A new Eldorado, will Kenya be a Rule-maker or Rule-Taker?

January 13, 2016 9:03 am


The big economic and financial news of 2016 is the complete rout of crude oil benchmark prices after prices hit an all-time decade low of US$30 per barrel Tuesday January 12th; markedly different circumstances and a far cry from the exuberance exuded by the Kenyan government, markets, pundits & oil companies in 2012 when oil was discovered in Turkana, with prices then at high of US$111 per barrel.

The sea-change in perceptions was instantaneous. Exploration Licenses were snapped up. Independent, and sometimes nondescript upstream firms pitched tent in Northern Kenya and off Lamu. A law-firm associated with a prominent politician flipped a US$1 million exploration license for an astronomical US$10 million, netting the holders US$9 million. The deal-making scene was abuzz. Massive oil-rigs were shipped in, complete with exotic, and experienced drilling personnel, and even sleeker oil-field services teams. East Africa-focused Oil and gas conferences proliferated on the local and international circuit. The National Oil Corporation of Kenya (NOCK) became the new poster-child of Kenya’s oil ambitions, having arrived well before the main dance commenced. NGOs dispensed unsolicited for wisdom on the Sovereign Wealth-funds, the Dutch disease, corruption and the oil-curse, and their twin evils, opacity and legalese in exploration, and production-sharing contracts and agreements. It was all shock and awe.

But nothing illustrates this better than wily global operators typified by the likes of 45 year-old Eric Prince who firmly placed his bets on Kenya’s oil-find. Prince is a former US Navy Seal, founder and CEO of the world’s largest private army when it existed – the controversial US defense contractor in Iraq – BlackWater USA. Together with his Hong-Kong based Chinese partners, he bought out Bamburi-based air charter services firm, Kijipwa Aviation for a reputed US$12 million, and forked another undisclosed amount for a 49% stake in Phoenix Aviation. Both firms were brought under the Hong-Kong listed Frontier Services Group (FSG),. Prince went further and lined-up a US$85 million war-chest, and 25 gleaming new planes at the scenic Kijipwa, all ready to ace the market.

With prices where they are today, all this may just be that unwelcome nightmare on Elm Street. The chips are down.

Outlook for oil exporters is bleak. In the short term, that is. One of the world’s biggest oil exporters, Saudi Arabia, is running a deficit of US 100 billion for FY 2015 alone, has raised taxes, and is considering listing ARAMCO, it’s national oil company on the bourse. Nigeria, one of Africa’s top producers, even under new President Buhari, is running a deficit of US$11 billion and has appealed to the IMF for a bailout, a request that the IMF Chief Christiane Lagarde has outrightly rejected. OPEC, that exclusive club of key oil producers has called for an emergency meeting to discuss production quotas to cut the glut. The house of Saud is torn, it’s geopolitical rival, Iran, allowed back in the oil markets gradually last fall after the nuclear armistice with the P5+1 Group, is ramping up production and discharge of its stockpiled oil reserves, and is growing emboldened beyond the Gulf of Hormuz, with Yemen and Syria teetering on total collapse. It is estimated that a third of US firms in the oil & gas ecosystem may file for Chapter 11 bankruptcy as they borrowed on the cheap, and now with the Fed interest rate hike last month, have to pay premiums on loans in a depressed oil market that does not even meet break-even costs.

What does this portend for Kenya? What will be the ripple effects on the muted global economy and trade? What is the impact on Kenya as a net oil importer, and putative oil exporter in 2-3 years; what is the fate of the ongoing upstream oil exploratory activities? How does this affect our fiscal position, trade account, balance of payments, debt repayments, amidst a depreciating shilling? Are our traditional products and services going to be more or less competitive? What can we do to ride out the downturn and reposition our economy in the medium to long-term?

Is Kenya going to be a rule-maker this side of town, and ride the tiger by the tail, or be a rule-taker, galloping along anonymously with the rest of the frontiers-market crowd, hoping for the best and preparing for the worst?

I bravely posit that the choice is largely ours.

The news is that whereas this low price was anticipated in some quarters, the bad news is that the number of hedge funds, commodity desks and futures traders who have wagered a bet that the new bottom will be a low of US$20 has exponentially increased, and points out that the we have not reached rock-bottom yet. All bets are on a bottom-out at US$25-30 a barrel, six times lower than 36 months ago, and prices will rebound in 24-48 months.

Upstream exploration activity has being scaled back if not almost ground to a halt. Many independents, cash-strapped, except brave Tullow, have farmed-out their minority stakes to bigger, better capitalized oil majors, the latest being Africa Oil which has sold its interest for circa US$350mn to Maersk Oil. Atlas Logistics has folded up in Kenya and headed to Ethiopia. Firms like Delonex have adopted a wait-and-see attitude.

We have to rethink and reprioritize our mega-infrastructure projects like LAPSSET that hinged on an oil economy as the demand-driver. Investors are way now wary of risks posed, with prices as they are. While the pipeline remains very much in the works, disagreements between Kenya, Uganda, South Sudan, Ethiopia, on which route to use, with Total-Oil insisting on the Southern route and terminating at Tanga Port in Tanzania, Tullow & CNOOC remaining non-committal means that Kenya has to rethink the economics of the pipeline, security, refinery and storage. Ethiopia is reportedly exploring the Djibouti route.

I expect greater pressure on the Kenya shilling on account of an appreciating dollar, falling demand for commodities and hence lower prices for our traditional export commodities like Coffee and tea; due to slowing demand in China amidst dampening domestic growth in consumer prices and a sluggish economy riding on the back of uncertainty about the Chinese currency and economy. There will be marginal pass-through retail fuel-price gains for energy consumers in Kenya, if any, despite us being an oil-importer as the energy prices are regulated by the ERC, and any windfall gains will be offset by rising interest rates and inflation given the level of the government’s indebtedness. Hence manufacturing costs may not come down in the immediate and costs will be passed onto the consumer.

Capital costs will remain high, more so with close to Sh500 billion of our debt maturing this year, most of it foreign-denominated, translating into additional pressure on consumer prices, taxation hikes, driving up the foreign exchange rates and interest rates, further dampening domestic consumption and trade in luxury and non-essential services and goods.

A tightening liquidity and fiscal position can already be discerned from both leading and lagging macro-economic indicators. The Nairobi Securities Exchange’s bear-run shaved off 20 percent of the market capitalization last year, costing equity investors a whooping Sh250 billion in losses as foreign investors stampeded out of emerging markets to the safety of safer asset classes elsewhere. Real-estate, a favorite investment class, will definitely take a hit.

It is not all doom and gloom though. This is our opportunity in the medium to long-term to restructure our economy through a mix of measures – there is no silver bullet. Increase share of manufacturing sector’s contribution to GDP from the low of 10 percent to the global average of 16 percent through cheaper energy as envisaged under the 5,000 Megawatts in 40 months – we also have an ambitious industrialization roadmap. A job created in manufacturing has huge multiplier effects, and creates 8-10 jobs down the value-chain. We should seek alternative and cheaper financing sources like sukuk bonds for our priority projects. Further, we should increase how much tourists spend on tour in Kenya from the US$1.4 billion total in 2014, through better marketing, a better value-proposition, diversified product portfolio, and leverage on our improving infrastructure, skills base, and huge wins at the 2015 World Tourism Awards.

And yes, we should rationalize our public workforce and wage bill, cut waste, and restore core values in public and corporate circles. But most of all, practice what we preach and walk that talk. I believe we are the rule-makers.

(Hez Gikang’a is the East Africa MD, KEAMSCO Ltd – a Management & Business Advisory firm)


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