Many have asked me how they can engage in equity participation for upstream oil and gas development.

This question is coming only a year after oil was discovered in the northwestern parts of Kenya, and as these discoveries await commercial confirmation, brisk exploration is also continuing on the coastal blocks.

However, it is not premature to engage in debate on how private Kenyans can in future participate as entrepreneurs in oil and gas ventures.

There are a number of categories of investors engaged in oil and gas search and development in the region. We have the international oil companies (Total, Shell, ExxonMobil) who will mostly use own equity funds, cash flows, loans from large banks or even float bonds to finance specific oil and gas projects.

Secondly, there are the large foreign national oil companies (Norwegian, Brazilian and Chinese) who may have easy access to developmental capital from their state banks.

Thirdly, we have the foreign independent oil and gas companies (Tullow, African Oil) who raise developmental capital from their shareholders, and who regularly float shares to finance diverse ventures. The last category comprises of lowly capitalised companies that acquire licences with the hope of selling them for a profit to larger investors.

Kenyans are an entrepreneurial lot and will throw in cash where they think they can get back a good return within reasonable time, and thus we need to think of how we can participate in this productive sector.

Kenyan citizens will benefit from oil and gas wealth through production-sharing formula already enshrined in oil and gas production-sharing agreements (PSAs), which give the exchequer as much as 50 per cent of oil and gas production. But it is the other fraction owned by investors that we are interested in.

PSAs provide for the national oil company to participate in what they call “carried interest” (currently up to 10 per cent) in equity when oil and gas companies start production. The minister for Energy some time back hinted to this figure going up to 25 per cent.

This carried interest will require to be funded when production starts, and this is how private investors can enter the oil and gas arena through the National Oil Company by way of equity participation through an IPO. It would be no different from how Kenyans participated in funding power generation and distribution through KenGen and Kenya Power.

The National Oil Company has, in fact, its own allocation of blocks awaiting exploration and, hopefully, eventual development should they discover commercial hydrocarbons.

Early restructuring of the National Oil Company as a future vehicle to carry Kenyan equity participation may require an early attempt to unbundle the company to separate downstream marketing roles and the more risky and highly capitalised upstream oil and gas. This is a highly recommended action that is in line with other countries institutional formats for upstream national oil companies.

Apart from equity participation through the National Oil Company, Kenyan entrepreneurs can go straight into the real business and form companies that can float shares.

In Tanzania, Swala Oil and Gas (Tanzania) Limited was floated on Dar Stock Exchange in February 2013 with a 35 per cent local shareholding and 65 per cent ownership by the Swala Energy Limited of Australia.

The Tanzanian company is currently selling shares not only to Tanzanians but also to outsiders. The company has already been allocated two exploration blocks in the Pangani and Kilosa basins.

This Tanzania model leverages partnerships with foreign companies with wider access to capital and with managerial and technological capacity to undertake oil and gas exploration and development.

The other alternative available to East African entrepreneurs is for the independent oil companies already operating in East Africa to list shares in the local stock markets through locally incorporated affiliates, an idea I have heard being floated in Uganda.

Local content

Kenyans entrepreneurs will need to take the initiative to search for entry points into the emergent oil and gas sector. By participating in oil and gas shareholding, Kenyans will have augmented the “local content” concept that may be emphasised in the upstream legislation that is currently under review.

However, a word of warning is that oil and gas exploration and development targets long-term financing and many years (beyond five years) will pass before dividends can be expected.

An oil and gas venture is full of risks and may take up millions of dollars and yet not find any (or commercially-viable) hydrocarbons. We saw it with Woodside in Lamu and CNOOC in Isiolo when the two companies wound up their operations in Kenya after failing to find commercial quantities of hydrocarbons.

It requires a basket of fields to balance risks as some blocks will yield while others will not yield. Project break-even will also be strongly influenced by global oil and gas prices ruling at any one time, and these can be very volatile.

In upstream oil and gas business, it is all about sharing and spreading risks and partnerships are the norm. This is the reason why as soon as the smaller independent explorers discover oil, they seek to partner with larger oil companies who are well capitalised and with wider technology to enter the next stage of oil and gas production development.

We saw this happen in Uganda when Tullow brought in Total and CNOOC to partner in oil production development.

 

Source : abdas.org