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Low oil prices strain exploration activities in Kenya

23rd Feb, 2016

NAIROBI, KENYA: A slowdown in local exploration activities witnessed in 2015 is expected to spill over to this year, with oil price free fall set to deny drilling companies cheaper funding, investment analysts have said.

Exploration firms are thus facing tough times ahead with projections they could cut spending on projects, including laying off staff on the back of thinning profit margins and high interests on loans.

Pine Bridge Investment Managing Director, Jonathan Stichbury said the sharp drop in global crude oil prices owing to a glut has pushed oil producing companies to the red, with low cash reserves threaten to disrupt schedule of projects.

“Plummeting oil prices stand in the way of oil firms which could deny them funding at competitive rates, a big impact will be felt on actualization of drilling projects,” said Stichbury.

Kenya’s prospects of being an oil producing country were lifted when one discovery after another was made in 2012. This attracted a number of multinationals keen to cash in on the emerging sector.

However things have dramatically changed following the unprecedented decline in oil prices which have hit Sh 89 a liter.

The exploration firms that were jostling to have a piece of Kenya’s promising sector have since scaled down their operations significantly with some entirely bolting out.

Analysts say the price could sink further in the coming days despite earlier views that the two year oil out would finally pick up this year.

The analysts however say the dark clouds of dismal oil prices have a silver lining in terms of the prices of products.

A rise in oil prices, they say, could have exposed consumers to higher costs of products.

Nonetheless, Kenya stands to lose immensely as the low fuel prices mean that the dream of joining the league of oil producers is ebbing further as it becomes less economical for first-time oil producers.

Exploration activities in Kenya slowed down by 50 percent in the second half of last year after crude oil prices fell below $50 per barrel.

Oil and gas services logistics firm Atlas Development sacked close to 750 staff members to scale down operations while Tullow Oil and its partner Africa oil decided to sell stakes in their oil blocks to larger companies to raise capital.

Early January 2016 oil prices were recorded below $28 per barrel to maintain an 18 month low streak compounding the reduced investments.

A storm back of Iran into the glutted oil market will push for an enormous strain for exploration firms over the next 12 months.

International Energy Agency (IEA) said Iran’s return to the market will offset any production cuts from other countries, with projections the oil market could drown in over-supply.

Indication from the agency is that Iran could move faster to look for buyers with competitive offers.

Stichbury is however seeing a situation where oil producing giants like Russia could start creating a net oil supply deficit to stabilize prices.

“I foresee a compromise on supply cut back to allow companies start making profits going forward,” he said.

Oil import bills have gone down by less than a third over the last one month, supported by a stable exchange rate as shilling seen steady at Sh 102 against the dollar.

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