Although it has significant potential for future development, Kenya’s nascent oil and gas industry is, like so many other markets, facing a number of challenges, both external and domestic, in 2015. An economic slowdown in China, weaker global oil prices, a depreciating shilling and proposed local content regulations have affected planned investments and domestic demand. As a result, the timeline for commercial production at newly discovered fields in the north-eastern Turkana region is being reconsidered, while domestic fuel prices – in a country heavily dependent on road transport – are proving stubbornly high.

Although upstream activity is likely to remain muted during 2015-16, an anticipated recovery in 2017 could spur a new round of investment, in addition to giving the government some much-needed time to develop its supporting infrastructure. Downstream demand is expected to continue rising, particularly as vehicle sales accelerate. While the forecast for 2015 is somewhat mixed, the industry’s long-term prospects remain bright, and the sector is likely to become a major economic engine over the next five years.

Sector Structure

Oil and gas development in Kenya is overseen by the Ministry of Energy and Petroleum (MoEP), established in 1979 and tasked with formulating policy, in addition to overseeing the utilities sector and renewable energy development. Day-to-day responsibilities for the sector are handled by the ministry’s Petroleum Energy Department. A number of state-owned companies are involved in the upstream and downstream sectors. The Kenya Pipeline Company (KPC) was established in September 1973 and began commercial operations in 1978, with a mandate to provide petroleum product transport from the Port of Mombasa to the East African interior via construction of a pipeline network running from Mombasa to Nairobi. KPC also manages the Hoima-Lokichar-Lamu crude oil pipeline, planned to link Uganda to Kenya’s northern port project as part of the Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) corridor. It is also tasked with marketing, processing and treating petroleum products, and transporting these products to downstream retailers.

The National Oil Corporation of Kenya (NOCK) was established in 1981 and began operations in 1984. NOCK is active both in exploration activities in its Tertiary Rift Basin block, 14T, which runs from the shores of Lake Bogoria to the Lake Magadi Basin on the Tanzanian border, as well as mid-stream projects, including the Single Buoy Mooring offshore jetty, the eventual establishment of strategic petroleum reserves and the formulation of a Petroleum Development Master Plan. In addition, the company also owns and operates 99 retail service stations across the country and sells to resellers, industrial consumers and the public sector. It has developed its own brand of fuel products, including liquefied petroleum gas (LPG), motor and industrial lubricants, and an electronic fuel management system.


The Energy Regulatory Commission (ERC), meanwhile, was formed in 2007 following the promulgation of the Energy Act (2006), and is responsible for regulating all petroleum products, including imports and exports, transportation, storage and refining, as well as retail prices.

The Kenya Petroleum Refinery Company was originally established in 1960 by Shell and BP to serve the East African region. Located in Mombasa, the region’s sole refinery previously undertook a range of activities, including distillation, hydro-treating, and catalytic reforming. Commissioned in 1963, a second train was launched at the facility in 1974. Today the company is 100% state-owned, after the Kenyan government agreed to buy Essar Overseas’ 50% initial stake in the venture for $5m in 2013.

Essar had been planning to invest $1.2bn to upgrade the refinery’s capacity from 1.6m tonnes of crude annually to 4m, but the plan was deemed not financially viable. The facility was officially converted into a petroleum storage facility with capacity for 192,000 cu metres of refined liquid products and 1200 tonnes of LPG, as of March 2015, while the government considers whether it will upgrade the facility or focus on new refinery developments as part of its planned LAPSSET corridor project. The project is aimed at developing transport and infrastructure, with financing for the Lamu Port, highways, airports, power generation facilities and an oil pipeline.

Rising Demand

With economic growth averaging 5.6% annually between 2009 and 2014, and a steady rise in vehicle sales in recent years (see Industry & Retail chapter), Kenya’s energy demand has grown, further increasing its dependence on imports to satisfy local consumption. According to the “Economic Survey 2015”, published by the Kenya National Bureau of Statistics, the total volume of petroleum products imported in 2014 rose by 11.7% to 4.46m tonnes, with the petroleum import bill simultaneously increasing by 5.6% to reach KSh333.15bn ($3.7bn), while total domestic demand for petroleum products growing by 5.3% to hit 3.94m tonnes. The dollar cost of imports may moderate slightly thanks in part to lower oil prices, but at the same time, the level of demand could ease somewhat in the coming months, should the US dollar continue to strengthen at the expense of emerging market currencies. Shilling depreciation in a market where imports are purchased in US dollars has kept fuel prices stubbornly high.

