Ministry of Energy Facts on Recent Oil Discovery in Turkana County

Republic of Kenya

Ministry of Energy

Facts on Recent Oil Discovery in Turkana County

Following the announcement by the Government last week of the oil find in Turkana, the media has been awash with articles on this important discovery.

The Ministry of Energy is, however, concerned about misinformation and false allegations that have been passed on to the public through some of the articles, which if not rectified could reverse the hard-earned gains so far made in oil and gas exploration in this country.

It is of paramount importance that information disseminated to the public is factual and objective. This can only be achieved through counterchecking facts with all parties concerned.

In this regard, it is noted that the Ministry of Energy was not contacted by any of the originators of the articles with false and malicious information which have been published. The Ministry therefore would like to provide the information hereunder to set the records right.

Kenya has four petroleum exploration basins namely: Lamu, Anza, Mandera and Tertiary Rift with a combined surface area of about 500,000 square kilometres.

For effective petroleum exploration these basins have been divided into smaller units called Blocks. Depending on progress made in exploration, these Blocks are revised from time to time to include new ones created to meet the increasing demand by oil prospecting companies.

Currently there are 46 of them from an initial 21 blocks in 2005.

Oil exploration which includes drilling of exploratory wells is an extremely capital intensive undertaking and for countries such as Kenya without any proven commercial discoveries (otherwise defined as frontier exploration areas), it is usually difficult to attract major oil prospecting companies.

Kenya status as a frontier exploration area, therefore, is a key disincentive to major international oil companies who have the requisite resources for underwriting attendant high petroleum exploration risks. Such major and high profile oil prospecting companies usually divert their risk capital to countries with proven and delineated hydrocarbon reserves and where production is on-stream or being negotiated.

As at 2005 only three companies, Star Petroleum, Afrex Ltd. and Pancontinental Oil & Gas were carrying out exploration in seven of the 21 Blocks. Due to the high investment risk, both Star Petroleum partnered with Dana Petroleum and invited and signed participation agreements for a number of blocks with Woodside Energy of Australia, a multi-billion dollar natural gas company.

Under these agreements, Woodside Energy became the principal partner and operator of these oil and gas exploration Blocks among them Block L5 where they sunk a dry well at a cost of more than US$90 million. Woodside Energy left Kenya after sinking that well.

Similarly in 2006 China National Offshore Oil Corporation (CNOOC), a fortune 100 company signed six oil exploration and production contracts with Ministry of Energy. To reduce its high risk exposure CNOOC invited and signed a partnership agreement with Africa Oil, Lion Energy and China National Petroleum Corporation (CNPC) for Block 9, but CNOOC remained the operator. The consortium drilled Boghal 1 well in Isiolo County which hosts the largest portion of Block 9, Anza Basin, at a cost of about US$ 26 million in 2010. However, the well was dry despite gas shows and consequently both CNOOC and CNPC pulled out of Kenya.

Africa oil took over the interests in the Block and has since then continued with exploration activities in the Block, because the Boghal 1 well has natural gas shows.

It should be noted that Formation of such consortia for oil and gas exploration is a standard common practice in the oil industry which is crucial for pooling resources to minimize exploration
risks which are usually very capital intensive.

It is encouraging that currently, 29 out of 46 Blocks are licensed to 14 foreign oil and gas exploration companies and one (1) to National Oil Corporation of Kenya (NOCK), thus making a total of 30 licenses granted. Plans are underway to drill an additional five oil wells in five Blocks; two onshore and three offshore between June 2012 and December 2013.

The entry by major foreign oil companies such as Anadarko, BG Group, Total, Tullow Oil, Africa Oil and Ophir, is a major breakthrough for confidence building in Kenya’s exploration portfolio and this is highly likely to attract more major oil firms to engage in oil and gas exploration in Kenya.

The efforts by smaller oil companies to bring on board the majors has accelerated acquisition of high quality data due to deployment of advanced data acquisition technologies such as three dimensional (3D) seismic and Full Tensor Gravity (FTG) which have since increased chances of oil and gas discoveries in the country.

The current cost of shooting 3D seismic is about US$40,000 per km square and minimum
coverage is 200 square km. The oil discovery in Block 10BB in Turkana County announced on Monday, 26th March 2012 is attributed largely to the advanced data acquisition technologies deployed by Tullow Oil, which is an equal equity partner with Africa Oil.

The history of oil discovery in the large Block B dates back to 1992 when the Block licensee, Shell, drilled two wells in Turkana County. One well, Elliye Springs 1 turned out to be dry while the second one, Loperot 1 well, intercepted about 10 litres of waxy crude oil.

