Is East Africa the Next Frontier for Oil?

Time
By Nick Wadhams / Nairobi
Mar. 10, 2010

According to local lore, Portuguese travelers as far back as the late 19th century suspected that oil might lie beneath parts of East Africa after noticing a thick, greasy sediment wash up on the shores of Mozambique. More interested in finding cheap labor, though, the explorers had little use for oil.

A century later, it turns out that the Portuguese were right. Seismic tests over the past 50 years have shown that countries up the coast of East Africa have natural gas in abundance. Early data compiled by industry consultants also suggest the presence of massive offshore oil deposits. Those finds have spurred oil explorers to start dropping more wells in East Africa, a region they say is an oil and gas bonanza just waiting to be tapped, one of the last great frontiers in the hunt for hydrocarbons. "I and a lot of other people in oil companies working in East Africa have long been convinced that it's the last real high-potential area in the world that hasn't been fully explored," says Richard Schmitt, chief executive of Black Marlin Energy, a Dubai-based East Africa oil prospector. "It seems, for a variety of geopolitical reasons, that more than anything else, it's been neglected over the last several decades. Most of those barriers are currently being lowered or [have] disappeared altogether."

Few have wanted to pay the cost of searching for oil or gas in the region, or risk drilling wells in volatile countries such as Uganda, Mozambique or Somalia. But better technology, lower risk in some of the countries and higher oil prices in recent years have changed the equation. Wildcatters and majors such as Italy's Eni, Petronas of Malaysia and China National Offshore Oil Corporation (CNOOC) have all moved on East Africa in the past few years.

They're hoping to mimic London-based Tullow Oil, which discovered some 2 billion bbl. of oil in landlocked Uganda over the past four years. Last month, Texas-based oil company Anadarko Petroleum Corp. announced that it had tapped a giant reservoir of natural gas off the coast of Mozambique. "Anadarko's find went off like a bomb here in Houston," says Robert Bertagne, a Texas-based oil wildcatter. "It was, 'Wow, we are finding large quantities of gas, and that means we have hydrocarbons in the area.' Once you have a discovery, more people are going to go in there."

Much of East Africa's hopes are focused on a fault line running from Somalia to Madagascar known as the Davie Fracture Zone. It's there that Bertagne's analysis — using Cold War–era sea-floor mapping originally intended for use by Soviet submarines — has prompted speculation about oil deposits rivaling those of the North Sea or Middle East. There's still a lot that's unknown: North Africa has seen 20,000 wells sunk over the past few decades, while drillers have sunk 14,000 wells in and off West Africa. In East Africa, the total is about 500 wells.

That's changing. Kenya issued six exploration licenses between 2000 and 2002 and two more to CNOOC in the next four years. In 2008 and 2009, it issued 18 new licenses. "Despite a long history of unsuccessful exploration, the oil companies are investing in Kenya," says Mwendia Nyaga, managing director of the National Oil Corporation of Kenya. "The question is not if any hydrocarbon deposits exist, but where they are."

It doesn't help that the region is so geologically complex — with lots of fractures and offshore oil deposits likely deep underground. Or that many of the countries likely to have deposits have seen wars and unrest. Somalia remains a no-go zone, and Ethiopia's eastern Ogaden region is beset by a violent rebel insurgency. And while Mozambique's civil war may have ended in 1992, it has taken years for the country to fully recover.

Explorers salivate in particular at the prospect of peace in Somalia. Oil reserves in the blocks licensed to two small oil companies, Africa Oil and Range Resources, could contain as much as 10 billion bbl. Nobody is talking about producing oil in Somalia anytime soon, but analysts say oil companies are less likely to be intimidated by political risk than they were in the past. They point to oil production in south Sudan, where a 20-year civil war that ended in 2005 threatens to reignite. "Definitely, there is a sense that there are discoveries to be had," says Aly-Khan Satchu, a financial adviser who runs Rich Management in Nairobi. "The reality and the perception of risk are narrowing."

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