The Great Kenyan Oil Discovery: Part 2
A Q&A with Alex Budden (Vice President External Relations – Africa Oil)
By: Andrew Thompson
Since the announcement of Kenya’s first major oil discovery by joint partners Tullow and Africa Oil caught the world’s attention in 2012, there has been considerable hype surrounding the frontier region’s potential.
Of the 1.3 billion barrel estimated in the South Lokichar Basin in North West Kenya’s Turkana County, 600 million barrels have been confirmed. The discovery in Turkana province now sits at an estimated 600 million barrels.
Tullow and Africa Oil are now working towards its development and commercial viability.
There are host of other companies now carrying out exploration work in Kenya across the highly prospective East Africa region, including Eni, Total, Anadarko and the BG Group.
The Kenyan government is in the process of enacting a wave of regulatory reforms and legislations to ensure it capitalises locally on the developing industry. However, the process has not been smooth sailing, with uncertain regulations, benefit sharing arrangements, political disputes and local community tensions, security issues and a falling oil price ensuring that the road from discovery to production will need to be navigated carefully.
Andrew Thompson spoke to a major player to find out where the sector is heading.
Alex Budden is in charge of External Relations for Africa Oil and has been working with local communities and the Kenyan Government to develop the company’s projects in North Western Kenya.
AT: How difficult has it been balancing community expectations with business imperatives?
AB: It’s been expectations across the board. The expectations of central and county governments are just as important here; but when you do look at the communities we are operating in, these are traditionally rural and pastoral communities. They have not had much involvement with modern day industrial activity before, so there is an awareness-raising element to what we have to do.
Kenya as a country has never been involved in the oil and gas industry in a serious way, so as soon as you mention there’s been a discovery, the expectation for a lot of people is that oil will be flowing the next day.
A lot of work needs to be put in to say, well actually we are in the very early stages of exploration, it could be several years before it even moves into the production phase, therefore what you think you’re getting out of this has to be put within context.
When expectations are high and delivery is at the early stage that can lead to frustration. Two-way communication is really the way to get through this, sometimes it works sometimes it doesn’t, but you’ve got to keep discussing these issues.
AT: The operation had an issue last year, where drilling had to be suspended due to security concerns, after local residents held protests demanding more jobs at the sites. How difficult was this to deal with?
AB: A lot of the trouble we’ve seen recently in Turkana is not just around the oil and gas industry, it’s around the local community’s concern about general insecurity.
They know that often the only way their voices are heard by the National Government is to blockade roads or demonstrate or agitate in a very physical way.
What we are trying to do is move the communities away from that and say, there will be times of disagreement. There will be times when you feel you’re not getting a fair share and we need to talk about it, but there will also be times when perhaps your expectations are too high for the reality on the ground, but rather than having a demonstration or blockading a road, let’s put in place a more communicative process where you truly feel your grievances are being looked at. That’s actually going to take a bit of time to get up and running.
AT: The Kenyan Government is in the process of bringing in a wave of regulatory reforms to ensure it maximises local benefits, is there a danger if they are too stringent it could scare off potential investors?
AB: Certainly when you look at oil and gas companies in Kenya we have production sharing agreements, which are our legal contracts with the Kenyan Government. We would like to see those contracts honoured. Contract stability is a key part of attracting foreign investment.
If the discussions are around how the amount of money going to the Kenyan Government is going to be split between the national, county and local authorities, we think that is an important area that needs to be debated.
What we would say is that legislation trying to bring in additional costs to the industry, suddenly changes the economic models that are being used to determine how we invest.
A lot of Kenyans don’t realise this, but all of the investment going into oil and gas in Kenya is coming from the international capital markets. Our Joint Venture is investing approximately $1 million a day into oil exploration in Kenya and all of that has to be raised on the international markets, which given the present state of global oil prices is a real challenge.
There is no Kenyan government money going into this at all. Kenya therefore is in competition with every other exploration phase country in the world.
If Kenya wants companies to invest and try and find oil, which in the long term will provide large levels of revenue for their economy, then they need to remain competitive. New legislation or regulation that erodes this competitiveness could risk future investment in the country.
AT: What is the time frame for first production?
AB: We are aiming to submit a Final Development Plan to the Kenyan government at the end of 2015. We would then hope to be able to make a Final Investment Decision approximately a year later, which will take into account all of the above issues. It will then take obviously a couple of years for a pipeline and the infrastructure to be put in place.
I think a lot of it depends on how quickly those things can proceed in terms of financial security.
People are not going to invest in the industry and they are not going to invest in pipelines, if they believe there is a high chance their investment will be eroded.
Security is certainly also going to be an element on people’s minds, as to whether a large-scale oil and gas infrastructure development will be secured properly. There are also issues around land access and local community.
I think we all hope that by 2018/19 we would be seeing first production, but I think at the moment it’s too early to say what that will actually look like.
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