Friday, October 25, 2013

Canada's Africa Oil Corp. Sees Promise in Kenya

Canada’s Africa Oil Corp. sees promise in Kenya

Yadullah Hussain | 24/10/13 | Last Updated: 24/10/13 5:00 PM ET

The terrorist attack in a mall two kilometres from Keith Hill’s Nairobi residence in September quickly brought home the dangers lurking in frontier markets. But the chief executive officer of Vancouver-based Africa Oil Corp. is looking past the dangers and instead focusing on one of the most promising plays in Africa.

Companies had been coming up dry in the Kenyan basins for the past 50 years, until early last year when Africa Oil and its partner London-based Tullow Oil Plc announced a series of surprising oil discoveries.

Since then, the company’s stock price has shot up to about $9.32 after languishing at about $2 on the Toronto Stock Ventures Exchange for a few years, as the company’s surprise 378-million-barrel finds turned heads.

“There are not many places left on earth where you can put together an acreage portfolio like this,” Mr. Hill said in a phone interview from his office in Nairobi. “Good contract terms, good support from the government — there are not that many happy hunting grounds left.”

Oil-importing Kenya, traditionally known for its tea and coffee exports, has surprised everyone with the speed and volume of discoveries. The country could turn into an oil exporter as early as 2016, according to Tullow, but Mr. Hill believes it may be a few years later.

“We have enough volumes to build a pipeline project and build a commercial project, although we need additional appraisal work and engineering work and issues we need to sort with the Kenyan government and possibly in conjunction with Uganda government.”

Kenya is keen to get a leg up on neighbours Uganda and Democratic Republic of Congo, which discovered oil a few years ago, but have been bogged down by infrastructure issues and political tensions.

The entire East Africa region has become a “hot property” for energy investors, following huge gas discoveries in Tanzania and Mozambique and oil discoveries in Uganda and Kenya, according to Calgary-based Evaluate Energy.

Drawn by the unexpected finds, a number of oil companies and deep-pocketed Chinese state-owned enterprises are already circling around key opportunities, but Africa Oil is not ready — yet — to partner or be acquired by SOEs.

East Africa saw investment of as much US$12.8-billion — or 32% of all capital expenditure in Africa’s oil and gas sector — from oil companies last year alone, Evaluate Energy said in a note.

Like its peers, Africa Oil is also pouring funds into the frontier basins. The company, part of Vancouver-based The Lundin Group, recently announced a US$450-million private placement to drill and further appraise its resource. The deal proceeds will fund the extensive drilling campaign onshore Kenya into 2015.

“Very likely at that point, we would probably look to bring in a strategic partner to help us fund that development — it will be fairly large, in the $5-billion to $7-billion range,” Mr. Hill said.

The chief executive also sees promise in other East African countries, but they remain risky propositions.

“There are a lot of opportunities in Ethiopia and Puntland [Somalia], but obviously the politics are difficult. We are hoping that some of the political issues can be resolved there,” Mr. Hill said, noting the company plans to make additional investments once the political risk subsides in Ethiopia.

Despite the dangers and lack of infrastructure in frontier countries, Mr. Hill would rather be in Africa than Alberta.

It’s not a case of sour grapes — he is exposed to the oil sands as a founding member and director of Calgary-based Black Pearl Resources Inc., named after his grandmother, Pearl.

“I don’t blame the Alberta government, as much as I would blame United States government for failing to [approve] the Keystone XL pipeline.”

Mr. Hill has cause to worry about pipeline constraints. This year RBC Capital identified Black Pearl, an early-stage oil sands and heavy oil development company, as one of the companies most hurt by a rejection of the Keystone XL pipeline.

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