Last week a 2022 presidential aspirant, Raila Odinga, while campaigning in Turkana County pledged to deliver a refinery to monetise oil resources that are stranded in the ground after years of delayed investment commitments. I will here analyze why an oil refinery located in Turkana is a credible option to be pursued, should the base case plan of exporting oil by pipeline via Lamu fail to take off within a reasonable time.
Crude oil was discovered in Turkana in 2012 with commerciality ascertained at between 80-100,000 barrels per day over a 20-year project life. Turkana oil assets are owned by a joint venture (JV) comprising of Tullow Oil (50percent), Africa Oil (25percent) and Total Energies (25percent).
The JV is expected to deliver a field development plan to the Petroleum Department, and this may result in a renewal (or otherwise) of their production concession whose one-year extension expires on December 31, 2021. Theirs is the base case oil export plan via a pipeline to Lamu.
When global oil prices collapsed from above $100 to as low as $25 in 2014 it became difficult to justify many greenfield oil projects, including Turkana oil. However, the recent oil price spike to above $80 may have fortified project economics.
Petroleum authorities will need to judge and determine the seriousness of whatever development plan submitted by the JV, including ability, and preparedness to promptly commit investment funds. If this is not the case, the ministry should be free to open up Turkana oilfields for new investors, while extending investment options to include local crude oil refining, among others.
The world is entering a new phase for oil markets, different from when we discovered oil in Turkana ten years ago. Climate change policies will over time reduce oil demands and production at speeds determined by climate strategies adopted by various countries. Over time, transportation will require much less gasoline and diesel as electrification and battery technologies become entrenched. And less crude oil will be required by global markets for importation and refining.
For this reason, capital for developing new oil projects ( oilfields, pipelines, refineries ) is gradually getting scarce and very selective, especially in respect of new projects. This is an inescapable reality that the petroleum authorities should also ponder when evaluating Turkana oil options. It will be even more difficult to attract any investment guarantees from any of the multilateral banks.
The principal strategy for Turkana oil should remain export by pipeline. However, should the current JV partners fail to give a clear-cut commitment, then we should include local refining as another option to be considered by new investors. The design of such a refinery would have to be simple, small, and low in capital costs considering the situation of future diminishing demands, and also considering that a new refinery in Uganda could limit regional export opportunities.
I would visualize a small non-complex refinery (making fuel oil, diesel, aviation quality kerosene, lower octane gasoline, and LPG ). It has to be a simple refinery that avoids complex conversion facilities. And investors for such simple refineries are likely to be from China and India, more than from the West. It would be prudent to pair such a refinery with a thermal power plant to use those refining fractions that would be uneconomical to convert to full spec products. Yes, the design of a Turkana refinery would have to be creative to meet changing local/regional markets.
Such a refinery would be supported by the simple logic that for Kenya any socio-economic value from Turkana oil is better than leaving the oil forever buried in the ground. Climatologists will of course advance contrasting arguments.
It does not matter that the oil refinery issue was raised in a political setting, for indeed it deserves open debates as a credible option in a scenario of rapidly evolving global oil markets. We should keep talking and evaluating options for Turkana oil ( and even Kitui coal) until these resources deliver value to Kenya
I need to mention that I started my petroleum career in a refinery in the early 1970s and was involved in the 2010/11 feasibility study of the LAPSSET refinery at Lamu.