East Africa set for major gas, oil transformation

By Jacinta Moran in Cape Town; Edited by Jeremy Lovell

July 12, 2012 - Oil and gas activity has started rolling in East Africa, as drilling activity ramps up, long-awaited deals are sealed and oil companies scramble to get a slice of what could be an energy goldmine. (see related map: East Africa oil and gas resources).

In Uganda, Tullow Oil has resolved a long-standing dispute with the government for the development of a number of oil-rich blocks, and the UK-listed explorer has also made Kenya's first ever major oil discovery.

Significant gas reserves have been found in Mozambique and Tanzania, where LNG facilities are now been planned. Drilling will kick off in Ethiopia later this year, while Madagascar is believed to hold significant reserves of gas and the Puntland region of Somalia is also showing positive signs.

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Uganda, Kenya

Uganda has been the most closely followed country in East Africa in the past few years after Tullow made a number of major oil discoveries in the Lake Albert basin.

France's Total and China's CNOOC have paid $2.9 billion to buy interests in Tullow's blocks, pushing forward a $10 billion development that is set to transform the East African country into a major oil producer.

The companies have now completed technical work on a development plan for the basin and construction of an oil pipeline and refinery.

In Kenya, Tullow discovered oil in March and said last week that prospects in the Turkana region have exceeded expectations with net oil pay found in the Ngamia-1 exploration well being more than double that of any exploration wells drilled to date in East Africa.

Kenya's first oil discovery has seen a surge of interest in new oil exploration licenses, and has boosted the country's oil reserves estimate by one third to around 4 billion barrels, the largest in East Africa.

Italy's Eni is among the latest companies to enter Kenya, having picked up three blocks, marking its first foray into the East African country while Total has finalized an agreement for block L22 in the Lamu Basin.

Oil production would boost economic growth directly as well as provide increased revenues to help strengthen Kenya's future economic potential. It would also help the country reduce its oil import bill.

Nairobi spent $4.1 billion on oil imports in 2011, around 11% of GDP and four times more than it received for its tea exports, Kenya's largest export earner, according to a recent report by Moody's ratings agency.

Drilling in Ethiopia

Successful oil discoveries in Kenya should bode well for landlocked Ethiopia, given their geological similarities.

Local company SouthWest Energy is on track to drill a well in the first quarter of 2013 in the Ogaden Basin which it believes contains an estimated 1.5 billion to 6 billion barrels of oil.

It is currently in discussions with a number of companies for a possible partnership in the country where it owns a 100% interest in 46,000 sq km of highly prospective frontier acreage.

"We have had strong interest from a number of potential partners. Discussions are progressing well," company founder and chairman Tewodros Ashenafi said recently.

SouthWest also owns the Gambella Basin block in the south west of Ethiopia and the Jimma block in the south, which has been shown to have great potential for the development of oil shale deposits, the company says.

Vancouver-based Africa Oil, with partner Tullow, plans to drill one well in the South Omo blocks in Ethiopia before the end of 2012. It is also moving ahead with work on the El Kuran oil accumulation in block 8 in the Ogaden Basin, discovered in the early 1970s.

Make-or-break year for Somalia

After decades of war, Somalia has been undergoing a peace and reconciliation process of late, with the internationally recognized transitional government preparing for presidential and parliamentary elections in August.

A solution to a territorial dispute between the Somaliland region, which declared its independence from Somalia in 1991, and its neighboring semi-autonomous Puntland region, could pave the way for resumption of oil exploration activities.

Oil companies that were awarded concessions by the last government of Somalia, including Shell, ConocoPhillips, BP, Eni and Chevron, ceased their operations a decade ago after declaring force majeure due to unrest in the country.

While Mogadishu says it still recognizes permits awarded prior 1991, it is not clear if concessions acquired post-1991 are considered valid, which include licenses granted to companies such as Africa Oil, Petrosoma and Jacka Resources.

Africa Oil previously drilled its Shabeel-1 well in the northern Dharoor block and said the well encountered several oil and gas shows indicating the presence of a working petroleum system.

Next page: Natural gas: a game-changer