uganda:oklahoma::kenya:texas

tullow oil’s discovery in its first well in the south lokichar tertiary rift basin, kenya’s find could change the preexisting commercial dynamics of east africa’s emerging oil plays in a similar manner that texas crowded out oklahoma’s discoveries in the early twentieth century. so far tullow has downplayed its ngamia-1 well’s 20 meters of net oil discovery on block 10bb in turkana county, but has hinted that adjacent acreage in kenya, and also ethiopia, could be significant in the company’s africa expansion strategy. the block’s operators—tullow, africa oil corporation, and lundin—have estimated reserves to be from anywhere between 30 – 45 bbls of oil in miocene era sandstones. kenyan president mwai kibaki and energy minister kiraitu murungi have compared kenya’s light, waxy crude with ugandan varieties. tullow had long written off the rift valley basin in favor of the albertine rift basin (which is ten times larger than what is in kenya and ethiopia), but recent discoveries suggest that the company many change how it views its east africa portfolio–essentially shifting more of its eggs in to its kenyan basket.

previous drilling campaigns have only explored at intermediate depths (approximately 1,000 meters), and tullow plans to drill almost 2,000 meters deeper to see if it can replicate its previous success. successful onshore campaigns have piqued the interest of kenya’s offshore potential, which is looking to compete with the flurry of discoveries off the tanzanian and mozambican coasts. however, across the world, daily rig rental rates have been steadily increasing, and in east africa the price tag can be as high as $600,000. and although the oil services industry plans to construct approximately 50 new rig this year, those interested in exploring kenya’s (and also uganda’s) oil will face difficulties in securing a rig, critical for the development of kenyan oil. the fact that there are few rigs under contract in the region suggest that ships must travel longer, to an unknown area. kenya—which predicts it will need up to half a dozen rigs to complete its exploration targets—will have to compete with tullow’s planned expansion in uganda, which is planning to drill up to twenty wells. and while somali pirates have taken a break from their own “exploration,” an increase in maritime commercial activity closer to their borders could incentivize a new piracy campaign.

the excitement around kenya’s oil discovery comes in the run-up to what will be hotly contested elections, which will likely be held in early 2013. while kenya’s embryonic oil story could share similarities with uganda’s drama with tullow and heritage surrounding payment on capital gains taxes (kenya does not have this on its books), the involvement of the controversial former foreign affairs minister moses wetangula adds a political dimension unlike what was seen in uganda. while uganda’s virtual one-party system ensures that politics stays out of commercial transactions, kenya’s vibrant, and at times violent, multipartyism means that business can be politicized.

although tullow oil and africa oil corporation have found themselves in favorable geological terrain, they could be sitting on questionable legal and political terrain, particularly if they decide to sell their blocks in the run-up to election season. the uganda oil rush has triggered a licensing rush in kenya’s tertiary rift basin, and the operators of 10bb were early to the game. a local subsidiary of canadian turkana energy stealthily emerged to sign a production sharing agreement before lundin, a current partner with the aforementioned two companies. two well-connected kenyans—amyn lakhani and wetangula—were the leading kenyan partners with turkana. turkana’s board agreed to a share-swap bid from africa oil in 2009, and eventually tullow purchased 50% of africa’s oil stake for about $34 million.

wetangula was appointed by president mwai kibaki, and has not been an anti-corruption crusader. an odinga victory looks increasingly likely in 2013, despite kibaki, kenyatta, and ruto attempts to reshape the “kkk” ethnic alliance that has for so long dominated contemporary kenyan politics in the wake of the icc indictments. an odinga win could see odm politicians target turkana and those companies who worked closely with them, if wetangula conspicuously contributes—in the same way that the ceos of ghana’s eo group, who contributed to the opposition npp during the 2008 elections, were targeted by the ruling ndc—to whomever becomes the pnu nominee for 2013.

who benefits from belinga?

in early february, rumors were circling that gabon was thinking about handing over the belinga iron ore project to bhp billiton after mines and oil minister alexandre barro chambrier met with bhp’s senior management in south africa. now it seems like this transfer may come to fruition, with a number of winners and losers.

