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Analysis: Kenya shutdown tempers east African oil ambitions

By Edmund Blair

NAIROBI (Reuters) - Tullow Oil's suspension of drilling in Kenya after weekend protests shows that popular impatience for a share of the spoils is compounding the problems energy firms face building an oil and gas industry from scratch in east Africa.

Backed by local politicians, demonstrators from Kenya's poor, northern Turkana community marched on Tullow sites demanding jobs and other benefits, prompting one of Sub-Saharan Africa's most experienced oil explorers to "temporarily" halt work.

That is a blow to Kenya's government, determined to show it has security under control following last month's attack by Islamist militants on the Westgate shopping mall in Nairobi, in which at least 67 people were killed.

Investors' confidence was another casualty.

While east Africa is a hot new province for oil and gas exploration, excitement has been tempered by wrangles with governments, gaps in regulations and rickety infrastructure.

Local populations are understandably anxious for a windfall, but production may be years away, and such direct action is only likely to slow the region's emergence as a significant producer.

"There are numerous potential risks on exploration projects in poor, remote areas," said Tom Savory at consultancy Africa Practice. "Navigating local politics can be just as much of a challenge as navigating national politics."

London-listed Tullow, which has a track record of delivering projects elsewhere in Africa, said it was working with the Kenyan government, local authorities and communities in the area to resume work as soon as possible.

Grievances in the local community erupted into protests around at least two of its drilling sites, demanding more jobs and contracts.

Tullow says more than 800 of its 1,400 employees in its Kenya operations are from the Turkana region.

"We welcome them (Tullow) to Turkana. But we want to start benefiting as early as possible," said James Lomenen, a regional member of parliament who joined the protest at Twiga South-1 site. He said he saw workers evacuated from the site.

REASSURANCES

"No one was telling them to go; the community was just coming to have dialogue," he said, adding that the protest was peaceful and demonstrators "were just outside singing".

An industry source, however, described a "very tense" scene, and a senior Kenyan energy ministry official, Martin Heya, said politicians, whom he did not name, had stirred things up.

"We want them (Tullow) to work as soon as possible," Heya said. "We shall work with security agents to make sure they feel secure," he added, after police said they beefed up security.

Such incidents are not unique to Kenya.

In Tanzania, where gas deposits have attracted firms like Britain's BG Group and Norway's Statoil , residents of the Mtwara region protested in May over construction of a pipeline there, demanding more benefits.

Hardy oil firms are not likely to be deterred by such unrest, but anything that makes them more wary and imposes extra costs hinders development of an industry that Kenya, like other governments, hopes will generate new revenues to plug budget deficits and lift more people out of poverty.

"Risks for operators in this zone will in the end be at the cost of Kenya's exploration success and potentially lead to delays in the commercialization of discoveries," said Duncan Clarke, chairman of Global Pacific and Partners, an advisory firm to the upstream industry.

"It will add some concerns, already emerging in Kenya, about tougher terms and state regulatory involvement," he said.

Kenya is revising outdated laws governing the oil and gas industry. A draft law could go to parliament in November.

Others are also updating industry rules. Tanzania is drawing up a new gas policy, but has yet to issue it as a debate rumbles on about how much gas should be sold to foreigners.

CHALLENGING AREAS

Elsewhere, a wrangle between Uganda and oil firms over whether to process crude or export it has pushed back production until 2016, a decade after oil was discovered. Uganda has now agreed with France's Total and China's CNOOC <0883.HK> on building a smaller refinery than it had earlier wanted.

After helping bring Ghana's discoveries to production, Tullow shows no sign of backing away from its Kenya and Uganda investment, but the shutdown in Kenya comes at a tricky time for the group.

It has suffered a greater number of dry holes this year than its investors have come to expect and is looking for a partner to take on the $4.9 billion development costs of its Tweneboa, Enyenra and Ntomme (TEN) offshore Ghana project.

"I do believe Tullow is a good operator in challenging new areas," said Mark Wilson, oil and gas analyst at Macquarie Securities in London, adding that the latest incident in northern Kenya should not be seen as too negative for the firm.

Tullow, which has a market capitalization of over $14 billion, estimates Uganda and Kenya could together export 500,000 barrels per day through a Kenyan pipeline.

But Wilson said Tullow faced a tough job managing expectations in the local community and needed government help.

"The company, with the best will in the world, can't actually predict how the Kenyan development will work out," he said. "It is very difficult, particularly in a new area where there is literally no (oil and gas) industry whatsoever."

(Additional reporting by Duncan Miriri, Drazen Jorgic and Humphrey Malalo in Nairobi and Andrew Callus in London; Editing by Will Waterman)

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