Industry Trend Analysis - Kenya, Uganda Set For Major Production Growth - JAN 2018

BMI View: We are positive on future oil production in East Africa and expect output from both Uganda and Kenya to ramp up into the mid 2020s. The necessary construction of several export pipelines will raise the risk of delays to first oil currently expected from 2021.

We are positive on the prospects for oil production from both Uganda and Kenya from the early 2020s, ramping up towards the end of our forecast period in 2025 and 2026, as both the size and the low-cost nature of the resource favours development in these markets. Both Uganda and Kenya have made solid progress in exploratory activities in their respective upstream sectors over recent years, with both the South Lokichar Basin and the Albertine Rift Basin emerging as key major resource bases in the East African onshore. At present, both the Ugandan and Kenyan projects are thought to have competitive break even costs, around USD25/bbl. The eventual break even cost is likely to be slightly higher due to associated costs with pipeline construction; however, costs will continue to be highly competitive in a global context.

However, we note that the successful development of oil resources within the region remains reliant on the construction and operation of several export pipelines to the coast.

If developed fully, the combined oil production from Uganda and Kenya could reach up to 300,000b/d by the mid-2020s (BMI base case scenario, although there is potential for further production upside). Crude oil flowing to the East African coast will be geographically well positioned to target demand centres in South East Asia, where we remain positive on oil consumption growth over the longer term (see 'Cementing Position As a Global Growth Engine ' , August 8 2016).

Output Proliferating From Early 2020s
Uganda and Kenya Long Term Oil Production, 000b/d
Note: Upside Scenario Based On Upper Estimations Of Planned Production. f = BMI forecast. Source: Company Announcements, BMI.

World Class Resource Base Emerging

At present, the cumulative discovered resource base in both Uganda and Kenya totals around 2.5bn barrels of oil (approximately 1.7bn bbl in Uganda and 750mn bbl in Kenya) and reserves in both countries are thought to have significantly higher upside potential. Ongoing exploration efforts, spearheaded by Tullow Oil alongside Africa Oil Corporation in Kenya and Total and CNC in Uganda, will continue to de-risk and expand the resource base within Lokichar and Lake Albert basins. Tullow in particular has made encouraging progress exploring and appraising the South Lokichar basin. The company is currently drilling a four well programme in the basin, the first of which -the Erut-1- has confirmed oil migration to the northern section of the play.

Importantly, ongoing exploration in the East Africa region will help materially de-risk the prospective resource bases, providing greater commercial credibility with which companies can work to secure capital requirements for the pipeline projects, including tariffs and lending bases (see ' Exploration Looking To Support Pipeline Development ' , January 12).

Pipeline Links Hold Key To Growth Ambitions

We caution that the long-term viability of oil development within East Africa will be limited by the capital requirement, operational risk and construction challenges associated with two large pipeline projects. Separate pipelines, from Hoima-Tanga and Lokichar-Lamu, will raise overall project costs and will demand a higher discovered resource base to be viable economically (see ' Upstream Momentum Despite Headwinds Over Ground ' , July 28 2016). We would note that the recent farm in of Total and CNC to Tullow's Lake Albert development in Uganda partially offsets inherent project financing risks, with the additional financial clout of the French major, and the associated operational expertise, providing impetus to an early production system final investment decision by the end of 2017 (see ' Project Momentum Building, Risk To Pipeline Remain ' , January 16).

Pipeline Projects Increase Risks To Timely Oil Development
Planned East Africa Crude Export Pipelines
Source: Bloomberg, BMI

Aside from the financing risks, both the Hoima-Tanga and Lokichar-Lamu pipelines face a range of operational risks, including the regional security environment, the low level of existing oil export infrastructure at destination-ports and the technical complexity required (both pipelines are required to be heated in order to prevent the waxy East African crude from congealing and preventing flow). Added to this, the region is limited by inefficient bureaucracies, both of which may drag on project timelines, particularly as the long, transnational routes are likely to raise a number of environmental and inter-communal land disputes.

Above-Ground Headwinds Add Risk To Project Timelines
Uganda, Kenya & SSA Selected Risk Index Components
Scores out of 100, higher score = more attractive market. Source: BMI Risk/ Reward Index .