KENYA: STILL IN THE HUNT FOR OIL AND GAS

UNCLAS SECTION 01 OF 02 NAIROBI 002144

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TREASURY FOR VIRGINIA BRANDON
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: ECON ENGR EPET EINV KE
SUBJECT: KENYA: STILL IN THE HUNT FOR OIL AND GAS

REF: A. IIR 6 854 0110 07 (notal),B. Nairobi 0266


C. 06 Nairobi 1637

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Sensitive-but-unclassified. Not for release outside USG channels.


1. (SBU) Summary: Despite coming up dry in a $100 million test well
drilled earlier this year, Kenya's national oil company is pursuing
additional exploration for oil and gas in the country. China's
national offshore oil company is currently a big player, but has to
decide soon whether to move from the study phase to actual drilling.
Australian companies are also in the hunt for oil and gas.
Meanwhile, the Kenyan government is prudently planning for improved
transparency and accountability in revenue flows in the event of a
major oil or gas strike. End summary.

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Trying to Recover From a Bad Well
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2. (U) As reported refs A-B, prospects for a significant oil or gas
discovery in Kenya were dealt a serious blow earlier this year when
a $100 million ultra-deepwater test well drilled by Australia's
Woodside Energy came up completely dry. The failure may lead
Woodside to abandon further efforts to find oil or gas in Kenya, and
the its failure to find hydrocarbons cast a pall generally over the
sector.


3. (SBU) In a briefing May 16 for Government of Kenya (GOK)
officials, attended by Econ/C, officials of the GOK-owned National
Oil Company of Kenya (NOCK) refuted the perception that further
exploration has stalled following the Woodside failure. NOCK Senior
Geologist Peter Thuo noted the presence of surface oil seep near
Wajir in the Mandera Basin, as well as small oil discoveries in the
Tertiary Rift Basin and the Anza Basin (the latter is believed to be
linked to the Central Rift system of hydrocarbon deposits extending
into Sudan). While all of these are non-commercial discoveries,
they strongly indicate the presence of additional hydrocarbon
deposits, according to Thuo. Kenya, he said, is pushing ahead in
search and exploration, and NOCK is currently negotiating 17
applications to perform exploration on 13 different blocks. Other
salient points from Thuo's briefing follow below.

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Who's In The Market and What They're Doing
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4. (SBU) The Chinese: The China National Offshore Oil Company
(CNOOC) has one-year study agreements in six blocks and a full
production sharing contract (PSC) in a seventh. The study
agreements will expire shortly, at which time CNOOC will have to
negotiate PSCs or abandon the blocks. Thuo said if CNOOC exits,
there are other companies interested in exploring the blocks. Under
the PSC CNOOC has for block L-4, it is obligated to acquire 500 km
of seismic data and drill two wells within two years, followed by
another two wells in the subsequent two years.


5. (SBU) The Australians: Origin Energy of Australia has PSCs for
two blocks and has already acquired 3,758 km of seismic data. Under
its PSCs, it is obligated to drill one well in each of the two
blocks within two years. Separately, Gippsland Petroleum has a
contract on offshore block L-6 and has acquired 1,214 km of seismic
2D survey data. Fugro Airborne is also conducting an airborne
gravity survey on Gippsland's behalf to acquire 4,474 km of
additional seismic data in the shallow offshore and onshore portions
of the block. Gippsland is obligated to either acquire additional
seismic data or drill two wells over the next four years. Finally,
Woodside Energy retains exploration rights in its two offshore
blocks and will drill one additional well in each within three
years, according to Thuo. (Note: As noted ref A, however, it's
possible Woodside will re-evaluate its position in Kenya and opt to
pay a penalty to the GOK to avoid having to drill any additional
wells. End note).


6. (SBU) Others: Houston-based GX Technology (GXT) completed in
March a large regional 2D seismic survey offshore Kenya, Tanzania,
Mozambique, Madagascar, and the Seychelles. The survey is
non-exclusive and GXT is selling the results to any interested oil
and gas exploration companies. Norwegian firm Petroleum
Geo-Services has been awarded a contract by NOCK to acquire 3,000
kilometers of seismic and magnetic data offshore in the Lamu
sedimentary basin. Thuo noted that data accumulation is critical to
attracting interest in exploring for hydrocarbons in Kenya. In the
past year, he said, NOCK has hosted visits from 18 scientists from

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10 companies at its data center, and sold data packages worth close
to $50,000.

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Moving Ahead on EITI
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7. (SBU) The GOK, meanwhile, continues admirably to make
preparations to submit itself to the disciplines of the Extractive
Industries Transparency Initiative (EITI - see ref C) in the event
of a major hydrocarbon discovery. In opening the May 16 briefing,
Investment Secretary Esther Koimett of the Finance Ministry spoke of
"the new scramble for Africa" in which the competition is not over
land or colonies, but natural resources. To avoid the "resource
curse," she and NOCK officials advocated persuasively for adoption
and implementation of EITI systems and standards in Kenya to assure
transparency and accountability in revenue flows stemming from any
future oil or gas find. This, said Koimett, is a necessary first
step in making sure any future oil wealth is used to enhance
long-term economic development that benefits all Kenyans. She and
NOCK officials repeatedly contrasted success stories, such as the
United Arab Emirates and Botswana, with the failures, such as
Nigeria, to point out the risks and opportunities Kenya would face
in the event oil or gas is discovered. Kenya, they argued, needs to
have the institutional framework in place before the money starts to
roll in.

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Comment
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8. (SBU) NOCK is a small parastatal with few resources and even
less political clout. However, its leadership is sophisticated and
principled. The company appears to be doing a commendable job in
attracting new interest in oil and gas exploration after the
Woodside debacle, and it is also doing the right thing by pushing
for implementation of EITI. The only thing missing now: An actual
oil or gas discovery.
Ranneberger