Ideas & Debate

Why setting up oil infrastructure is key in achieving exports goal

oil

Trucks transport oil from Turkana to Mombasa under the Early Oil Pilot Scheme. PHOTO | PETER WARUTUMO

The recent firming up of global oil prices to above $70 per barrel has provided economic justification for upstream oil investors in Turkana to move to the next step of oil reserves commercialization. Tenders for the design of infrastructure for oil production development, and also for design of the crude oil export pipeline have been awarded.

The two Front End Engineering Design (FEED) studies are expected to inform investor final investment decisions next year, with anticipated completion of the infrastructure construction in 2022 when first oil export via Lamu can be expected.

It is during construction that the country and local communities will benefit from heightened economic activities, often dubbed “local content”.

Preliminary indications are that the two projects are likely to be sized to a production and export capacity of about 100,000 barrels per day (bpd) over a 20/25 years project life. For comparison, Kenya consumed about 110,000 bpd of imported petroleum products in 2017.

As the two projects take off, a number of challenges will need to be addressed to ensure timely implementation. Access roads are required especially for the pipeline construction. It is important that works on the Isiolo-Lokichar road are committed. The Lamu-Isiolo road is about to commence, and this will ease logistics for the pipeline works.

In addition to providing access, the roads will also facilitate security management which is an issue in northern parts of Kenya.

The host communities in the oil producing areas and along the pipeline route will need to be brought on board, and their expectations in respect of the projects correctly aligned.

The current Turkana oil commercialization model is offshore exports. As such, a refinery at Lamu cannot be expected to be in the immediate plans.

In the future, should Kenya decide to refine crude oil (from Turkana or from elsewhere), the preferred refinery location will be nearer crude oil sources and nearer products markets.

Which brings me to the Mombasa refinery. The refining operations at Mombasa were shut down in 2013, leaving the storage tanks to be used for products imports, and storage of early crude oil from Turkana for eventual exports.

READ: President Kenyatta flags off Kenya's first crude oil exports

Technically, the refinery cannot be viably revived without expensive major modifications to meet the latest global and national products standards. Facility upgrade would also be essential to get maximum product value from crude oil.

Going further downstream, indications are that the new 20-inch products pipeline from Mombasa to Nairobi is about complete. This line, plus the expanded receiving storage capacity at Nairobi will significantly improve products imports and distribution efficiency and hopefully reduce logistics costs.

KPC can now consider implementing the two proposed pipeline branches from Nairobi to Isiolo via Sagana; and from Nakuru to Migori via Bomet/Kisii.

The two spur lines have the potential to increase products market outreach, reduce local costs, and while improving safety on our roads as petroleum tankers decrease.

Apparently the regional petroleum infrastructure between Kenya and Uganda is no longer high on the agenda. The Uganda crude oil export will be via a pipeline to Tanga port in Tanzania.

The 60,000 bpd refinery in western Uganda is still on plan, with a products pipeline from the refinery to a central products depot in Kampala.

Rwanda is planning a products pipeline from the Kampala depot to Kigali. The Eldoret/Kampala reverse flow products pipeline does not feature on the priority list. The new refinery and distribution infrastructure in Uganda will mean reduced transit products imports through Kenya

KPC is planning an LPG import facility in Mombasa to increase LPG availability while reducing its unit costs and consumer prices. In the meantime, a private investor AGOL continues to expand its Mombasa LPG import capacity, and this is already providing stability to the supply of LPG and prices.

As Kenya upgrades and expands its products imports and distribution infrastructure, the petroleum authorities will need to create capacity and systems for strategic security stocks, which we currently do not have. Our economy is dangerously exposed to unplanned disruptions to the products supply chain.