Tullow sets 2017 date to start commercial oil production

Tullow Oil has committed to meet the government’s target of commercialising oil by 2017 even as it described the resource discovered already as being of high quality and highly marketable internationally.

Tullow, which has made eight oil discoveries in Kenya since early 2012, said Kenya’s type of oil has a “strong price outlook” that would attract potential buyers from Europe and the Far East.

The British exploration firm has also said that the amount of oil discovered in the next two and a half years will enable it make a decision on whether or not to sell a part of its stake in its Kenyan blocks.

The company’s executives said this when speaking at a capital markets briefing held in London on Wednesday.

“The government of Kenya is very ambitious and they are looking to have first oil in 2017,” said Paul McDade, Tullow’s chief operating officer.

“They are sending the message that this revenue is important for the country and that we should not waste time getting it into the economy. Our development schedule is towards meeting this target.”

Even as Tullow races to meet the 2017 goal for “first oil”, there are several things that need to be accomplished for timely commercialisation.

READ: Tullow eyes commercial oil production in Kenya

Top among them is where the regional 1,300km underground heated pipeline between Hoima in Uganda and Lamu through Lokichar in Kenya will be laid.

The construction of this pipeline is crucial to Tullow’s plans in East Africa since it intends to transport Uganda’s and Kenya’s oil through a single export pipeline.

“The quality of the oil in Kenya and Uganda are compatible and can pass through the same pipeline; we hope the two projects can come through at the same time,” said Gary Thomson, Tullow’s vice-president for South and East Africa.

This plan, which Kenya’s government set rolling this week by inviting tenders for a consultant, will determine the land to be acquired from locals.

President Uhuru Kenyatta has already invited locals to buy a stake in the pipeline in order to fully unlock the value of the infrastructure.

“We have only began some scoping work and we have only narrowly defined the route,” said Mr Thomson, adding that the company is doing this simply on a technical capacity.

“We are working with a 50km corridor at the moment which we will narrow to 2km and then finally 200 meters. It is only until you get to that point that you can determine where you need to be acquiring land.”

Tullow’s race towards commercialisation will also be determined by the outcome of the seven Kenyan basins yet to be drilled.

READ: Tullow announces fresh oil and gas finds

Of the 12 basins that Tullow has in East Africa, only two – Lake Albert basin in Uganda and Lokichar in Kenya – have yielded positive results of 600 million barrels per year.

The Kenyan basins to be drilled by the end of next year include North Lokichar, Kerio Valley, Kerio South, Turkana North and South, Nyanza Trough and North Kerio.

Determining the exact amount of Kenya’s oil is especially important since this figure is a key component in helping the exploration firm determine just how much it has spent on extracting one barrel of oil in the country.

This is the value that will be presented to government and be used to set the retail price of the commodity.

However, Tullow, which has spent over $215 million (Sh19 billion), drilling just 10 wells in Turkana says it expects the expenditure per barrel on Kenya’s oil to be roughly the same as that of Uganda at $6 (Sh525).

“It is too early to state the capital expenditure per barrel in Kenya However, given the similarities in our Kenyan and Ugandan activities, we should not expect to see a material difference in development costs,” said Mr McDade.

The cost per barrel will later be adjusted upwards to cater for things like transportation costs, which in this case will be considerably high given the pipeline will be heated to allow continuous flow of the waxy type of oil.

A barrel of Brent crude oil is currently retailing at about $113 (Sh9,900) per barrel on the international markets, as of Thursday.

Research shows that laying two or more heated pipelines adjacent to each other can significantly lower the energy expended in transporting the oil, minimising the cost and maximising profit margins.

Tullow says they will be exploring this option in the construction of the pipeline which is expected to costs approximately $4.5 billion (Sh394 billion).

The company’s decision-making process of where the pipeline will actually pass and also if it is more economical to have several of them laid next to each other will increase the cost of the project by about $10 million (Sh876 million).