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East Africa Oil

Written By Christian DeHaemer

Posted August 18, 2011

“The Independence of South Sudan has set the stage for a scramble for land in eastern and northern Kenya, including the northern Coast.”

— The East African, August 14, 2011

The night was cool. A billion stars shone like diamonds. The giraffe lay sprawled in a mess of blood and gore on the side of the highway, its long front legs twisted backwards. Bits of white plastic and broken glass were scattered around.

As we eased by in the traffic jam, a pied crow fished a black eyeball out of the socket and gulped it down.

“Jambo Kenya,” said my driver, smiling.

Jambo Indeed

Most people know Kenya for the nation’s marathon runners or the great wildebeest migration…

But people like you, who make money from cagey investments, know it for its oil.

Kenya is the only stable country in a region suspected to have the largest untapped oil reserves on earth.

But what you may not know is that across the border in Sudan sit 6.7 billion barrels of proven oil reserves, and they are producing 490,000 barrels a day. Eighty percent of this is located in the South.

But there’s a problem…

Comprehensive Peace Agreement

Last month, on July 9, 2011, South Sudan broke off from the North to become the world’s 193rd nation.

The problem is that all of the pipelines lead north through Khartoum to Port Sudan on the Red Sea.

According to the Comprehensive Peace Agreement — which ended a twenty-year civil war that resulted in the deaths of two million people — there was to be a fee for transport and handling of the oil. So naturally, the North decided South Sudan should pay $32 a barrel, which is more than triple the going rate internationally.

In other words, until South Sudan can move its oil out some other way, Khartoum has them over a barrel, as it were.

Chinese Oil

The wild card in all of this is the Chinese. The Khartoum government has already granted oil blocks to CNPC. According to the Saigon Daily:

President Bashir has granted the China National Petroleum Corporation (CNPC) three promising new petroleum blocs and offered a partnership with the national petroleum company Sudapet in the fields where it operates.

The Middle Kingdom is the biggest buyer of Sudanese oil and the largest military supplier.

The Chinese have a lot to lose if the bickering between the two Sudans interrupts the flow of oil; they are working deals with South Sudan as well.

Enter: Kenya

As you can see by the map below, Kenya is the only stable country bordering South Sudan that also has a port and a refinery.

There are ongoing talks with Japanese investors about a pipeline route from Juba to the Kenyan port of Lamu.kenyapipelinemap

According to the Financial Times:

Toyota Tsusho, the trading arm of the Japanese carmaker, said it was developing plans to build the $1.5bn pipeline, which would run for 1,400km from Juba, the capital of south Sudan, to the Kenyan island of Lamu, where an oil export terminal would be constructed.

Kenya is spending $4 billion to update the port of Lamu and a transportation corridor to South Sudan. This build-out will add to the oil frenzy going on in Kenya — and in East Africa in general.

More infrastructure will lead to more investments in exploration. Already you have the big French oil company Total exploring Block B in the Indian Ocean. London-based oil company Tullow (TLW.L) has bought up a number of Kenyan blocks. Uganda is building a refinery near the two-billion-barrel find at Lake Albert…

All told, there are 14 oil and gas explorers, including Anadarko (APC), Afren (AFR), and Apache (APA), that have leased blocks for exploration.

And yet, Kenya produces no oil at this point — nor has major drilling even taken place.

Make no mistake: The blocks are all sold out and the price of leases is going up.

One company I recommended to readers of my Crisis and Opportunity, Vanoil (VEL), has just turned down a buyout offer after it received its new independent resource estimate.

And no wonder. The independent estimate by Sproule put the amount of oil at 3.6 billion barrels of oil equivalent. At $50 a barrel, that’s worth $180 billion!

Vanoil has a market value of just $26 million. You can argue about what it’s worth, but it’s worth more than that.

As soon as one of these wildcatters hits pay dirt, all of these prices will go up dramatically — roadkill giraffes or not.

Good hunting,

Christian DeHaemer
Editor, Energy and Capital

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