Shell, however, pulled out of the Block because in their assessment there were no viable commercially viable deposits.

Exploration activities in Block B, subsequently divided into Blocks 10BA and 10BB, became dormant from 1992 until 25th October 2007 when Turkana Drilling Consortium was granted a Production Sharing Contract for Block 10BB in which Loperot 1 well is currently located. The discovery oil well, Ngamia 1 well is located about 25 Kms from Loperot 1 well.

On 15th June 2009, Africa Oil entered into a farm-in agreement with Turkana Drilling Consortium where the Consortium would transfer 100% working interest in Block 10BB to Africa Oil.

Africa Oil issued 7,499,934 common shares to the shareholders of Turkana Drilling Consortium (based on an exchange ratio of 0.20647 Africa Oil share for one Consortium share).

In addition, Africa Oil issued 787,400 common shares at a deemed price of Canadian Dollars (CAD$) 1.27 per share to the holders of convertible loans of Turkana Drilling Consortium in the amount of CAD$1million. On the basis of an exchange rate of Ksh.69.0338 to CAD$ on 15th June 2009, the final maximum share transaction amounted to Ksh.726,574,820.512.

Pursuant to the above information from Africa Oil, it should be noted that on paper this was a cashless transaction which is provided for in sub-clause 35(2) of the Subsidiary Legislation issued under Section 6 of the Petroleum Exploration (Production and Exploration) Act, Cap 308 of the Laws of Kenya which states “the contractor may assign to a person other than an affiliate part or all of its rights and obligations under this contract with the consent of the Minister which shall not be unreasonably withheld and which shall be granted or refused within 30 days of receipt by the Minister of notice from the contractor (in this case Turkana Drilling Consortium) that it intends to make such an assignment….”

The allegations in the media that the Ministry was involved in the sale of land in Block 10BB is false and utterly misplaced and appears to have been calculated to portray the Ministry in bad light. It is common knowledge that all land transactions must be processed through the Ministry of Lands and this being community land the local County Council would have been involved.

These are facts that can be easily ascertained from the Ministry of Lands and Turkana County Council.

Further, a section of the weekend press made serious allegations to the effect the Ministry had withheld Chemical analysis results of a liquid substance which was submitted by Interstate Mining Co. Ltd in 2005.

This is far from the truth as the company was handed the results at the Ministry headquarters in Nyayo house. This was after the analysis by Kenya Petroleum Refineries Limited (KPRL) as per its records dated 15th July 2006 which concluded that the sample was characteristic of Fuel Oil with no light ends. Interstate went ahead and sued the Ministry and oil companies that were conducting oil exploration in the Turkana area but lost the case.

It is, therefore, malicious to claim that the Permanent Secretary and therefore, the Ministry withheld and used the results of the analysis of the substance submitted by Interstate for other purposes.

It should be noted that Interstate Mining Co. did not disclose to the Ministry of Energy the location in which the Company had obtained the samples. Moreover, crucial scientific and geological information on the oil exploration data produced by Shell was and still remains available at the data centre of the National Oil Corporation of Kenya.

Regarding licensing of petroleum exploration blocks, the Ministry of Energy wishes to point out that this is governed by the Petroleum Exploration and Production Act Chapter 308 of the Laws
of Kenya. All contracts are based on a Model Production Sharing Contract (PSC) issued as a schedule to the Regulations issued under Section 6 of the Petroleum Exploration (Production and Exploration) Act, Cap 308 of the Laws of Kenya.

Licensing of blocks is conducted on basis of an open door policy whereby interested oil companies send in their applications directly to the Ministry. Other methods of licensing blocks such as bidding rounds will apply in future when Kenya will no longer be classified as a frontier area. This is when the petroleum potential of the country’s sedimentary basins will have been delineated and commercial reserves ascertained.

The procedure for licensing of Blocks begins with the promotion and marketing of the potential of the country’s basins and blocks to prospective investors at conferences and workshops.

Interested companies at their expenses visit the national data base at NOCK and upon undertaking some review, send written applications to the Ministry to express interest in specific block or set of blocks.

Received applications are analysed by the Ministry, after which offers are made to the applicants. An Investor has 30 days within which to accept or decline the terms contained in the offers. If the terms are acceptable the contract is processed in accordance with the provisions of the Petroleum Exploration (Production and Exploration) Act, Cap 308 of the Laws of Kenya.


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