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The big winners in Kenya’s oil debut

James Stafford, Oilprice.com
Monday, 21 Oct 2013 | 10:45 AM ET
A bull elephant walks in Amboseli National Park, Kenya.
Tony Karumba | AFP | Getty Images
A bull elephant walks in Amboseli National Park, Kenya.

Kenya will start pumping its first commercial oil next year and begin exporting in 2016, but that's just the opening salvo: New discoveries in recent months and fast-track new well development are likely to make Kenya the darling of East Africa from an investor's perspective.

Kenya is set to soar past Uganda, which discovered oil much earlier, but is now having a hard time getting it out of the ground and into the market. And the next five months should bring not only news of the first commercial output for Kenya, but new commercial prospects coming online.

As the discoveries pile up for pioneers British Tullow and Canadian Africa Oil, the plan now is to escalate development and further the pace of exploration, while a third winner in this scenario—Taipan Resources—is set to benefit enormously by owning acreage right next to the pioneers' high-reward prospects.

(Read more: World's second largest oil field in US?)

Tullow, in partnership with Africa Oil—made the first discovery in western Kenya just last year, and in total have discovered more than 300 million barrels of oil equivalent resources in Kenya's South Lokichar Basin. The firm is still exploring.

In late September, the duo announced a fourth crude-rich discovery at Ekales, hitting a net oil pay of 60-100 meters. Significantly, this discovery is right between the Ngamia-1 and Twiga South-1 wells that first put Kenya on the oil map, and the reservoir properties are similar. Drilling success here has been 100 percent and this is the fourth consecutive wildcat discovery in this basin since March 2012.

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In the next 12 months, market watchers expect another 12 wells to be drilled along Kenya's "string of pearls," and what investors are sure to be eyeing is the fast progress on two new wells—Bahasi and Sala—being drilled by Tullow and Africa Oil. Those wells—targeting 700 million barrels between just the two of them—are in eastern Kenya. That's where Taipan is operating.

(Watch: Oil platform building boom!)

The Bahasi is a 300-million-barrel well that was started this month and should be completed around December. Upon completion of Bahasi, Tullow and Africa Oil will start drilling the Sala well, which is a massive 402-million-barrel prospect.

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That spreads the discovery net wider, and Taipan is eagerly watching the results, because both new wells are right next to their own Block 9 acreage, so a hit for one there means a hit for all. They're all targeting the same geology—the Tertiary part of the Lower Cretaceous.

Africa Oil and operator New African Global Energy also expect to start the highly prospective El Kuran well this month. El Kuran is just to the north of and on trend with Taipan's Block 1. It's a low-risk prospect because there has already been a discovery and it's really about testing commerciality and flow rate.

And with the 100 percent success rate for drilling in Northern Kenya so far, there is reason to be optimistic.

(Read more: Libya could become an oil 'paradise': Eni CEO)

For Taipan, there are plenty of other catalysts as well, including a farm-out agreement earlier this month for 55 percent of its Block 2B with Premier Oil Investments Limited, which will cover the cost of drilling and testing its Pearl-1 prospect. The drilling campaign should be in place by the second quarter of next year. A lot of information on geology will come to light—before Taipan drills—from the Bahasi and Sala wells.

It was only in 2012 that Tullow and Africa Oil struck the first oil in Kenya. This makes a commercial production timetable of 2014 and export goal of 2016 a relatively quick turnaround, and puts Kenya leaps and bounds ahead of its neighbors.

—By James Stafford of Oilprice.com. Click here to read the original story.

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