Wednesday, February 27, 2013
Tullow Oil (LON: TLW) Discovers Ethiopian Oil
Tullow was under a fair amount of pressure to discover more oil after a disappointing trading performance in January and a failure to find oil off the coast of French Guiana last year.
Tullow’s partners include Marathon Oil (NYSE: MRO) and Africa Oil Corp. (TSX-V: AOI), and the oil find has been part of a vast project that covers Ethiopia and Kenya.
There could be as much as 23 billion barrels of oil concentrated underneath two basins, extending from southern Ethiopia to southwestern Kenya. This does not include two other unexplored basins.
You may be wondering why this is such big news, since oil in Africa is nothing new. Well, this is the first discovery where commercial production is truly possible.
Kenya could very well become the next major oil-producing nation in the world— something that could foster competition with the Arab world in the future. There could be “10 billion barrels of oil and gas” in just this area, according to Bloomberg. This location offers the real possibility of opening a new source of oil for the world market.
But despite all this great news, there are potential problems.
Historically, oil discovery in Africa has not enriched local communities, mostly due to state corruption. I point to the Middle East as an example of a region similarly plagued with conflicts rooted in oil.
The Middle East is sitting on a surplus of oil, but only a few business and political leaders have benefited from the oil revenue. There are two sides of the Middle East: the opulence and vast wealth of the Arab monarchies, and the lack of jobs, sub-par electrical grids, and lack of basic facilities where these royal families reside.
The discovery of commercial-grade oil in East Africa could go in many directions, but this a great opportunity to get local communities involved. Not only would there be an addition of refinery jobs, but the revenue could also be a real chance for the nation to begin construction of new facilities.
Energy investment must include a few investors, oil companies, and state officials, but the larger community must also be brought into the fold. From an investment standpoint, a stable and thriving East Africa is good for business.
According to Reuters, there could be as much as “2,850 barrels of oil per day” in western Kenya alone.
But before investors begin popping open the champagne bottles, there are many obstacles in the way, beginning with next week’s election in Kenya.
Kenya’s election process has a history of violence and instability. The addition of oil into the mix can be recipe for greater even greater troubles.
Top contenders Prime Minister Raila Odinga and Deputy Premier Uhuru Kenyatta have said little of the oil discovery in Kenya. It should be noted that Kenyatta is facing possible crimes-against-humanity charges for his role in previous election violence, and he may have bigger problems on his mind than oil if he becomes election winner.
However, Kenyatta mentioned a plan in diverting 5% of all profits from energy to the communities with another 5% devoted to renewable energy. Kenyatta further said oil in the region would “benefit all Kenyans,” according to Reuters.
Odinga has only mentioned his hopes of avoiding an “oil curse” in certain campaign events, alluding to Africa’s past troubles with oil.
But neither contender has a concrete way of dealing with the sea of oil discovered in their country. Kenyatta’s 5% plan for community and renewable energy investment lacks any specifics.
That being said, much of what the candidates are saying is campaign rhetoric, and the election winner’s actions will speak louder than the words on the campaign trail.
As of now, investors are worried about the election, which is not good for Tullow. After such a discovery, they could use the momentum in garnering outside investment and keeping business partners hopeful.
Infrastructure needs to be in place as well. The closest refinery is outdated, and a pipeline will need to be constructed.
Oil production in Uganda is set to begin in 2017, something that should have Tullow worried. Investors and partners are hoping to begin drilling as early as this year. This is quite a far-reaching goal, which only shows how eager oil companies and investors are in getting started.
Tullow is part of the Kenya Oil and Gas Association, an organization that hopes the Kenyan government will make upgrades to facilities and get the legislative gears rolling when it comes to oil production in the country.
Tullow has quite a bit of work ahead of it if commercial production in Kenya will be successful. The company must walk the line carefully in dealing with Ethiopia, Kenya, and Uganda, nations that have had their fair share of border disputes.