A reality check on promised quick exports of Turkana oil

Over the past two years little has been heard of Kenya’s upstream oil sector. This is because investors have in the period reduced exploration and development activities mainly as a result of collapsed global oil prices.

Only minimum caretaker activities have been maintained commensurate with downsized investment budgets.

Last week Tullow Oil, the main investor in Turkana oilfields, announced new oil discovery — Erut-1 in Block 13T.

Though not yet appraised for quantities, this discovery will definitely push the total recoverable oil reserves towards one billion barrels.

This would translate to a potential total recoverable oil flow upwards of 100,000 barrels per day (bpd). For comparison, Kenya consumes about 80,000 barrels per day of oil products.

The other positive news this month has been the hardening of global oil prices which are currently hovering above $55 per barrel after OPEC and other key producers resolved to reduce production to strengthen prices. Early last year prices had dropped to $25 down from over $100 in mid 2014. Current indications are that prices will continue to strengthen above $55.

Higher prices and increased oil reserves have simultaneously increased the total realizable export value of the Turkana oil reserves.

This has improved the composite economics of the Turkana basin project which includes field development and the associated crude oil export infrastructure via Lamu.

When Uganda decided to export their crude oil via Tanzania, the economic viability of a stand-alone Turkana oil project became marginal due to weakened economies of scale.

It therefore became imperative for investors to continue looking for more oil while waiting for the recovery of prices.

Until the oil quantities and prices are high enough, investors will continue to dilly dally on their final investment decisions. This therefore makes it unrealistic to give a definitive date when Kenya can expect to export its crude oil.

Any dates given by investors or the government are therefore only indicative. A third piece of welcome news this January came from Uganda when Tullow Oil announced that it was selling 21.6 per cent of their assets in Uganda to its partner Total for some $900 million (Sh92.7 billion).

This sale is seen as motivated by Tullow’s plan to increase its cash liquidity to enable it accelerate exploration and development of Turkana oil reserves.

In a depressed oil price environment, it has become increasingly difficult for the less capitalised independent operators like Tullow to sustain operations with debt and equity financing.

As such, asset rationalisation and divestment are becoming a routine method for strengthening their balance sheets and for raising development capital.

Turkana basin investors are not strongly capitalised and this makes the oilfields susceptible to change of ownership.

I will now discuss a much debated subject in the name of early crude oil export. My fair assessment is that 2,000 bpd of crude oil is too small for offshore export. The project cannot possibly be viable.

Perhaps volumes above 10,000 bpd can make some economic sense. Further, I am not sure that clear budgetary provisions for funding the project exist.

But what is more sinister is that the early oil export project will prematurely trigger negative and un-necessary public debates considering that we are yet to put in place legal, regulatory and institutional systems for revenue management and sharing.

If operators in Turkana are facing storage shortage of crude accumulated from exploration operations, it is commercially viable to truck the oil to cement factories at Athi River or Magahi Soda to be used for heating in place of imported heavy fuel oil.

Blessing in disguise

A few plant modifications by the factories will permit the use of waxy Turkana crude oil. From a balance of payment point of view, dollars saved on imported fuel will offset dollars that could have been earned from the export of crude.

The ongoing oil downturn has indeed been a blessing in disguise as it has allowed Kenyans to scale down their expectations from oil, allowing them to revert to their normal economic activities.

With or without oil, our national economy has continued to prosper because it is not hinged on the resource as yet.

We have also appreciated the dangers of over-dependence on oil at the expense of other productive sectors.

Oil resources should be taken as an incremental opportunity to our GDP and should never be permitted to dilute existing economic activities. The ongoing Nigerian economic downturn offers strong lessons on benefits of a widely diversified economy.

Information from Turkana indicates that there has been a shift in socio-economic outlook and expectations by the communities with an increased sense of entitlement from the oil reserves.

There is need to empower local communities with sufficient capacity (technical and entrepreneurial skills) to help them effectively absorb the benefits of an oil economy.

Kenya’s journey to becoming an oil producer and exporter is still work in progress which requires effective partnerships between the national and county governments, investors and of course all the other stakeholders.

The government should, in the meantime, be straightening up the unfinished regulatory work and proactively provide infrastructure along the proposed pipeline corridor to Lamu.

Mr Wachira is a director at Petroleum Focus Consultants. [email protected]