Kenya has set a cap on prices of petrol, diesel and kerosene since 2010 and lists maximum prices for each area of the country, with prices remaining valid for a month. In July 2015 the ERC raised the maximum retail prices of diesel, gasoline and petrol for Nairobi. “What we are seeing is that the lower price of oil, along with a couple of local players being more active in investments, has helped improve prices. However, the shilling’s depreciation has had the opposite effect,” Aegidia Schnepp, planning and supply manager at Total Kenya, told OBG. “We expect to see the central bank take action to halt depreciation.”

Upstream Potential 

Kenya is home to four prospective sedimentary basins Anza, Mandera, Tertiary Rift and the Lamu Basin offshore. Oil exploration began in the 1950s when sector majors Shell and BP carried out the first survey work, including mapping geological basins, with the first exploratory well drilled in 1960. Since then over 40 wells have been drilled, both on and offshore, although successful discoveries were not made until 2012, when Tullow Oil’s Ngamia-1 well in Turkana County was found to contain commercially viable oil resources.

Although the US Energy Information Administration reports that Kenya’s considerable oil reserves are yet unproven, Tullow estimates that reserves in the Lokichar Basin in Turkana County stand at 600m barrels of oil, with new discoveries in January 2014 raising the potential for these fields to 1bn barrels.

The regional proximity of newly discovered proved oil and gas reserves, most notably in Uganda and Tanzania, has attracted a wide variety of international oil firms over the past five years, including Tullow Oil, Africa Oil, BG Group and Total.

“The potential for investment is large when you take the view of an energy-poor country,” Wanjiku Manyara, general manager of the Petroleum Institute of East Africa, told OBG. “Our intention is to become industrialised, so the opportunities are significant. The fact that there is demand for technology, for people who have had experience in other countries, it encourages investors to come in.”

Recent Exploration

Tullow is also the producer for Jubilee field in Ghana – that nation’s first large-scale commercial block – and has been the most active upstream player in recent years, most notably in Turkana County, where it has partnered with Africa Oil to carry out exploration activities in blocks 10BA and 10BB; with Africa Oil and Afren to explore block 10A; and with Africa Oil and NOCK for block 13T. Tullow has also formed a partnership with Swala Energy to explore block 12B. The company is in the midst of finalising appraisal and testing these blocks, with the process expected to wrap up before 2016. So far, however, tests have yielded mixed results.

Testing Well 

Africa Oil, a Canadian oil firm with assets in Kenya, Somalia and Ethiopia, is another major player in the market and several of its current exploration projects are shared with Tullow. In early 2015 Africa Oil reported that its Amosing-1 and Amosing-2 wells had been completed, with initial rig-less flow testing during clean-up reporting a combined maximum rate of 5600 barrels per day (bpd) and 6000 bpd. Production at the Amosing wells reached a combined average constrained rate of 4300 bpd under natural flow conditions, and a cumulative 30,000 barrels of oil was produced into storage.

Africa Oil also said that pressure data from its Amosing wells indicates significant connected oil volumes and confirms lateral reservoir continuity, lending an optimistic outlook to development of the field.

In July Africa Oil reported that preparations for extended well tests at the Ngamia field in the South Lokichar Basin were under way, after multi-zone completions at the Ngamia-8, Ngamia-3 and Ngamia-6 wells. Initial rig-less flow testing during clean-up was at a combined maximum rate of 3900 bpd and 1740 bpd at Ngamia-8 and Ngamia-3, respectively, with ongoing testing at Ngamia-3 and Ngamia-6.

Meanwhile, in March 2015 Tullow announced that its PR Marriott 46 rig, which drilled the Ngamia-7 appraisal well in the South Lokichar Basin, had discovered 132 metres of net oil pay, expanding the proven extent of the field. However, its Engomo-1 exploration well located west of Lake Turkana failed to discover significant quantities of oil or gas. “While we would have hoped for basin opening success in the North Turkana basin’s first wildcat well, Engomo-1, we still have a vast amount of un-drilled acreage with identified prospects and leads providing significant remaining exploration potential,” Angus McCoss, Tullow Oil’s exploration director, told local press.

Offshore Potential

With Mozambique and Tanzania also recording significant offshore finds, the MoEP has actively pursued new offshore drilling opportunities. In addition to a number of medium-sized exploration companies, French oil firm Total purchased a 40% stake in Anadarko and Cove Energy’s concessions located in the Lamu Basin in 2011. The company moved in the following year to acquire a 100% stake in block L22, although wells drilled in blocks L7 and L11B, majority-owned by Anadarko and Cove Energy, have failed to yield positive results. In 2012 Apache drilled its Mbawa 1 well in offshore block L8, but the concession was abandoned in late 2013. More recently, the Erin Energy Corporation was awarded an 18-month extension to its exploration contract for offshore Kenya blocks L27 and L28, extending them until February 2017.

