Dominion faces Tullow in search for oil in Kenya

Posted  Monday, March 28 2011 at 00:00

The scramble for oil exploration blocks in Kenya has heightened as companies make last-ditch efforts to resolve the puzzle of why the country — despite sitting on a rich vein that has yielded oil elsewhere — is yet to strike wells with tangible quantities for exploration.

The jostling has gained tempo in the past year as assigned blocks change hands rapidly and more reputable miners compete for the handful of blocks that are yet to be allocated.

“Several companies with good experience and resource capacity for successful exploration are trooping in and we hope to at least strike something in the short term,” said Mr Martin Heya, the head of petroleum at the Ministry of Energy.

Raised expectations

The presence of two London listed firms — Dominion Petroleum and Tullow Oil — in particular has raised expectations of an oil find.

Tullow has said it will start seisimic tests and drilling in Northern Kenya while Dominion is betting on an offshore block it won a permit for last week.

Dominion elbowed strong competition to win one of three highly sought after blocks off the coast of Lamu dubbed Block L9.

“Kenya’s Block L9 represents one of the very few ‘ground floor’ opportunities remaining in the highly prospective, and increasingly attractive, East African offshore basins,” Dominion CEO Andrew Cochran said on Monday last week when he announced the acquisition.

One well, Simba 1, showed signs of potential gas reserves when it was sunk in 1979 while offshore oil seeps had been identified to the north of the block, which has similarities to Dominion’s Block 7 offshore Tanzania.

Dominion will take a 60 per cent stake of offshore block L9 in the Lamu Basin, with the government likely to take a 15 per cent share later.

The company will spend between Sh517 million ($6.15 million) and Sh3.87 billion ($46 million) on exploration over the next two to six years, according to the terms of the contract.

Oil and gas explorer, Tullow Oil through its local subsidiary Tullow Kenya BV, is scheduled to sink two wells within Blocks 10DD and 10A that hug the Lake Turkana Basin, raising expectations of a find as it did in neighbouring Uganda.

Tullow is next year expected to start oil production within the Albertine Basin in Uganda where billions of barrels of the precious commodity have been discovered.

Tullow entered oil exploration in Kenya after an agreement completed last month with East Africa-focused exploration firm Centric Energy which accepted to farm out to Tullow a 50 per cent interest in its Block 10BA in north-western Kenya.

In the deal that pushed to five the number of Tullow Kenya BV’s operated exploration blocks in northern Kenya, Tullow paid Sh80.7 million ($0.96 million) in historic costs and will finance 80 per cent of future expenditures to a limit of Sh2.5 billion ($30 million).

Fresh prospecting

Officials at the Energy Ministry said applications by several giant firms lining up for fresh prospecting activities continued to swell, despite past failed attempts to strike oil.

Kenya has so far awarded 26 of its existing 38 exploration blocks countrywide, creating a market for farm-in deals between smaller players holding stakes in the blocks and bigger players such as Apache Corporation and Anadarko Petroleum Corporation whose wealth of resources render hope of positive results.

The renewed interest among experienced firms and signs of gas and oil deposits have brought enthusiasm within government circles with Mr Heya looking beyond the prospects.

“When we discover oil ourselves, we shall bring it into production faster than our neighbours – we have the infrastructure, skilled people, a product pipeline, and a refinery – I think we can do it,” he was quoted by the Financial Times saying.

Brent Up 1.5% Near $116; Libya Action Stokes MEast Fears

Brent climbed 1.5 percent on Monday towards $116 after western forces launched a military campaign against Libya, stoking fears that violence will intensify in North Africa and the Middle East, source of more than a third of the world's oil. 

Unrest over the weekend also flared in Syria and Yemen in the wake of popular uprisings that toppled long-time leaders in Tunisia and Egypt earlier this year and a crackdown on protests in Bahrain last week.  

U.N.-backed strikes led by the U.S., the U.K. and France raised the stakes in a civil war that has cut Libya's oil output to less than a quarter of the previous 1.6 million barrels per day (bpd), nearly paralyzing shipments abroad from what used to be the world's 12th largest crude exporter. 

In London, Brent crude for May [LCOCV1  115.35    1.42  (+1.25%)] rose as much as $2.29 to $116.22 a barrel and was up 1.5 percent at $115.69, about $4 from last month's 2-1/2-year high near $120. 

