Bloomberg News

Kenya’s Deepwater Debut Heralds East Africa’s First Oil: Energy

July 11, 2012

Apache Corp. (APA:US) will drill Kenya’s first deepwater oil well next month, a prospect that could add a $70 billion crude find to the record natural-gas discoveries along East Africa’s coast.

Apache and partners including Tullow Oil Plc (TLW) said the Mbawa well is likely to strike oil based on seismic data and slicks seen on the Indian Ocean’s surface. The drilling is targeting as much as 700 million barrels, a resource valued at twice Kenya’s annual economic output at today’s oil prices. With a 50 percent a stake in the well, a strike could add more than 10 percent to Houston-based Apache’s reserves.

“What we are looking at in this well is to see if we can actually change the paradigm” in what’s been a gas-prone area, Tullow Chief Financial Officer Ian Springett said in a phone interview. “It’s a high-risk, high-upside well.”

East Africa has become one of the world’s most active exploration areas since Anadarko Petroleum Corp. (APC:US) made the decade’s biggest gas discovery off Mozambique. An oil find would be a boon for Kenya as the commodity is easier to sell than the gas found in neighboring Tanzania and Mozambique, which will require spending at least $50 billion on export plants. The Lamu basin, where Mbawa is sited, may hold as much as 5 billion barrels, according to one of the well’s partners.

The Mbawa seismic study indicates the possible presence of gas and crude, Bob Brackett, an oil analyst with Sanford C. Bernstein & Co., wrote in a May report. “Another indicator of oil -- sea surface oil slicks that have been collected” in the area, he said.

Africa Explorers

Explorers in East Africa including Anadarko, Statoil ASA (STL), Eni SpA (ENI) and BG Group Plc (BG/) have discovered more than 100 trillion cubic feet of gas, enough to meet U.S. demand for more than four years.

The interest in East Africa can be seen in the bidding war for Anadarko’s London-listed partner Cove Energy Plc (COV) between Royal Dutch Shell Plc (RDSA) and PTT Exploration & Production Pcl (PTTEP), putting Europe’s largest oil company against Thailand’s state energy producer. The battle has more than doubled Cove’s share price this year.

“Exploration of East Africa is at a very, very early stage, and yet success so far has been very significant,” Andrew Whittock, a London-based analyst at Liberum Capital Ltd., said by phone. “Most industry is following behind and trying to establish positions.”

Apache, the second-largest U.S. independent oil and natural-gas producer by market value, will operate the Mbawa well in the L8 Block. The Deepsea Metro 1 rig will take about two months to drill to the 3,250-meter (10,663-foot) target depth at a cost of more than $60 million. The partners may follow up with the Tai well, which could hold 500 million barrels of oil resources, according to Apache.

‘Looks Attractive’

“There are no wells in our block so we can’t say definitively that the crude is there,” John Bedingfield, a vice president for exploration at Apache, told investors in June. “From a prospect perspective, we think it looks fairly attractive.”

John Roper, an Apache spokesman, declined to comment on Kenya beyond the company’s statements at its June investor conference.

The Lamu basin geology is similar to areas in Madagascar, the island that was joined to East Africa before splitting apart about 145 million years ago. Since the 1970s, Royal Dutch Shell Plc, Chevron Corp. (CVX:US) and Eni along with other companies have drilled in Madagascar, which holds 24 billion barrels of heavy oil resources, according to Afren Plc. (AFR) Only about a dozen wells were drilled off the island.

Pulled Apart

“Historically Madagascar was attached to Kenya and during the rifting it pulled apart,” said Frank Patterson, a vice president on exploration at Anadarko. “We also have seen data in Mozambique that indicates there is potential for oil source rock in there too. We are still high on oil in East Africa, but it’s got to be in the right setting.”

Tullow Oil, which holds the most exploration licenses in Africa of any U.K.-based explorers, has opened four frontier oil and gas provinces in French Guiana, Ghana, Uganda and Kenya, with more than 4 billion barrels since 2007. Using continental drift theory worked when it found crude in French Guiana, which split from West Africa, an oil-producing region, millions of years ago. In March it discovered crude at on onshore well in Kenya.

Two years ago, Anadarko said it discovered East Africa’s first deep-water oil with its Ironclad well in the Rovuma Basin off Mozambique. In February, Statoil and Exxon followed up with the Zafarani well off Tanzania, which opened an older reservoir with crude potential. Both wells need more testing to prove petroleum resources.

Cheaper to Produce

“We are still trying to understand what Ironclad means,” Patterson said. “We have some theories and we are going to drill some wells in the southern part of our block later this year.”

Eni and Total SA have secured the latest four exploration licenses off Kenya, according to the companies. Woodside Petroleum Ltd. (WPL), Australia’s second-biggest oil producer, in 2006 drilled the deepest Kenyan offshore well as of 2011, which failed to find oil or gas.

Most oil companies prefer to find crude oil reserves rather than natural gas because it’s cheaper to produce and supply to customers. Crude can be loaded on a tanker and shipped worldwide from remote fields, while gas has to be chilled and liquefied before shipping, what requires higher investment in LNG plants.

“Oil is a simpler story,” said Al Stanton, managing director for oil and gas research at RBC Capital Markets. “ Gas is still playing some sort of second figure to oil.”

To contact the reporter on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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Companies Mentioned

  • APA
    (Apache Corp)
    • $87.96 USD
    • 0.38
    • 0.43%
  • APC
    (Anadarko Petroleum Corp)
    • $100.19 USD
    • 1.21
    • 1.21%
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