Oil and gas activity has started rolling in East Africa, as drilling activity ramps up, long-awaited deals are sealed and oil companies scramble to get a slice of what could be an energy goldmine.
In Uganda, Tullow Oil has resolved a long-standing dispute with the government for the development of a number of oil-rich blocks, and the UK-listed explorer has also made Kenya's first ever major oil discovery.
Significant gas reserves have been found in Mozambique and Tanzania, where LNG facilities are now been planned. Drilling will kick off in Ethiopia later this year, while Madagascar is believed to hold significant reserves of gas and the Puntland region of Somalia is also showing positive signs.
Uganda, Kenya
Uganda has been the most closely followed country in East Africa in the past few years after Tullow made a number of major oil discoveries in the Lake Albert basin.
France's Total and China's CNOOC have paid $2.9 billion to buy interests in Tullow's blocks, pushing forward a $10 billion development that is set to transform the East African country into a major oil producer.
The companies have now completed technical work on a development plan for the basin and construction of an oil pipeline and refinery.
In Kenya, Tullow discovered oil in March and said last week that prospects in the Turkana region have exceeded expectations with net oil pay found in the Ngamia-1 exploration well being more than double that of any exploration wells drilled to date in East Africa.
Kenya's first oil discovery has seen a surge of interest in new oil exploration licenses, and has boosted the country's oil reserves estimate by one third to around 4 billion barrels, the largest in East Africa.
Italy's Eni is among the latest companies to enter Kenya, having picked up three blocks, marking its first foray into the East African country while Total has finalized an agreement for block L22 in the Lamu Basin.
Oil production would boost economic growth directly as well as provide increased revenues to help strengthen Kenya's future economic potential. It would also help the country reduce its oil import bill.
Nairobi spent $4.1 billion on oil imports in 2011, around 11% of GDP and four times more than it received for its tea exports, Kenya's largest export earner, according to a recent report by Moody's ratings agency.
Drilling in Ethiopia
Successful oil discoveries in Kenya should bode well for landlocked Ethiopia, given their geological similarities.
Local company SouthWest Energy is on track to drill a well in the first quarter of 2013 in the Ogaden Basin which it believes contains an estimated 1.5 billion to 6 billion barrels of oil.
It is currently in discussions with a number of companies for a possible partnership in the country where it owns a 100% interest in 46,000 sq km of highly prospective frontier acreage.
"We have had strong interest from a number of potential partners. Discussions are progressing well," company founder and chairman Tewodros Ashenafi said recently.
SouthWest also owns the Gambella Basin block in the south west of Ethiopia and the Jimma block in the south, which has been shown to have great potential for the development of oil shale deposits, the company says.
Vancouver-based Africa Oil, with partner Tullow, plans to drill one well in the South Omo blocks in Ethiopia before the end of 2012. It is also moving ahead with work on the El Kuran oil accumulation in block 8 in the Ogaden Basin, discovered in the early 1970s.
Make-or-break year for Somalia
After decades of war, Somalia has been undergoing a peace and reconciliation process of late, with the internationally recognized transitional government preparing for presidential and parliamentary elections in August.
A solution to a territorial dispute between the Somaliland region, which declared its independence from Somalia in 1991, and its neighboring semi-autonomous Puntland region, could pave the way for resumption of oil exploration activities.
Oil companies that were awarded concessions by the last government of Somalia, including Shell, ConocoPhillips, BP, Eni and Chevron, ceased their operations a decade ago after declaring force majeure due to unrest in the country.
While Mogadishu says it still recognizes permits awarded prior 1991, it is not clear if concessions acquired post-1991 are considered valid, which include licenses granted to companies such as Africa Oil, Petrosoma and Jacka Resources.
Africa Oil previously drilled its Shabeel-1 well in the northern Dharoor block and said the well encountered several oil and gas shows indicating the presence of a working petroleum system.
Natural gas: a game-changer
East Africa is also set for a natural gas boom. Substantial discoveries offshore in the Indian Ocean are about to change the continent's coastal economy.
According to the US Geological Survey, East Africa's offshore holds more than 440 Tcf of recoverable gas resources.
Mozambique, one of the poorest countries in the world with little heavy industry, looks set to cash in on a gas bonanza following a run of discoveries in the Rovuma Basin by the U.S.' Anadarko Petroleum and Italy's Eni.
Eni and its partners have found 52 Tcf of gas in place at the Mamba Complex Area 4 in the Rovuma Basin, while Anadarko's more recent finds have brought its estimated recoverable reserves up to 60 Tcf.
These volumes make multi-train LNG projects a foregone conclusion. Anadarko hopes to make a final investment decision on the first two LNG trains in late 2013 and to begin LNG exports in 2018. Each 5 million mt/year train is expected to consume 750,000 Mcf/d of gas.
A bidding war by Thailand's PTTEP and Shell for Cove Energy's 8.5% stake in Anadarko's Area 1 highlights the importance with which East Africa is regarded by the oil majors, and the premium they are willing to pay.
Tanzania
Neighboring Tanzania is also turning out to be gas-rich. The World Bank estimates that in the next 25 years, Tanzania's gas industry will receive $35 billion, which will transform East Africa's second-biggest economy.
Gas reserves are currently estimated at 28.74 Tcf and despite the ambitious LNG development program to the south off Mozambique, industry experts feel there is sufficient demand for a second LNG complex offshore Tanzania.
Statoil, with partner ExxonMobil, has found 3 Tcf of gas with the Lavani well near its Zafarani discovery, giving them around 9 Tcf of gas in the Mafia Deep Basin.
Statoil's discoveries come after similar large gas finds offshore Tanzania by the UK's BG Group and Ophir Energy, which total some 15 Tcf across blocks 1, 3 and 4.
Madagascar
Other oil majors are starting to move eastward toward Madagascar and the Comoros Islands -- the feeling is that these countries are going to become increasingly attractive to oil and gas explorers because of the success offshore Mozambique and Tanzania.
A Chinese company has made a light oil discovery in block 3113 immediately to the south of Tullow's block 3111. This is in addition to the significant heavy oil reserves, which are being developed in Madagascar's onshore blocks further north by Total and U.S.-based Madagascar Oil.
Challenges remain
While East Africa has emerged as one of the most exciting areas for the oil and gas sector, the boom does not come without its challenges.
Mozambique and Tanzania's gas finds have raised concerns over what government policy will be with regard to the monetization of these reserves.
Kenya and Somalia are locked in a row over their maritime boundaries, threatening both existing and future exploration licensing.
Ethiopia's Ogaden region is plagued by a violent rebel insurgency while Somali piracy attacks on commercial ships are a threat to activities down the East African coast.
It is also not clear where Kampala will find the $2 billion to build its refinery within the next three years.
President Yoweri Museveni's hopes of persuading neighboring countries to back the refinery may have been thwarted now that Kenya will look to extract its own oil. Ongoing debate over domestic refining strategy may delay vital export infrastructure decisions.
Despite these challenges the region presents some of most promising opportunities of any recent discoveries with more drilling to come.
The excitement is palpable and competition is rife among new entrants jostling to gain a footprint within a new world-class hydrocarbon region.
Jacinta Moran
Platts