U.S. light, sweet crude for April [CLCV1  102.62    1.55  (+1.53%)] advanced $1.79 to $102.86 after western powers launched a second wave of air strikes on Libya early on Monday, dismissing a ceasefire announced by the country's military late on Sunday.

"With involvement from the West, the uncertainty that has surrounded the region and the fear of upheaval and unrest spreading to countries like Saudi Arabia, where we could lose a lot more crude that what we did Libya, is definitely going to be the main price driver," said Matthew Lewis, an analyst at CMC Markets in Sydney. 

President Barack Obama ordered U.S. forces into the biggest military intervention in the Arab world since the 2003 invasion of Iraq, while Libyan leader Muammar Gaddafi vowed to fight to the death.  

"At this stage, it looks like Libya has further to play. Gaddafi still seems very defiant. We'll see further spikes and shocks in the oil market this week," Lewis said. 

Military action on Libyan air defenses over the past two days, sanctioned by the United Nations in a Security Council resolution on Thursday, has crippled Gaddafi's capability to launch airstrikes and detect foreign aircraft, a senior U.S. military official said on Sunday. 

But Gaddafi's control of oil infrastructure in the long term would probably mean reshaping deals with foreign oil companies in favor of countries not participating in the attacks. 

Libya is considering offering oil block contracts directly to China, India and other nations it sees as friends, Libya's top oil official said on Saturday, instead of opening bidding processes. 

China, India, Russia, Brazil and Germany were the five nations that abstained in last week's U.N. vote to authorize the use of force against Gaddafi. The other ten members of the Security Council voted in favour. 

The weekend's military intervention hit a diplomatic setback as the Arab League chief condemned the "bombardment of civilians".

The strikes began on Saturday, as a coalition of western nations vowed to prevent Gaddafi from launching attacks on civilians as he seeks to crush a rebellion against his four-decade rule.

MidEast Premium

Crowds set fire to a headquarters of the ruling Baath Party in the Syrian city of Deraa on Sunday, while Yemeni President Ali Abdullah Saleh fired his government after a string of allies broke ranks with him as he faces increasing pressure from street protests to step down.

Saudi Arabia and other countries from the Gulf Cooperation Council (GCC) last week sent troops into Bahrain to help quell Shi'ite protests there against the Sunni monarchy. That angered Iran, which denounced the foreign intervention in the island state that lies less than 100 kilometers from the hub of the Saudi oil industry.    

"The key is really how Saudi (Arabia) and Iran play out. Cool heads need to prevail. It's contained at the moment but if things worsen, you see a Mideast premium very quickly," said Jonathan Barratt, managing director of Commodity Broking Services.

Iran's oil minister said on Saturday said any output increase by individual OPEC members aimed at reducing oil price pressures caused by the Libyan crisis would not have the desired effect. 

Some OPEC countries, including Saudi Arabia, have already increased production partly to compensate for the drop in Libyan output and to prevent prices from reaching levels that could derail the global economic recovery. But that has also eroded the group's spare capacity to offset further disruptions.

"None of the OPEC countries have considered it (the current oil price) damaging" to the world economy, Nigerian oil minister Allison-Madueke said on Sunday. 

Oil prices have now recovered completely from a slump triggered by Japan's strongest earthquake on record on March 11. 

Japan hoped power lines restored to its stricken nuclear plant may help solve the world's worst atomic crisis in 25 years, triggered by the earthquake and a tsunami that also left more than 21,000 people dead or missing.

Likely to limit oil's gains was Friday's increase in China's rate reserve requirements as the nation stays focused on stifling inflation, traders and analysts said. 

Phantom ships and crude pricing:What is going on in the oil sector?

Very strange things are happening in the oil sector. On February 14, the State-owned National Oil Corporation of Kenya (Nock) sent out a note to the industry informing them that a ship by the name Volga Tanker with 62,000 metric tons of petroleum products would be arriving in Mombasa on February 26.

That consignment was to be shared by all companies under the so-called OTS arrangement. As is the practice, oil companies checked in international marine registers to establish whether such a ship was, indeed, headed for Mombasa with the said products.

The search showed that the ship did not exist in any register. Volga Tanker was a phantom ship. There were even reports that this specific ship had been scrapped for metal as far back as 2004 in India. Absolutely incredible, to say the least.