Offshore gas has still not been discovered in commercially viable quantities, but BG Group and its partners announced in 2014 that they had located both oil and gas in blocks near Lamu. Although offshore drilling is expensive – a well in Kenya typically costs $80m to drill, according to an October 2014 report by the Oxford Institute for Energy Studies – positive results will bolster efforts to further explore Kenya’s offshore potential, despite the near-term difficulties in obtaining the necessary capital to do so.

Oil Prices

In April 2015 the government announced plans to create 14 new onshore and offshore blocks for exploration of crude oil, increasing the number of blocks in the country to 60, with international firms expected to benefit from more favourable terms and prices given current market conditions. However, although the sector retains tremendous potential for future development, 2015 has been a challenging one globally for upstream companies, with depressed global oil prices having a significant impact on profits, revenues, and planned investment in exploration and drilling – and Kenya is no exception.

International oil prices have fallen from a high of $115 per barrel in June 2014 to around $45 per barrel as of October 2015, the result of a combination of weaker demand in a depressed global economy, competitive price positioning between OPEC and other producers, and a supply glut resulting from producers’ efforts to remain fiscally viable by selling volume into the price drop. The effects on firms operating in Kenya was seen as early as January 2015, when Tullow announced it would cut its 2015 exploration budget to $200m, after earlier reductions in 2014. Capital expenditure for 2015 was lowered to $1.9bn, from $2bn in 2014. However, the company plans to move ahead with its Kenyan operations. In July 2015 Tullow announced it expected commercial production to begin in 2020 and the company stated it is still planning to invest $100m for further exploration and appraisal drilling. According to press reports, however, detailed plans for the Uganda-Kenya pipeline, unveiled in August 2015, indicate commercial export will not commence until 2022.

Waiting Game

Even with price declines, delays to projects are not expected to have a significant impact on the industry’s long-term outlook, although they will likely mean production will not begin until after the anticipated oil price recovery.

“This depression has been existing globally for over a year now and it has certainly, in Kenya, had an impact in that many players here have scaled back on operations. But they have not shut shop, they’ve simply been rationalising which assets they develop and which they put on hold,” Sonal Sejpal, director at law firm Anjarwalla & Khanna, told OBG.

Infrastructure Upgrades

A major aspect of the government’s push to improve the overall attractiveness of the country’s upstream, midstream and downstream segments is a regional mega-project linking the hydrocarbons sectors of three neighbouring countries to infrastructure in Kenya. The LAPSSET corridor project will include construction of a crude oil pipeline connecting South Sudan, Ethiopia and Uganda to deepwater export facilities in Lamu, as well as a new oil refinery, at an estimated cost of $24.5bn.

The project is ambitious and, perhaps not unexpectedly, is running behind schedule, according to a 2015 report by UK consulting firm Oxford Analytica – although this could have benefits for local operators, which will have additional time to develop the capacity to be involved in the project. The extra time required to reach commercial production could also be beneficial to the government as it seeks to allocate the necessary financing while building up supporting infrastructure and human capital.

“The focus has shifted from first-oil target dates to issues that relate to capacity building, such as the crude oil pipeline, related ancillary infrastructure, refineries, and decision-making around that, as well as human capital in terms of fast-tracking competency issues,” Manyara told OBG. “This means that Kenyans will be ready to participate in the next stage of the exploration and production cycle.”


Given current market conditions, the authorities have shifted their focus to the proposed Lokichar-Lamu pipeline, with the governments of Kenya and Uganda reaching an agreement on its route through Kenya in August 2015. The 1300-km Lokichar-Lamu pipeline is now set to trace a northern course, from Hoima in Uganda through the Kenyan city of Eldoret, and connecting to Lamu rather than to the southern Mombasa port, as originally envisioned. The $4.5bn pipeline is expected to be finished by 2020, following completion of a detailed front-end engineering design study, although Uganda is also exploring an alternate pipeline route with Tanzania.

One month earlier, KPC announced it expected its KSh50bn ($550m) Mombasa-Nairobi pipeline to be operational by August 2016, after signing a finance agreement with a consortium of six banks, including Cooperative Bank, Citibank Kenya, Commercial Bank of Africa, Standard Chartered, Barclays and the Rand Merchant Bank. The loan will be repaid over 10 years and cover 70% of the costs required to replace the current 37-year-old pipeline, which has been operating below capacity for a number of years.

The new 450-km pipeline will boost fuel transport capacity by 30% on completion, and take an estimated 4000 trucks currently shipping fuel between the two cities off the roads, offering significant knock-on benefits. The pipeline’s capacity will reach 1m litres per hour (lph), up from current levels of 730,000 lph.

