Kenya may have got it wrong on oil export plan

Early oil is an essential upstream activity by oil investors, with the regulators and government merely facilitating where needed, and in line with the laws and production agreements in place.

However the way the Turkana early oil was initially conceived sounded like a priority government project to get the oil into the “export” market as early as possible. It was even assigned unnecessary “top level” monitoring and budgets.

This could have created the wrong public understanding of early oil. It was wrongly labelled an oil “export” project whereas indeed it is an integral part of exploration and production operational activities.

There was already 60,000 barrels of oil accumulated in the course of well drilling, appraisal and testing and required disposal. There will also be more oil accumulation as well development continues and until we start oil exports via Lamu pipeline. How to dispose of this “accumulation” is essentially an evaluation of the most economic logistics option available to investors in consultation with the regulators. The easiest option is storing oil in new tanks on site until the exports via the Lamu pipeline commence.

Another option is to truck the oil to an “active” refinery to be used as a feedstock to produce products. However, there is no active refinery in Kenya or in the region.

Another option is the use of crude oil as a “fuel’ by heavy industries that usually consume heavy fuel oil. As long as the price offer is right and burners can be modified, industries like Magadi Soda, cement industries and thermal power plants can use the early oil.

If opportunities exist and logistics are economically justifiable, the accumulated oil can be sold out of the country. It is this option that Uganda has chosen and they plan to use specialised containers transported on flat-bed trucks to Mombasa to be shipped out like any other containerised cargo.

The early oil export logistics model selected by Kenya is more complicated and certainly more expensive because it involves bulk road transfers to Mombasa followed by intermediate heated storage, and final pumping into specialized heated marine tankers for export. The Uganda option sounds operationally simpler, quicker and cheaper.

Yes there are indeed many smaller upstream petroleum investors all over the world who are less capitalized and require “early cash” to help finance production development. For these investors, early oil is a business necessity and quantities involved are much larger for economies of scale. Turkana investors are certainly better resourced to implement oil production development up to pipeline exports without requiring cash flows from early oil.

The Turkana early oil was wrongly labeled “export business” and this perception may be the cause of current problems. Moreover, we currently do not have the right legal and institutional frameworks to undertake the business of exporting oil resources, nor systems for oil revenue management. I believe Uganda has most of these pre-requisites in place.

It is not too late for Turkana oil investors to re-evaluate their early oil options which they can undertake even as we await the upstream petroleum law. My opinion is that the investors should review the merits of the Ugandan logistics model which looks credibly simpler, quicker and cheaper.

The early oil has unfortunately become a pawn in Turkana oil politics especially in respect of oil revenue sharing and the passage in parliament of the upstream petroleum law. Public education and awareness on the subject of early oil may have been insufficient or ineffective resulting in the ongoing stand-off.

There is need to seek understanding with the Turkana communities so that they see the early oil as a routine operational activity and not an attempt to prematurely export oil. More importantly, oil resources should be seen to be mutually beneficial to both the wider Kenya and the Turkana people.

The urgency now should be to get the upstream petroleum law passed, and to get final investment decisions from investors for both the oil production development and pipeline construction. The two are separate projects which are mutually dependent. Early oil should not be allowed to steal the show.