New Turkana crude finds will strengthen export assets value

The recent announcement by the oil investors in Turkana that a new oil discovery has been made at Emekuya-1 well in Block 13T and an earlier discovery in January at Erut-1 in the same Block, will improve Turkana assets value and project economics.

With only one rig deployed, the investors have in the past two years been undertaking exploration and appraisal drilling to search for more oil, while confirming the extractable oil volumes from the basin.

The investment objective is to ultimately produce commercially sufficient oil for export via a pipeline through Lamu port.

This investment model is not to be confused with the ongoing early oil project to export about 2,000 barrels per day (bpd) of crude oil by road via Mombasa.

Early oil commercialisation is an operational necessity to evacuate oil that accumulates during exploration and appraisal drilling operations.

Since drilling started five years ago, as much as 60,000 barrels of oil has accumulated in storage tanks in Turkana. The government has also stated that the early oil will additionally facilitate testing of the export market.

The official figure for confirmed commercial oil reserves as published in the 2017 Economic Survey is 750 million barrels, which approximates to 80,000bpd over a 25 years project life.

Investors have stated that with the recent discoveries they are now nearing a figure of one billion barrels — equivalent to about 100,000bpd.

In respect of Turkana oil we have the production investors and soon we shall have pipeline investors and each is looking for an adequate return on investment. There are three key factors that will influence project economics and investor’s return.

First, for both the oil production and pipeline investments, the volume of available oil is a critical driver of economies of scale. It is a divisor that sets the unit capital and operating costs for the projects.

When we had Ugandans partnering with Kenya on the pipeline joint-venture, the combined volume of oil from both countries provided sufficient critical mass for a correctly sized pipeline from Lake Albert to Lamu.

With Uganda now routing their exports via Tanzania, any new oil discovered in Turkana improves the oil production and pipeline investment economics.

Second, the realisable export price on crude oil sales delivered to the final purchaser (a refinery somewhere in Asia) is a key project economic input. When we discovered oil in Turkana in 2012, oil prices were above $100 per barrel but today the price is hovering around $55.

Although investors argue that the investments can break even at this price, it is the uncertainty of future price profile that is slowing down final investment decisions.

Third, the cost of transportation of oil to export destinations is another important project economic input for the oil producers.

The pipeline tariff has to be low enough to make oil exports competitive, but high enough to motivate the pipeline investors. Higher volumes of oil will help distribute pipeline capital and operating costs to a lower tariff.

Yes, new discoveries are good for Turkana oil profitability, especially when prices are reluctant to sustainably move above the stubborn $55 level.

And many are asking when Kenya can expect to export first oil via Lamu. The year 2022 has been floated but my opinion is that this is quite ambitious and the date could be slightly later.

Even if the oil prices shot through the roof today, we still do not have in place the legal, regulatory, fiscal and institutional framework necessary to make investors open their chequebooks.

Further, the same fears and issues that scared off the Ugandan investors from participating in a pipeline venture via northern Kenya have not been fully addressed and these include perceived insecurity and absence of access infrastructure. Community relations issues are still potentially disruptive.

Yes as we continue to discover more oil and wait for prices to strengthen, there is a need to proactively address known barriers to quick investment decisions.