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MICHAEL KAVANAGH

LONDON— Financial Times

Published Monday, May. 07, 2012 3:49PM EDT

Last updated Monday, May. 07, 2012 3:56PM EDT

Kenya has moved a step closer to establishing a commercially viable oil production industry following the discovery of fresh reserves by Tullow Oil, the FTSE 100 explorer.

Tullow, which is partnering Toronto-listed Africa Oil (AOI-X7.822.0234.83%) in drilling across six licence blocks in the country, said on Monday that further drilling on an exploration well had discovered oil-bearing rock of more than 100 metres in depth.

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The findings follow the announcement in March of a more limited reservoir of 20 metres of oil-bearing rock at the Ngamia-1 test well at shallower depths.

Tullow has yet to declare the find in the north of the country commercially viable, but it said it would accelerate its seismic work and drilling in the region.

It said: “The Ngamia structure is the first prospect to be tested as part of a multi-well drilling campaign in Kenya and Ethiopia. Many leads and prospects similar to Ngamia have been identified and following this discovery the outlook for further success has significantly improved.”

Keith Hill, president and chief executive officer of Africa Oil, said the company, which also holds exploration interests in Somalia and Mali, backed plans to accelerate exploration in the region.

Tullow, whose main production asset is the Jubilee field off the coast of Ghana, had exploration success last September at its “potentially transformational” Zaedyus well off French Guiana.

That exploration campaign, backed by Royal Dutch Shell and Total of France, was based on a theory that geological conditions leading to creation of the Jubilee and other fields in west Africa might be mirrored on the other side of the Atlantic.

However, Tullow is also active in east Africa, and is partnering CNOOC of China and Total to develop the oil reserves in the Lake Albert basin in Uganda.

Shares in Africa Oil rose by $1.36, or nearly a quarter, to $7.16 on Monday, raising its market capitalization to $1.57-billion.

Trading in Tullow Oil, which acquired its interest in blocks covering the onshore Rift Basins of Kenya and Ethiopia in 2010, resumes on Tuesday after closing at £14.69 ($23.61) on Friday ahead of the U.K.’s public holiday.

In a note on Monday, Al Stanton, analyst at RBC, said “considerable uncertainty still surrounds the commerciality of the Ngamia oil accumulation”.

But he argued stocks in both companies would respond strongly to the drilling update, given their presence in the region and the chances of further discoveries.

Success for Kenya in developing a commercial oil sector would follow recent success of neighbouring states Uganda, Tanzania and Mozambique in discovering significant deposits of oil and gas.

However, following last month’s news of initial drilling success, Kenyan President Mwai Kibaki cautioned that the news was “the beginning of a long journey to make our country an oil producer.”