in 2007, gabon gave the belinga project to the china national machinery & equipment import and export corporation (cmec) to develop it over a 25 years. cmec promised the government that it would begin mining belinga’s high grade iron ore reserves (64%) by 2011, at a rate of 30 million tons per year under a $3.5 billion investment program. the infrastructure plan included constructing a 500km railway, a hydropower dam and port. ever since china began to drag its feet on the 1 billion ton project, the gabonese government has become increasingly impatient with its suitors from the far east. bhp, who had long been waiting in the wing, had been courting the government in the event that china could not fulfill its obligations.

i am confident that the government will formally approve bhp’s acquisition of belinga, and that a number of winners and losers will emerge. bhp will have to manage expectations with the gabonese government on their ability to quickly build out enabling infrastructure. lower commodities prices have accelerated bhp’s slowdown in earnings growth so far this year, even though the company’s most recent interim earnings before interest and tax are expected to rise to $15.7 billion from $14.8 billion in 2011. the company’s full year earnings are forecast to drop by approximately 10%, but if one were to use spot commodity prices in calculating the company’s profitability, earnings would slump even further. given the company’s challenging financial situation, the question remains whether or not bhp will cut capital expenditure spending, and/or how it will prioritize investing in these new projects. in brief, bhp has to recover from its disastrous $20 billion shale gas plays, and belinga is one important piece of the puzzle.

although belinga is positive for gabon’s macroeconomic outlook, the country’s microeconomic outlook—employment and income distribution—will not improve because the quality of iron ore mined from belinga does not need to be beneficiated. in the absence of targeted social spending programs, gabon—which has a relatively low yielding, $1 billion eurobond—like nigeria, will continue to see growth without development. nevertheless, another indication as to why there is likely to be minimal governmental interference in bhp’s acquisition of belinga is that the australian giant’s investments squares nicely with president ali bongo’s desire to break the commercial ties of françafrique that marked his father’s administration. ali’s grip on the country is stronger than that of his father, as he has further personalized his family rule, divided the political opposition, and has skilfully walked the country’s ethnic tightrope by appointing a diverse group of individuals in his government. the centralization of political power in gabon allows for bongo to fast-track many of his preferred investor’s projects through the corresponding ministries.

belinga is one such project that bongo prioritizes given the profile of investors. bhp is partnering with indian abhijeet infrastructure ltd., who will link the project to the trans-gabon railway at booué. if the railway is quickly constructed, sundance resources, which is waiting for the cameroonian government to approve the terms of sale of its mbalam iron ore project to china’s hanlong mining investment, could choose to connect with the trans-gabon railway. although the cameroonian government recently declared the proposed land in rail corridor from mbalam to lolabé port for public utility, it is possible that hanlong (or sundance) could change its mind and decide that exporting iron ore through gabon. after all, the distance from mbalam to booué is about the same from mbalam to lolabé. in this scenario, whose likelihood increases in the event china abandons or brings in an outside partner to develop mbalam, gabon and cameroon would likely run in to the same squabbles as liberia and guinea are having over exporting iron ore from simandou. similarly, bhp could choose to connect export its iron ore through cameroon, especially given that sundance has recently signed a memorandum of understanding with equatorial resources to share iron ore infrastructure resources.

while bhp, gabon, and possibly cameroon could benefit from belinga, china certainly does not emerge a winner, as losing the mine is a further blow to its plan of diversifying its sources of iron ore. about 85% of china’s iron ore comes from australia, brazil, india, and south africa, and the government does not want to be too dependent on a handful of countries. the chinese government has embarked on a flurry of joint ventures and partnerships across west africa—in guinea (chinalco’s simandou), in sierra leone (shandong iron and steel group’s tonkolili), and in liberia (wisco’s bong mines)—with the intention of providing its own domestic steel producers with a stable and diverse supply of iron ore that would ultimately allow them to be self-sufficient. along with mbalam, belinga was to be completed owned by chinese interests (a first in its african iron ore expansion), giving it license to some of the world’s largest iron ore projects. ownership of projects with high-grade iron ore would permit it to skip the expensive process of beneficiation, which would allow it to bypass much of the local content pressures that would ultimately be demanded by host governments. further, direct access and control to some of the world’s best quality iron ore would allow china to challenge the oligopolistic pricing of iron ore by rio tinto, vale, and bhp. despite the shift from an annual to quarterly system that more accurately reflects global trends, china remains uncomfortable being at the whim of the big three. although west and central african iron ore projects will not be the catalyst for china to lead the change in the structure of global iron ore markets, the setback in gabon will certainly prompt it to look more aggressively for new sources of the strategically important resource.