Legal Reforms

As the industry prepares for commercial production, the Kenyan government has sought to reform the regulatory environment, and a number of critical pieces of legislation are in the works, including a new Energy Bill, a new Petroleum Bill (now before the Parliamentary Committee on Energy and ICT), as well as an over-arching development strategy, the National Energy Policy (NEP). The Petroleum (Exploration and Production) Act of 1986, last revised in 2012, is the main body of legislation governing upstream oil and gas activities in Kenya. Under the law, the government owns all hydrocarbons reserves, and the Cabinet secretary of the MoEP has significant powers over the sector, yet the legislation provides few details on production activities.

National Benefit 

In line with the broader push across the continent to boost local content, contractors are also legally required to give preference to locally available staff, goods and services, a particularly contentious issue in recent years. Ensuring that the national and county governments, and local communities, benefit from petroleum revenues is a constitutional imperative, and local content provisions have risen to the forefront of regulatory reforms in recent years. Although there is no current definition of “local content” under Kenyan law, the 2010 Kenyan constitution mandates parliament enact legislation to ensure investments made in the country benefit local communities, while the Petroleum Act provides that one of the terms of a production-sharing contract (PSC) is an obligation on the contractor to give preference to the employment and training of Kenyan nationals in petroleum operations. However, the lack of clarity and definition in terms of local content laws has created a number of challenges for private and public stakeholders, most notably due to the absence of an independent regulator responsible for monitoring and enforcing the relevant provisions of each PSC.

Lack of uniformity within PSCs also means that investors do not have a clear picture of which provisions will be included in a PSC and the extent to which a PSC can be negotiated, according to a February 2015 report published by law firm Dentons. Local communities have become disenchanted with the PSC process, as evidenced by protests in Turkana that affected production in the region in October 2013.

In addition, stakeholders argue that pre-existing skills and infrastructure gaps entail significant expenditure in training, construction and logistics. As a result, a number of operators are looking to take proactive measures in terms of community engagement to stave off future concerns, by introducing training programmes and holding town hall meetings.

Energy Bill

These challenges highlight the importance of legislative reform. The most significant changes will come with the new Energy Bill now before parliament. The bill is a key facet of the NEP, which mandates creation of a revised local content regime that will dovetail the existing PSC scheme.

In 2013 the government released a draft Energy Bill stipulating that the proceeds from petroleum exploitation be shared proportionately between the national and county governments, while local communities near drilling sites must receive 25% of all royalties collected from petroleum exploration and production. Stakeholders noted at the time that the draft bill did not state how much revenue local authorities would be entitled to, with the constitution stating only that county governments must receive an equitable share of at least 15% of revenues collected by the national government each year.

“The problem, as people have found, is that if the local community is disgruntled things will eventually grind to a halt or become difficult for the investor to take forward. So there is quite a bit of jostling still to be had between national, county and community governments, but it is not something that is putting off investors,” Sejpal told OBG.

Human Resource Challenge 

In addition to its other shortcomings, the draft Energy Bill did not include an administrative and institutional framework to support implementation of local content policies. As a result, in April 2015 the government proposed new rules requiring oil exploration firms to give local investors a 5% stake in their operations, in addition to using local suppliers and staff for their services. Under the proposed regulations, oil companies would be required to source between 60% and 90% of their goods and services locally, as well as 70-80% of management and technical staff within 10 years.

The government’s draft NEP, unveiled in November 2014 and approved by the Cabinet in August 2015, states that the country’s skills gap must be addressed. Although it mandates the government to enhance manpower, technical capacity and local content in energy-related projects, stakeholders worry that the 5% local content law will restrict future expansion and create unfair burdens for the private sector.

“The problem is that if you introduce a wholesale local content agreement too early in the cycle, you’re not going to find the people with the skills to handle something that is extremely sophisticated,” Sejpal said. “Just to give you an example, if you’re a supplier of expensive drilling equipment and supplying someone in Kenya, and the contractor is being told they must use local workers, you as an equipment supplier are not going to be happy as it will be in breach of your own contracts and insurance to have unqualified people working on your equipment.”


Although 2015 and 2016 will be tough years for the industry, the country’s enormous potential for expansion at all levels of oil and gas production remains unchanged. With vehicle sales rising, pipeline development progressing and regulatory reforms ongoing, the country remains well positioned to capitalise on both its extensive petroleum resources, as well as its geographic position as a critical gateway for its land-locked neighbours on the continent. Government efforts aim to keep a greater share of the economic benefit from this new activity in-country, although ensuring the availability of sufficiently trained labour will be key to this initiative’s success.