Crude Oil Prices and Kenya's Upstream Industry - Part One

There is a saying in the oil industry that goes like, “When E&P companies have a cold, the oil and gas service sectors have a heart attack”.

The oil industry, with its history of booms and busts that date back to the 1900s, is in a new downturn. Earnings are down for companies that have made record profits in recent years, leading them to sharply cut investments in exploration and production. Reports indicate that more than 200,000 oil workers have lost their jobs across the value chain. Tullow Oil, a company with acreage in Kenya and that discovered oil in March 2012 at the Ngamia-1 well, reduced their exploration to $200 million for the previous $1 Billion and this has seen their activities reduced to a bare minimum.

The cause is the plunging price of a barrel of oil, which has been cut roughly in half since June 2014, reaching levels last seen during the depths of the 2009 recession. While the causes of past price swings have all been different, the effects have generally been the same. To refresh your mind, you need to go back to 2008-2009; the period saw a decline in oil prices from almost $150.00 per barrel of oil all the way down to under $40.00 per barrel.

So what made the prices fall from $115 per barrel to the current $45-$51 per barrel? While this may seem like a very complicated question, it boils down to the simple economics of supply and demand. The oil price is partly determined by actual supply and demand, and partly by expectation. Demand for energy is closely related to economic activity.

The oil price fall, by more than 50% since June, 2014 comes after nearly five years of stability. At a meeting in Vienna on November 27^th, 2014, members of OPEC (Organisation of Petroleum Exporting Countries), who controls nearly 40% of the world market, failed to reach agreement on production curbs, sending the price on a free fall. 

...to be continued

Building a Business Startup: Part Two

As mentioned in the part one of this 3-part series, it takes a lot to build a business from scratch. This journey is not for the faint-hearted or the short-term oriented mindset. It is a long game. Everyday, you will wake up to the same routine, a strive towards making your business better. Each day is different and the challenges you face are equally different. Although the world wants to brainwash you with the fairy-tales of instant wealth and overnight success, I have learned that such is simply a load of baloney;

It is about drive.

They do not teach you drive in school. Most of the founders I have spoken to say that they invest more in passion and drive, then a great business plan. There are so many highs and lows days in and day out that only those with the most endurance will make it through. Others will give up too early.

Start Small

You can never climb a tree from the top. It is easy to be carried away by the glamour and allure of running a BIG company. It is great to be the owner of Safaricom, Equity Bank, Centum and Oando among other big players. What we are never told are the behind-the-scene stories of humble beginning, hard work, failure and setbacks, and the amount of time it has taken for the above companies to get where they are today.

As a startup entrepreneur, start small and be proud of it. Many of the world's top billionaires such as Bill Gates and Mark Zuckerberg started small. For example, Mr. Gates and Mr. Zuckerberg, who hold $79.3 billion and $35.7 billion fortunes respectively, started their business ideas and enterprises from their university hostels. Apple founder Steve Jobs started in a garage.

You will work longer hours

A day has 24 hours, but if you ask any entrepreneur, these hours are not even enough. I know there are those who keep talking about having a balance, and that is all good. I can assure you one thing, during the initial years, having 'balance' is a luxury. A lot goes on, mostly mistakes and building systems. Weekends and holidays become part of your working days. You will miss lunches, sleep late and wake up even earlier. This is real stuff.

I read an update on Linkedin earlier today posted by the owner of CompuLynx Limited who said, "...its been an amazing 21 year journey of starting, building and growing Compulynx from a 2 man 1 location company to a 150+ people organization...A lot has been done, but a lot more remains to be achieved".

Think about that....21 years is not a short period of time. Others have done it for what seems to be forever. For example, Warren Buffet.

That statement sums up my attitude towards building a business. It takes working hard, for long hours a day and for a very long period of time. The tragedy is that sometimes what is portrayed in the media is very deceiving. Success is not as easy as they make it look in the movies.

Embrace and Enjoy Failure.

Most of us do not give ourselves a second chance. Yet failure is a part of life. As a brother, as friend, as a boyfriend, as an entrepreneur, failure is something I know about. I have failed in all aspects of life you can think about. But guess what, the day I learned to enjoy failure was my biggest break.

I draw inspiration from the likes of billionaire Richard Branson. Among his famous failures include Virgin Drinks, social networking platform VirginStudent, wedding dress business Virgin Brides, online car sales outfit Virgin Cars, and lingerie store line Virginware.

According to Mr. Branson, who is worth $4.8 billion, the failures have sharpened his business skills. He says that his mistakes gave him a chance to bounce back and make smarter choices in his subsequent moves.

I believe that is the spirit you should embrace, to accept failures and learn from your mistakes. Am doing it on a daily basis.

There you have it. Building a business from scratch is not easy...you need to embrace failure as it is real, you will start small and then scale up and you must have drive!

Building a Business Startup: Part One

No matter how many business books you read, nothing can really prepare you for building a business from ground up. While there are academic institutions that are eager to offer courses on entrepreneurship, I have not found it to be something that you can be taught in a classroom.

