Factors and inputs that will impact Kenya 2018 oil prices

As we enter year 2018, the price of Brent marker crude oil has suddenly increased to $67 per barrel after a steady price recovery through 2017.

Prices had dipped from above $100 in mid 2014 and reached a low of $25 in early 2016. The big question now is what level the prices will find in 2018.

In Kenya, oil prices attract bi-polar interests. There are the consumers who long for the lowest possible prices, and we have the aspiring oil producers who desire high prices.

The retail pump prices in Kenya have been increasing and will continue to go up until the monthly price formula catches up with the import costs associated with the latest price of $67.

For the Central Bank macro-economic monitors, the oil price increases are not good news. Inflation will increase, especially in transport services, consumer goods, and electricity.

More dollars will be needed to pay higher oil import invoices, and this may upset the dollar exchange rate. Also, the balance of payments will weaken.

When oil was first discovered in 2012, global oil prices were above $100, and drilling rigs busily dag into the Lokichar basin discovering between 0.75 and 1.0 billion barrels.

Since the prices weakened in mid-2014, foreign direct investments and field activities in the upstream oil sector have slowed down.

Specifically, as prices went down, commerciality of the Turkana oil reserves became doubtful. Although, it has been mentioned in some quarters that profitability can be achieved at about $50, it is only the investors who can correctly comment on the right level of prices to drive decisions to commit investments.

This is because, in addition to prices, there are other factors and inputs that may be holding up oil development progress. There are the costs and timing of the Lamu oil export infrastructure which are yet to be determined.

READ: Tullow says Kenya oil commercially viable at 25 dollars a barrel

There is also the unfinished work of confirming the actual volumes of pumpable oil from the Lokichar basin, which is a major input in the determination of unit costs and tariffs.

The other pending critical issue is the delayed approval of the umbrella Petroleum Bill, which is necessary to implement regulations and institutions to govern development and exploitation of oil resources.

With all the work that remains to be done, my estimate is that even if prices were to sufficiently shoot up today, first export oil via Lamu may be difficult to achieve before 2022.

Now, I can venture into guessing what prices are likely to be in 2018. The high global oil inventories that had caused prices to collapse have come down, allowing prices to climb to the current levels. This was mainly due to the production control agreement between Opec and Russia.

Should this agreement hold to the end of 2018, prices are likely to remain above $60. To support this “high price” scenario, the demands are expected to continue growing through 2018.

However, the reality is that prices persistently above $60 will tempt more production from non-Opec quarters especially the US shale oil investors.

This is a likely scenario that may increase global inventories and restrict price increases or even pull them down.

Finally, real or imaginary geopolitical upsets and fears in the oil producing regions and countries can cause prices to shoot up in anticipation of supply disruptions. And there are quite a number of such scenarios in the Middle East.

Back to the Turkana oilfields. One can guess why the subject of oil was not included as a priority item in the second Jubilee manifesto.

This is an area whose performance is not entirely in the hands of the government. It is the investors who make the final call, and as we move into 2018 oil prices remain an uncertain stumbling block.

The best the government can do is to expedite the legal and institutional frameworks.