Civil society says oil export rush will cost Kenya Sh4 billion

Kenya’s rush to start exporting crude oil in the middle of an election year could cost the country more than Sh4 billion loss, a civil society group said yesterday.

The Kenya Civil Society Platform on Oil and Gas described the plan as questionable given the costs involved and the prevailing global crude prices.

The lobby group, in a report made public yesterday, said exporting oil by road over such a vast distance covering more than 800 kilometres would only culminate in massive loss of revenue that could be saved by developing the relevant infrastructure such as a pipeline and a mini-refinery.

Part of the loss will come in the form of heavy investment needed to develop the infrastructure to transport and store the waxy crude for shipment overseas.

President Uhuru Kenyatta’s Jubilee government, which has been pushing for early export of crude, has in recent weeks appeared to prepare the Kenyan public for that loss with an announcement that the Early Oil Production Scheme is not a money making venture and should therefore not be expected to produce any revenues.

READ: Kenya needs oil prices to rise past $50 - PS

Yesterday, Petroleum principal secretary Andrew Kamau disputed the report’s finding that Kenya stands to lose revenues in the oil experiment, insisting that there should be no revenue expectations in the initial plan.

“This is not a money making operation, we are simply proving our capacity to export crude oil and preparing the market for full production,” the PS said, adding that Uganda has had 30,000 barrels of crude stored in Hoima for six years, a reality he described as lacking merit.

“We hope to know and address any challenges within the two years and thereafter have a smother sail when we begin full production,” Mr Kamau said.

Tullow Oil described the civil society group’s report as thorough even as it supported Mr Kamau’s stand that the early oil production scheme is not viable.

READ: Tullow raises Kenya’s oil export hopes with March 2017 production date

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“The early oil production scheme is not viable unless the project is heading towards full field development, including the development of a heated pipeline,” adding that it is a pilot scheme designed to assist the government and the oil companies on the way to Full Field Development.

“It will give us further technical data about the oil reservoir we are working with; establish commercial arrangements and infrastructure that will facilitate the implementation of the Field Full Development; create small-scale employment and business opportunities locally and allow us to establish Kenyan crude oil in international markets,” said Tullow.

The civil society report uses the total volume of crude expected to be produced under the plan and the costs involved in its transportation to the port of Mombasa to measure its viability.

“The total volume of oil produced and exported will be about 900,000 barrels at a combined capital and operation cost of around $63 million (Sh6.3 billion) in two years. At $46 per barrel, the revenue will be $34 million (Sh3.4 billion), which is a loss of $29 million (Sh2.9 billion),” Charles Wanguhu the organisation’s co-ordinator, said at a Press briefing in Nairobi.

Mr Wanguhu, however, added that the loss could drop to Sh1.3 billion if the global crude prices rise to $56 per barrel.

This is in addition to what the billions of shillings that must be spent to make the early export plan a reality, including the Sh1.5 billion upgrade of the Kenya Petroleum Refineries Limited (KPRL) storage facilities in Mombasa.

Mr Kamau also dismissed the cost estimates, saying nobody could have come up with the estimates when even the government had not awarded the tender for transportation of the crude by road.

The Kenyan government acquired KPRL from its Indian owners at a price of Sh500 million and yesterday opened 23 tenders for the supply and installation of various equipment to modify the facility and turn it into a storage point for the waxy crude before export.

Sh5 billion has also been set aside for the planned upgrade of the A1 road from Lokichar to Eldoret.

Meanwhile, plans are under way to build a Sh210 billion heated pipeline from the Turkana oil fields to Lamu in five years, rendering investments in KPRL of no use by 2022.

More costs are expected to come with the massive recoverable cost claims that oil firms at the centre of the project have been building in the past four years and which the government has yet to audit.

The tender for the audit of the recoverable claims has yet to be awarded, leaving the State with the option of wholly honouring the costs as presented.

Tullow Oil, the principal player in Kenya’s oil sector, said in April that it has so far incurred $1.5 billion (Sh150 billion) in exploration costs, which will be recovered once production begins.

Africa Oil and Mersk Oil are the other explorers involved in the scheme.

The civil society group, however, warned that the biggest risk to the Kenyan public in the entire oil mining project lies in the fact that the government is yet to make public details of the production sharing agreements it has signed with the multi-national oil firms – shielding it from public scrutiny.

The civil society group said it had consulted experts from budding and developed oil markets and came to the conclusion that Kenya stands a better chance of benefiting from its oil deposits by constructing a pipeline to transport the crude and using samples to market the product before venturing into the export scheme.

Kenya will need between 14 and 16 trucks to transport the 2,000 barrels of crude to Mombasa every day with each taking an average of six days on a single round trip.

The trucks will have heated tankers known as ‘isotainers’ which the report estimates to be leased at about Sh16,000 each  and have to be loaded on trucks.

The isotainers, which hold about 70 barrels of oil and weigh around 10 tonnes each, are required to keep the oil at a temperature of 75-80 C, the same conditions the KPRL facilities have to hold the crude before shipping.

The planned export of 250,000 barrels of crude out of Mombasa means that ships will wait to evacuate 125 days’ worth of production to the refineries.