Monday, May 10, 2010

Oil Diplomacy 101 (As taught by China)

China's influence and profile as one of Kenya’s top bilateral partners is clearly on the ascendancy. The new relationship is being brokered at the very highest level – by President Kibaki himself.
What exactly is going on? Is the new relationship going to be based on aid or trade? Or is this China’s oil diplomacy? My sense is that in the coming months, we will be hearing more and more about China in the field of oil exploration.

It is instructive that President Kibaki’s visit came against the backdrop of high expectations about what the Chinese are doing on what is known as the Bhogal well in northern Kenya. I don’t want to raise expectations prematurely, but there are just too many things happening that make me suspect that the Chinese are up to something dramatic on this well.

First, there was the news that they had found what experts described as a high concentration of gas. In Toronto, the stock of Canadian firm AfricaOil, which has a 20% stake in Bhogal, has been rising steadily. The stock of Vanoil, another Canadian Company that owns a block next to Bhogal, has also shot up. Right now, the rumour mills are on overdrive. Speculation is rife that the Chinese are about to start drilling test wells, a signal that a discovery of gas or oil may be in the offing.

Then you have the two-day East African Petroleum conference which opens in Nairobi on today. All the big names in the oil exploration business , including CEOs of major fund managers from the United States, Canada and Europe, are trooping to Nairobi for this meeting. Interest in oil exploration in Kenya has never been higher. Tullow Oil and Heritage, the two firms behind sensational oil discoveries in Uganda, are currently negotiating farm-ins and may enter the fray very soon.

In Beijing a fortnight ago, the Chinese were taking advantage of President Kibaki’s visit there to announce interest in the development of the proposed Lamu Port. In the event that Bhogal happens, the proposed Lamu Port could become even more strategic for the Chinese.

Because of Lamu’s location, the proposed port will be a strategic link to southern Sudan where gas discoveries by Chinese exploration companies cannot be put to commercial use due to the lack of an export outlet. Depending on what happens in Bhogal in the coming months, there will be opportunities for building gas pipes or a refining plant in the Lamu area.

The Bhogal well was identified several years ago. But the point of departure is that the Chinese have dug deeper than anybody else has attempted in the past. At 5,600 metres, the well is the deepest ever in Kenya.
Neighbouring Uganda, with confirmed deposits of an estimated 2 billion barrels of crude, has been hitting oil at a mere 800 metres.

President Kibaki made his first visit to China in 2004 when he signed a memorandum of co-operation covering many areas including trade, education, and infrastructure development. That visit is what set the stage for China’s designs for a foothold in the oil exploration sector in Kenya. Indeed, East Africa has emerged as an appealing region for Beijing’s international strategy of securing and diversifying its sources of energy. The clue that it was all part of China’s oil diplomacy was to emerge when, on President Kibaki’s return from that first visit, the first thing the government did was to give the state-owned China National Offshore Company (CNOOC) exclusive rights to a total of six out of 11 oil exploration blocks. European oil exploration companies that had been hankering after oil exploration licences were caught flat-footed. The only recourse for them was to negotiate farm-ins with CNOOC.

As a matter of fact, there was a time CNOOC put out adverts in the international media inviting farm-ins from interested oil exploration companies. There were loud murmurs especially from Spanish and Swedish firms that had been waiting in the queue for exploration acreage. After two years, the Chinese gave back four blocks to the government, retaining Bhogal where they are currently drilling.

We must thank the Chinese for the unprecedented interest by foreign investors in the oil exploration sector in Kenya. I am no China-basher, but at the rate at which activity by the Chinese is rising in Kenya, it will not long before we see a China Town in Nairobi.

1 comment:

Anonymous said...

Whatever the immediate environment, I have always been intrigued by the continued latent aggression between the two countries, when I came across 33% discount on India and China: The Battle between Soft and Hard Power By Prem Shankar Jha, I could not control myself. The most interesting part is while the rest of the world seems resigned to the rise of India and China, the author doesn't agree.