Pool cash to fund oil sector, banks advised
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PHOTO | DIANA NGILA UBA Kenya managing director Tunji Adeniyi during the Upstream Oil and Gas Limited conference. NATION MEDIA GROUP
By PAULINE KAIRU polinekairu@yahoo.com AND JOHN NJIRU jnjiru@ke.nationmedia.com
Posted
Tuesday, March 5
2013 at
02:00
Local lenders have been advised to form a consortium with international banks if they want to tap into the lucrative oil and gas sector.
A stakeholders’ meeting in Nairobi last week admitted that local banks lack the financial muscle to venture into the nascent sector.
“Most local banks are small and don’t have the capacity to play in this league. Maybe if the banks form a consortium, then we can begin to talk,” said UBA Kenya’s chief executive Tunji Adeniyi.
According to Mr Michael Mutiga, CITI’s corporate and investment director, the banking industry is still incapable of adequately funding upstream exploration even if they pool finances.
“The size of financing for the oil sector is a lot bigger than the capacity in the local market, if you consider the cost of what a single well costs and we are doing multiples, then we have to raise this money offshore. The local market doesn’t come close to raising that kind of money,” he said.
The average cost of drilling a well in the country is $30 million (about Sh2.5 billion). There are 47 oil blocks licensed for exploration in Kenya at the moment.
Statistics from the Central Bank of Kenya show that the banking industry’s balance sheet stood at $27 billion, about Sh2.3 trillion, last year.
Taipan’s chief executive Maxwell Birley said it is difficult to get crucial funding at this point of development in the industry.
“Anything to do with exploration is high risk. This stage is only comparable to gambling,” he noted.
There are 17 wells to be drilled onshore and seven offshore in the next 18 months. The venture is estimated to cost the investors at least Sh88.5 billion during the period.
“One exploration is likely to be a failure and one good well can have a significant impact. The chance of success is about 10 per cent to 20 per cent. Exploration is not financed by many institutions or banks as it is too risky. Very few people or institutions finance exploration,” said Mr Birley.
There is also the aspect of foreign currency which can result in a major headache for potential local investors. Even if Kenyan banks were to form a financing consortium, oil is financed in dollars and it would not be cost-effective to do it locally, the bankers argued.
“The pool of resources out there is much larger and the comparable cost of dollars is much more cost effective,” said Mr Mutiga.
Besides, since Kenya lacks expertise, not having been involved in exploration activities before, it would be difficult for local banks to do requisite evaluations of their investment, like the strength or weakness of the oil finds.
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