Pressed by the industry, Nock said it had nominated another ship by the name MT Adden to deliver 25,000 metric tons between February 17-19. MT Adden did not show up in Mombasa.

At one stage, the industry was given the name of another vessel by the name MT Ratna Sheruti. It did not deliver either.

On February 24, Nock revised the vessel’s nomination for the fourth time, now advising the industry that the performing vessel would be a ship known as MT Ratna Namrata. It finally brought 55,000 metric tons, arriving in Mombasa on March 1.

What happened is an illustration of what obtains when you allow a State-owned firm run by political appointees to participate in such a high-risk business .

With Nock yet to build a full-fledged trading department of its own, a perfect opportunity had been opened for sharks with friends in high places to exploit the situation.

That is how we have ended with this sensational tales of phantom ships, brief-case traders, and oil trading deals gone sour.

I like the way the permanent secretary in the Ministry of Energy stepped in with alacrity to float an emergency OTS tender in order to cure the cock-up by Nock. Someone must be made to account for these phantom ships and brief-case middlemen.

When Nock sent invoices to oil companies asking them to purchase their share of the 55,000 tons consignment on March 2, it sparked a bigger controversy.

Oil companies cannot agree with Nock on what they call ‘‘the applicable month of pricing’’. They say the price at which Nock has invoiced them is way above the price at which the oil company was awarded the OTS tender in February.

They have threatened to boycott the consignment, saying the new prices amount to an additional Sh3 per litre at the pump.

In the past, when the market was liberalised, they could have simply passed on the extra cost to the consumer. They don’t have that choice right now as pump prices are regulated.

If the boycott is effected, there will be no space to accommodate other imports. The stage has been set for disagreements over the distribution of ullage space at both the Kipevu Oil Terminal and the oil pipeline. The controversy will spill over to the next OTS industry tender in April.

This thing could precipitate a major crisis in the whole supply chain whose ramifications will be felt across neighbouring countries of Uganda, Rwanda, Burundi and parts of DRC.

We need to look afresh at Nock’s role in the oil industry. Oil trading is a high-risk business. Among the majors, trading is handled by full-fledged departments staffed with experienced people.

I am not against the idea of Nock playing the role in the market. Let’s not give it more than it can chew. The financial exposure involved is just too high.

As it is, the parastatal has borrowed billions of shillings from a syndicate of commercial banks for working capital to finance crude oil imports.

Technically, these loans are not guaranteed by the Treasury. But they remain contingent liabilities on the government’s books. It’s the taxpayer who is exposed.

I can’t claim any authority on the working of OTS rules. What I know is that any system that allows a player to alter the prices of a competitive bid is flirting with disaster.

This controversy could unravel the whole OTS arrangement. Everybody must be made to play by both the letter and spirit of the rules.

PHOTOS: The Giant Saudi Oil Compound That's Just Miles From The Protests

A quick geography lesson before tomorrow Saudi Day Of Rage. Ra's Tannura is a major compound and port for the world's largest oil company, Saudi Aramco.
Just west of Al Khobar is one of Aramco's giant residential compounds.
This region, including nearby Bahrain, is home to a discontent Shiite majority. There have already been protests in Qatif.

The biggest refinery in the world

Millions of barrels of oil stored on Ras Tanura Sea Island

5 million barrels of oil are loaded onto ships every day at the peninsula

This is where they oversee everything

The largest compound, Dhahran has 11,300 residents and grassy sports facilities

Dharan's Core Area at twilight

Image: Courtesy of Saudi Aramco

R&D Headquarters

A look UNDERGROUND

Image: Courtesy of Saudi Aramco

The Exploration and Petroleum Engineering Center, or EXPEC

Image: Courtesy of Saudi Aramco

The world's largest seawater treatment plant

Countless of barrels of Arabian Extra Light crude oil flows through this pipeline, pictured during construction in 1997

Saudi Aramco geoscientists and petroleum engineers

The Shaybah facility at night

The Haradh Project

Image: Courtesy of Saudi Aramco

Another dramatic picture of Haradh

can't get enough oil?

Oil since 1861

Since the start of QE I (up until very recently), oil and stocks have been very closely correlated

Meanwhile, oil prices are severely lagging food prices

You can see easily how the Mideast crisis blew out the spread between WTI and Brent Crude

A massive divergence is brewing between the Baltic Dry Index and oil

Oil's burden of GDP is nearing old highs

To keep up with demand, a lot is resting on future oil fields.

