Cost of playing East Africa oil game on the rise

A few years ago governments in east Africa would practically pay companies to come and explore for oil or gas on their territory.Those days are gone.Promising discoveries from Mozambique to Kenya have put governments in the driver’s seat and the rising fees they will demand from oil and gas companies will start to weed out the smaller players that have blazed the region’s exploration path.Kenya has said it will revamp its tax rules to benefit more from profits earned by foreign oil and gas exploration.Energy Ministry Permanent Secretary Patrick Nyoike said last week the country was proposing to raise the signature bonuses companies pay for exploration and drilling licences to $1 million from $300,000.This remains small change on a global scale but the upward trend is clear.Oil producing countries, established or emerging, are keen for exploration companies to pay to signature bonuses and other fees, not least because they are instant cash for government coffers.The joint venture Sonangol-Sinopec International (SSI) in 2006 bid $2.4 billion for the rights to prospect for oil in the relinquished areas of Blocks 17 and 18 in Angola, setting a new record at the time for a single signature bonus with $1.1 billion.There are no billion dollar bids on east Africa’s immediate horizon, but they are expected to rise sharply and go beyond the million dollar price tags Kenya plans to introduce.Industry executives say this is to be expected.“Yes, signature bonuses are going up. But it’s basic economics,” said Aidan Heavey, chief executive of British explorer Tullow Oil plc.The company said on Wednesday it had encountered oil in a second well it is drilling with Africa Oil Corp in northern Kenya close to another one where they had struck oil earlier in the year.“Look at Kenya. People looked for oil there for 30 years and could not find it. After years and years and years of spending money and not finding oil, no one wants to go there. So, to make it attractive, governments give better terms,” Heavey told Reuters on the sidelines of an African oil conference organised by Global Pacific & Partners. “So, the person who finds oil generally finds it on quite good terms,” he said.In countries such as the central African state of Chad, which became an oil producer about a decade ago, industry sources say they have run as high as $15 million.This is far out of reach of the small companies that have done much of the exploring in east Africa.“It’s really tough, we are really feeling the squeeze now in east Africa,” said a senior executive with one small exploration company that is active in the region.Governments are trying to extract more revenue and benefits from the oil and mining sectors amid perceptions they have not delivered wider prosperity on the world’s poorest continent.“Asking for higher fees, that’s not resource nationalism. That is the evolution of a frontier province,” said Galib Virani, associate director at oil and gas explorer and producer Afren.“I think the governments are totally in their rights to let market forces determine the price,” he told Reuters.As east Africa’s oil industry matures, bigger players will also naturally move in to take on the projects that small companies simply cannot undertake, which has been the case in the established crude province of west Africa.Much of the exploration in east Africa has been onshore but as it moves further offshore, only big players have the capital and technical abilities to search for oil in deep water.Total for example is exploring in water depths of between 2,000 and 3,500 meters in Kenya’s offshore block L22.Analysts and industry watchers say this is in line with what has happened in other emerging oil provinces, such as Latin America.“You are seeing the same evolution in east Africa. Often it is smaller operators who start the exploration because they are the ones who can take the greater risk,” said Paul Bugala, senior sustainability analyst at U.S.-based Calvert Investment Management, Inc.“After that it becomes a big boy’s game,” he said.Interest in east African hydrocarbons has been growing rapidly since the 2006 discovery of oil in Uganda.Among new frontiers, industry sources said they expect a round of bidding for exploration blocks next year from the Seychelles, a tropical Indian Ocean island state famed as a tourist destination for its beaches and warm waters.The price of admission there remains relatively low, industry sources say. That is sure to change if it struck oil or if more was found in the neighborhood.

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Cost of playing East Africa oil game on the rise