Ideas & Debate

New business models needed for Turkana oil as price hits $60

Oil exploration in northern Kenya. FILE PHOTO | NMG
Oil exploration in northern Kenya. FILE PHOTO | NMG 

As oil prices climbed from $55 to about $64 over the past month, investors in Kenya have been committing themselves to increased oil exploration and development work.

Prices had plunged from above $100 in mid 2014 to as low as $25 in early 2016 prompting investors to substantially reduce their capital and operating budgets.

Specifically, this slowed down development of Turkana oil discoveries, and exploration activities elsewhere in Kenya.

We recently witnessed the signing of Joint Development Agreement by investors to commit engineering designs for the Lokichar-Lamu crude oil export pipeline, which is a critical project for commercialisation of oil from Turkana oil basins.

Further, investors have signified entering into Turkana oil production development phase, while explorers in other parts of Kenya are planning to undertake exploratory drilling.

On the legal and regulatory side, indications are that the Petroleum Bill will soon be signed off after concurrence on the revenue sharing formula.

This will permit operationalisation of the law into institutions and regulations to facilitate oil and gas investments and operations. This is an area the government should fast-track to ensure that we capitalise on the oil price recovery.

Although no exactitude exists in prediction of future oil prices, all indications are that, going forward, oil prices above $55 can be sustained by the prevailing supply/demand and geopolitical dynamics.

As long as the Organisation of Petroleum Exporting Countries (Opec), Russia, and their allies maintain responsible production controls, and as long as the global oil demand is growing, prices will most likely stabilise above $60.

The US shale oil enterprises have also learned their own lessons during the price collapse and will likely act diligently not to rock the boat.

This cautious confidence will permit selective investments in areas where technical, regulatory and political risks are manageable. This is a caveat that Kenya should note, because we are still fairly undeveloped frontier oil and gas area, whereby we need to specifically attract and sustain “risk” capital.

And the three years of price hardships have not been in vain. Oil firms have learned to reduce exploration and production costs through enhanced technology, portfolio rationalisation and operating efficiencies.

It has been mentioned that in a price range of $55-60 investors in Kenya can make a return considering that their production costs are in the mid $20.

The reality on the ground is that it will not be business as usual. The business models when the investors first entered Kenya were based on prices above $100, probably with a sensitivity scenario at $80.

It is therefore expected that unit costs will be a key factor for viability of oil investments and operations in Kenya. This is a fact that stakeholder communities, politicians and even regulators should bear in mind.

Then there is the other side of the Kenyan coin. The country is fully dependent on oil imports for most of the socio-economic sectors, and as such the ongoing oil price increases will negatively impact the country’s macro-economics.

The oil import bill will soon be on the increase, thus upsetting the balance of payments. Pressure will simultaneously mount on the shilling exchange rate as more dollars are sourced to pay for larger oil import invoices.

Fairly soon fuel pump prices will be back to over Sh100 per litre after a three-year respite.

Goods suppliers and transporters, who apparently never reduced their prices when prices went down, will predictably be raising their prices thus increasing inflation. For the households, cooking gas prices will go up.

Air travel will cost more as aviation fuel is a key cost input in ticket prices.

Driving excesses witnessed over the past three years will probably dwindle as car owning families re-prioritise their household budgets, and this is likely to reduce traffic jams on our roads.

As an aspiring oil producer, Kenya should learn from experiences gained recently from traditional oil dependent nations whose national budgets were severely upset by global oil price volatility.

We should always focus on diversifying our economy, and never to over-emphasise oil production at the detriment of other productive sectors. This way we shall shield our country from commodity price volatility.