There are a lot of things that founders go through and in most cases, they never tell you. Well, let me mention a few of the things that I have faced in my entrepreneurial journey. If you are in a place you do not want to be, you are just one decision away from where you want to be. I have made some stupid decisions along the way and those 'failures' have been my greatest lessons;


Have a plan, then a Plan B

"If the founders of Google, PayPal, or Starbucks had stuck to their original business plans, we'd likely never have heard of them. Instead, they made radical changes to their initial models, became household names and delivered huge returns for investors.". This is a quote from the book, Getting to Plan B, by John Mullins & Randy Komisar.

While starting out, you will have an idea of what you want to achieve and how you want to achieve it. As you execute your plan, you will learn what works and what does not work.

Over the last two years, I have executed what I thought was a perfect plan. The good news is that during that period, I have also learned a lot about the market dynamics as well as the key issues affecting my business model. I am now clearer on what to pursue further, what to change or improve and also what to completely throw away.

My goal was to ensure that we had a very clear way of doing things by the time we reached our third birthday in 2016. It seems am ahead of schedule on this one.

It is okay to have an open mind to the fact that what you started with may not be what you finish with. Your original business idea is just but a start of a journey that is not linear.

Pick the right partner

They say that you could end up spending more time with your business partner than your spouse. In that regard, choosing a business partner is more like choosing your life partner. It is that serious. One of the most challenging aspects of having a business partner is on deciding how decisions will be made when partners do not agree. There are partners who seem to expect the greatest return for the least effort. Will he or she put in the long hours it takes to get a business off the ground? Unlikely. Would I end up putting in extra hours to make up the slack? Likely. Get advice from an experienced entrepreneur, not an amateur.

In one of my businesses, I have had a partner for a while now and it has taught me quite a bit. The lessons you can never learn from a classroom. This experience has made me smarter on the kind of partner I really need, the kind of qualities to look for and more importantly, the fact that the partner need to have real entrepreneurial experience. In the early stages of a business startup, I will always choose practical over theoretical knowledge. Partnering with someone who has years of experience with the problem your business faces from a professional, or personal perspective adds unique value to the solutions you are creating, value that someone without hand-ons experience could never supply.

It is not an easy decision. Yet it is not a choice you can afford to flub. Choosing the right partner will not only affect your very livelihood, it will also affect your business and your own attitude.

You will attract haters

When you launch your business, be prepared to attract haters. It is flattering and comes with the territory. It seems to be an unavoidable fact of life, unfortunate as it may seem. The mature way to cope is to wait a little while to cool off and then to respond if, and only if, you can rationally and succinctly respond to whatever claim was made. Given the nature of most haters' claims, that may be impossible to do. So, if you cannot respond in a clear, concise and convincing manner that will end the conversation, just do not respond. Haters do not deserve your time. Forget about it, focus on the great things you are doing, and then move on.

Oil & Gas in Kenya: Let us remain proactive in the Oil and Gas Industry

I said it then, and I will say it again.

The history of oil and gas exploration in Kenya dates back to the 1950s with the first exploration well being drilled in 1960. Over the past 50 years, a number of oil companies have invested their resources in the search for the ‘black gold’ in Kenya.

They were unsuccessful, though some efforts showed signs of hydrocarbon presence in our basins. Our own National Oil has a data center where one can get information about work done so far in our basins.

Out of the 33 wells which had been drilled in the country by the year 2012, 16 of them showed signs of hydrocarbons, but none were considered commercial. Only 4 had been drilled offshore and of these only 1 in Block L5, drilled by Woodside in 2007 was in deep water.

A lot has happened since then and we are now talking of about 46 blocks, being operated by about twenty three oil companies. There are plans by the Ministry of Energy and Petroleum to increase the blocks to 54 by issuing eight new licences.

Petroleum exploration process involves a series of decisions made under uncertainty—we do not know whether oil or gas is present until after an exploratory well has been drilled. This is an extremely capital intensive undertaking.

Kenya’s status as a frontier exploration area, therefore, is a key disincentive to major international oil companies who have the requisite resources for underwriting attendant high petroleum exploration risks.

In most case, the oil and gas companies will subcontract their major operations to oilfield companies.

Local investors, contractors or suppliers have a great opportunity to offer value to the emerging oil and gas sector. The government should also put in place local content legislations that will boost the participation by local contractors while maintaining the high standards required in this sector.

Oil and gas development in Kenya is about more than the oil and gas sector alone. It is crucial that the resources are developed in a manner that maximizes benefits to Kenya by supporting growth in the domestic public and private sector institutional competencies.

It needs also to support growth in domestic businesses, increased employment across the country, development of infrastructure to support expanded economic activities and expanded access to training and education opportunities.

As a country, we have a window of opportunity of a few years to make the right decisions. These initial decisions will shape the path that the development of the oil and gas sector in the country will take. It is very crucial that we get it right early.

*This article originally appeared in Kenya's Business Daily newspaper. Also on Linkedin

What is the role of Media in Kenya's Oil and Gas Story?

