

Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider and Mint Press News.