Here's a look at non-OPEC production changes

The peak of discovery was in the 1960s

Google trends shows that the oil spike hasn't capture people's imagination like it did in the last time

The long term trend of stocks priced in oil is brutal

And even gold isn't keeping up with oil

And of course, personal income has badly lagged the cost of crude

Saudi Arabia increases oil production to cover Libya loss

The International Energy Agency confirmed on Friday that Saudi Arabia was stepping in to cover the fact that many platforms producing high-grade oil from Libya have been completely shut down because of the unrest.

A source told Reuters that the Saudi state oil company increased its production to more than 9m barrels per day – a rise of more than 700,000 barrels.

The worsening situation in Libya has seen about 1.2m barrels of production out of Libya's 1.6m barrels daily output lost.

European refineries have been particularly worried about a shortage of high-grade crude, of which Libya is a key supplier.

However, the news of Saudi Arabia's intervention calmed the spot price of oil, which had risen to a two-and-a-half year high above $119 at one point on Thursday.

On Friday, Brent crude dropped down to $111 per barrel. However, it still closed up 9pc for the week, reflecting continuing unrest in the wider oil producing region. Riots have spread from Tunisia to Algeria, Egypt, Bahrain and Yemen in recent weeks.
Analysts from ICAP Shipping said on Friday: "In terms of pure volumes there are ample supplies of crude that can be brought to the market if there is a major and prolonged disruption of exports [from Libya].
"However, with the lion's hare of Libyan crude comprised of light, sweet grades, it is also not entirely clear how global trade flows will be affected."
IEA figures show that Saudi Arabia has 3.5m barrels a day of spare capacity, while the United Arab Emirates could add 330,000 barrels, Qatar could put on 180,000, and Kuwait 230,000. While not all of this would be likely to come on stream at once, Middle East production is still 1.7m barrels per day lower than it was at the height oil price spike in mid-2008.

BARCLAYS CAPITAL WRONG ON SAUDI'S CAPACITY TO REPLACE LIBYA OIL EXPORTS

Some in the oil market think that Saudi Arabia can tap their reserves to replace lost Libyan oil produce. Barclays Capital argues this is not the case.

Latest estimates suggest around 1 mb/d of crude oil production is currently affected in Libya, with the rest of the 0.6 mb/d increasingly under threat too.

A plethora of foreign companies suspended their operations yesterday.
Repsol, one of the largest foreign operators in Libya, has suspended all its production and exploration activities in Libya, including output from the country’s El Sharara oil field (200 thousand b/d of key export-grade crude).
Another company with significant exposure to Libya, Eni (total production of oil liquids in Libya is around 550 thousand b/d), also suspended oil production from a number of sites as a precautionary measure following Statoil, BP, Shell and others who had already closed down their offices and removed expatriate staff.
Eni also announced the suspension of natural gas supplies through the Greenstream pipeline running across the Mediterranean from Libya to Italy.
Earlier in the week, al-Jazeera had reported that crude production at the Nafoora oil field (400 thousand b/d) had stopped because of a strike by workers, though this was denied later. Either way,

Some in the oil market believe Saudi Arabia would tap into their reserves to pick up the slack.
Barclays argue this is not the case:
"Firstly, the grades and quality of crude available from Saudi Arabia is likely to be different from Libya," says Suki Copper at Barclays Capital.
For instance, the volume-weighted average of Libyan grades would have an API of around 37-38, while the current shut in Saudi production is biased towards medium crude.
Cooper goes on to say:
"Moreover, Libyan crude is sweeter, with CPC Blend and Azeri Lights likely to feel the shortages. Effectively, West African crude should receive a higher bid from the Med, with the ultimate effect likely to be seen via a widening in the Brent-Dubai spread, as prompt supplies of Brent-related crudes remains the issue
"Moreover, the time taken to bring those Saudi barrels to the market is likely to be significantly longer compared to the ongoing Libyan production. Thus, the concept of a barrel for barrel replacement is not a correct one.
"Ultimately, the overall significance of the situation in Libya is more than just about lost barrels. It continues to inject a huge amount of uncertainty in the oil market especially for the medium term, as destabilisation in the Arab world, home to the world’s largest oil and gas reserves and production, is of extreme significance."