Capital TV: Focus with Renee - Oil and Gas Opportunities in Kenya

A few weeks ago, I was honored by Kenya's Capital FM to visit their studios to discuss oil and gas industry during their Capital in the Morning show, hosted by Renee and Maqbul. It was an interesting discussion that covered a whole range of issues in the oil and gas value chain, from what is happening in Turkana, to global oil and gas geopolitics as well as governance and environmental concerns.

That discussion, and the subsequent interview on Capital TV's Focus with Renee got me thinking on the role of media in the oil and gas industry in Kenya.

Good governance of the oil and gas sector requires effective oversight from the media. A knowledgeable media plays a critical role in helping inform and engage citizens, and parliament to effectively hold the government and the companies involved in the sector accountable.

In Kenya, we are very keen to ensure that we avoid the mistakes made by other countries that have discovered oil and gas resources. As we inch closer to being an oil producer, we must ensure that the stakeholders are well informed of the impact the oil and gas resources will have in our society, environment and the economy in general.

Among the key issues that the media would help citizens understand include licensing of exploration blocks, legal and fiscal regimes, local content, governance, environmental concerns and very importantly, the economics of the oil and gas projects like the crude pipeline.

We have embarked on a project that will help in providing the Kenyan media and journalists with requisite information and knowledge. We hope that this will in turn help them report and inform you better on matters regarding upstream oil and gas in Kenya.

With love,


Joe Watson Gakuo

Rise of "THE COLDER WAR" in Oil and Gas Industry

I recently came across “The Colder War” by Marin Kitusa, which captured my imagination so much that I finished reading it in just a few hours. I just could not put it down.

This book is written in a very clear and easily understandable language which allows you to consume the text with pleasure. The basic plot is captivating and sometimes even dramatic. It will keep you wondering what may happen next. This is a really good read. You will understand what is currently happening in the world of oil, gas and uranium.

The Colder War is a remarkable book.

The beauty of this book is it’s theme; that a new cold war, which the writer refers to as The Colder War, is underway. To be in a position to understand what it is, why it is happening and what the outcomes of it might be, you will have to study the history of US-Russia relationship. You will need a clear understanding of the global oil and gas situation, and most importantly, you must get inside the mindset of one Vladimir Putin, the Russian president.

In this book, the writer argues that Putin has been greatly mis-understood and largely under-estimated. Two big mistakes that the western powers led by the United States have made. The issues raised in this book are very important and will be key to the world history in the next few decades.

Interestingly, in the global arena, Russia just took a lead role in the ongoing Syrian war. I do not like confrontations and war, but there is a reason why Mr. Putin made that decision, and I believe it has something to do with oil and gas.

The lessons which you, the reader, must learn is that you must have a clear plan take step by step approach as you prepare for the ultimate win, understand that you must have clarity of vision and most critical, you must assemble a very loyal team. Loyalty in achieving success is priceless. This lesson can be applied in business life and the personal relationships that we build in our day to day activities.

I would recommend this great book to anyone, especially those interested in the emerging oil and gas industry in Kenya and within the Eastern Africa region.

With much love,


Joe.

Joe Watson Gakuo: Oil and Gas Prices Fall, Gain

Why does the price of oil keep falling? Back in June 2014, the price of Brent crude was up around $115 per barrel. As of January, 2015, it had fallen by more than half, down to $49 per barrel. The impact of such a fall is unimaginable.

Countries are in economic brink and some companies in this sector may not recover from this. To understand this, we first have to go back to the mid-2000s.

Oil prices were rising sharply because global demand was surging especially in China, and there simply was not enough oil production to keep up. That led to large price spikes, and oil hovered around $100 per barrel between 2011 and 2014.

As this happened, many oil companies found it profitable to start extracting oil from hard-to-drill places and formation. In the US, companies began using techniques like fracking and horizontal drilling to extract oil from shale formations in North Dakota and Texas.

In Canada, companies were heating Alberta’s oil sands with steam to extract usable crude. This led to a boom in “unconventional” oil production.

For much of the past decade, oil prices have been high bouncing around $100 per barrel since 2010. This was because of soaring oil consumption in countries like China and conflicts in key oil nations like Iraq.

Oil production in conventional fields could not keep up with demand, so prices spiked. What we all never saw was that those dynamics were shifting beneath the surface.

By late 2014, world oil supply was on track to rise much higher than actual demand. A lot of unused oil was simply being stockpiled away for later. So, in September, prices started falling sharply.

Crude Oil Price Decline

As the prices slid, many waited for OPEC to make a move to cut production. This did not happen and the prices went on a free fall.

This is going to be a very interesting year for oil industry. If you are keen to play in this sector, hang in there. We are much closer to the bottom than the top.

Once we hit the rock bottom, the only way out will be up. The oil industry has survived much worse cycles and good management teams know how to survive until oil and gas prices move higher.

If oil demand remains weak and production stays high, prices might not bounce back for some time. If history is any indication, oil prices will eventually rise again. But the world is full of potential surprises.

Conflict could break out again in oil producing countries like Libya or Iraq, which would hamper oil production. China’s economy could come roaring back.

Europe could suddenly rebound out of its crisis. Saudi Arabia could decide that enough is enough and cut back on production all of the sudden. Any of those things could increase prices.

Article first published in Kenya's Business Daily Newspaper.