Bottom Line: The decision by Jordan’s Edgo Energy to relinquish its offshore exploration license opens up opportunities for new explorers but highlights two key problems: the technical difficulty of drilling in Kenya’s deep waters and the security implications of exploring in this maritime border area which is still disputed by Somalia and Kenya.
Analysis: Edgo Energy’s license area is Block L26, which is a technically challenging (and expensive) drilling area, which lies in ultra-deep waters of the Lamu basin. Edgo acquired Block L26 in July 2012 in a joint deal with Qatar First Investment Bank. Along with the technical difficulties and the expense of drilling here, a border dispute between Kenya and Somalia places this block right in the firing line.
There remains a great deal of uncertainty over how Somalia will eventually respond to Kenya’s bullish move to auction off exploration blocks in disputed territory. The heart of the issue is whether the maritime border should run directly east, parallel to the line of latitude. This was how it was drawn up in a 2009 memorandum of understanding; however Somalia has rejected that and instead wants the maritime border to run perpendicular to the coastline. This would give Somalia a larger swathe of offshore waters - some areas of which have already been auctioned off by Kenya to Anadarko, Total and Eni, as well as some smaller companies, like Edgo.
Kenya - empowered by recent oil discoveries and its military role in Somalia that has been instrumental is pushing back militant al-Shabaab forces - has categorically ignored Somalia’s warnings over disputed offshore oil blocks. Kenya certainly holds the upper hand in this dispute, but Somalia could seek to at least delay exploration.
Recommendations: While Edgo’s relinquishment of some of its offshore acreage in Kenya will be eyed by other juniors on the scene who have rushed to acquire Kenyan blocks after major discoveries by Tullow, we caution against acquiring acreage in this disputed area.