Kenya says Lamu-Moyale pipeline won’t transport Turkana crude oil

Kenya has ruled out use of its planned Lamu-Moyale pipeline to transport the Lokichar crude oil saying the facility backed by a joint deal with Ethiopia targets refined products.

Petroleum PS Andrew Kamau has described the deal with Ethiopia as “strategic” and dismissed speculation that Kenya opted for a partnership with northern neighbour after Uganda abandoned the Northern Corridor route.

“The pipeline was never a crude oil pipeline but a product pipeline that starts in Lamu and ends in Moyale,” he said.

Last month, President Uhuru Kenyatta and Ethiopia Prime Minister Hailemariam Desalegn signed a deal to build a joint pipeline raising speculation that Kenya had found a replacement for Uganda which has opted to route its oil to Tanga port.

Under the joint deal, Kenya is supposed to look for the financiers for the Lamu-Moyale section while Ethiopia takes up section to Addis Ababa.

Ethiopian Mines, Petroleum and Natural Gas minister Tolossa Shagi has played down the legal effect of the deal. He reportedly told journalists in Ethiopia that the deal signed by the two countries remains at the memorandum of understanding (MoU) stage.

Kenya holds the same sentiments: “It is an MoU. Even the deal we had with Uganda was an MoU, same as the one Uganda has with Tanzania,” said Mr Kamau. “You only sign an agreement when you have facts about volume, cost, owners and funders.”

Experts have said Kenya would still need to meet the costs of its Sh210 billion construction of the 865-kilometre crude oil pipeline linking the oilfields to Lamu port or find a viable partner to help finance it.

Kenya Civil Society Platform on Oil and Gas co-ordinator Charles Wanguhu said the country may have to walk alone since Ethiopia does not have a confirmed oil reserves.

“My understanding of the just signed Ethiopia pipeline is the Nakuru-Isiolo-Moyale-Awasa-Addis Ababa is that this will be a products pipeline and not a crude pipeline, that is, finished products such as diesel and super petrol and not crude. Ethiopia has yet to have confirm commercial reserves of oil,” said Mr Wanguhu.

Tough deadline

The Ministry of Energy expects to start construction in 2018 and end in 2021, giving the government a tough deadline to organise financing before it can start exporting oil.

According to an analysis compiled by regional consultancy KPMG going it alone to move the crude oil by pipeline from Lokichar to Mombasa port will push costs up by 68 per cent.

Before the surprise Uganda pullout, it was estimated that Kenya’s oil business could break-even at relatively lower export prices and so going it alone also cuts expected rate of return on Kenya’s oil from 13 per cent to 10 per cent.

The government has ruled out refining crude oil locally saying it is not cost-effective and would continue importing all its refined petroleum.

Kenya buys refined petroleum products after its sole refinery in Mombasa was closed in September 2013. The country also plans to sell the oil next year under the Early Oil Pilot Scheme announced by the Jubilee government although analysts have questioned the viability of the effort.

A report by Kenya Civil Society Platform on Oil and Gas argues that given the remoteness of the Turkana region, the only long-term economically viable option is a pipeline.

The Turkana oil road/rail project shall truck crude oil in o-containers from Lokichar to Eldoret where the containers shall be transferred onto wagon flatbeds on existing rail systems.

At Mombasa, crude oil shall transit through the existing refinery storage to be pumped straight into export ships at the existing jetty at Kipevu.

However, if this temporary measure to make some early cash as the government awaits the full development of crude oil production and export infrastructure, will offer a return on investment given the muted oil prices is subject to debate.

“We are undertaking a study on road and rail option we believe that it will be above $10.70 pipeline costs possibly making it unviable at the current prices of oil,” said Mr Wanguhu.