Economy & Politics

Kenya eyes European market for its crude oil exports

Petroleum PS Andrew Kamau. PHOTO | DIANA NGILA
Petroleum PS Andrew Kamau. FILE PHOTO | DIANA NGILA 

Europe has become the main hunting ground for Kenya as Nairobi races to find a buyer for the country’s crude oil, whose export the government wants to begin next June.

Petroleum principal secretary Andrew Kamau said samples of the crude from Turkana oil wells have been shipped to Europe and a number of potential buyers have expressed interest based on its quality.

The revelation comes as a New Year’s gift for President Uhuru Kenyatta’s government, which is pushing the early oil exports plan despite the dire state of the global petroleum market.

“European refiners have been very positive because our oil is low on sulphur, easier to refine and has passed the environmental test,” said Mr Kamau, adding that “we are going to the market by June.” 

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He, however, declined to disclose the specific countries where the samples have been taken, arguing it would reveal the identity of the potential buyers and pre-empt negotiations. Germany has the highest refinery capacity in the EU at over two million barrels per day, followed by Italy, Spain, France and Netherlands.

Crude is set to expand Kenya’s portfolio of exports to the EU, which is currently dominated by agricultural products.

Critics of Kenya’s early oil export plan have pointed at low crude prices and distance from key markets as reasons why Kenya should tread carefully with the plan.

The government hopes that oil exports will earn the country the much-needed petrodollars and help stem the rising tide of public debt that now stands at Sh3.7 trillion or half the gross domestic product (GDP).

Kenya plans to export its first consignment of 2,000 barrels of oil per day beginning June to test the global oil market.

Kenya’s oil is classified as light and sweet, meaning it has less sulfur. This type of oil is known to fetch higher returns because dealers find it cost-friendly and easier to refine.

It is, however, waxy and sticky, making it necessary to heat it to flow through a pipeline, adding costs on the Kenyan side.

Nigeria’s oil – bonny light – is among the best in the world while the Gulf oil is of low quality and is classified as heavy and sour as it comes with lots of sulfur that has to be removed before refining, raising processing costs.

The Kenyan government has more recently come under heavy criticism for its rush to enter the saturated oil market, even before crafting a strong business case for the trial.

Kenya’s total oil reserves are estimated at 750 million barrels – which Mr Kamau said are commercially viable at the current price of $55 (Sh5,610) a barrel. (A barrel is equivalent to 159 litres.)

British oil firm Tullow struck Kenya’s first oil in Turkana’s Lokichar basin in northwest Kenya in 2012, and followed it with a string of other finds, that have put the country on the path to becoming a producer of the black gold.

Tullow in August announced that it would start producing 2,000 barrels of crude oil daily from March 2017 and have stocks ready at Mombasa port for shipping in June.

The announcement was in line with State House’s plan to have the oil transported by road from Turkana to Eldoret for onward delivery by train to the Mombasa port – a distance of 1,089 kilometres.

Kenya plans to initially move between 2,000 and 4,000 barrels per day by trucks and trains in the absence of a pipeline, but leaving room to expand to a peak of 10,000 barrels a day.

It is, however, not until 2022 that Kenya hopes to embark on large-scale production with the construction of the 865-kilometre crude pipeline linking the Turkana oilfields to Lamu port at a cost of Sh210 billion.

The pipeline will enable East Africa’s largest economy to pump out at least 80,000 barrels a day. This is expected to earn the country Sh163.8 billion per year, based on the current crude prices of $55 a barrel. The Turkana oilfields have a lifespan of 25 years.

Kenya closed its defunct refinery in 2013, putting the country on the sole path of exporting crude even as it continues to import refined petroleum products.

Crude oil prices have remained volatile amid oversupply and cooling demand.

The Kenya Civil Society Platform on Oil and Gas reckons that government’s rush to start exporting crude in the middle of an election year could cost the economy more than Sh4 billion loss given the vast distance to be covered by special trucks.

The lobby group insists that the State should construct a pipeline before exports.

Mr Kamau says that Kenya will make a profit from oil sales at $34 – $50 per barrel.

At $34, Kenya’s break­even level is higher compared with top producers like Saudi Arabia ($9), which pumps out 10 million barrels a day and Venezuela ($23.50).

Nigeria’s profit level is $31.60, Angola ($35.40) and the US ($36.20), according to Norway­-based consultancy firm Rystad Energy.