Kenya continues its pipeline plan as oil prices drop

Kenya is forging ahead with its plan to build a Sh121.45 billion pipeline from Lokichar to Lamu to boost its crude oil exports despite the concern over falling prices of the commodity in the global market.

Budget estimates show that the State Department for Petroleum plans to spend Sh648.5 million in the financial year starting July 1 on the oil pipeline, commonly known as Project S.

The allocation is in addition to the Sh777.5 million allocated in the current financial year to undertake research, feasibility studies, project preparation and design for the project.

According to the official timelines, the pipeline construction will be completed in the second half of 2023 and not June 2022.

“We can conclude the award to EPC (engineering, procurement and construction) contractor in the second or the third quarter of the year and begin construction then,” Petroleum PS Andrew Kamau told the Business Daily in an earlier interview.

The pipeline project is under a joint partnership between the Kenya government and the oil companies’ consortium of Tullow Oil Kenya B.V, Africa Oil Turkana Ltd and Total Oil (formally Maersk Oil).

The crude oil prices have of late plunged in recent weeks to levels below $30 (Sh3,000) per barrel, raising doubt over the viability of a capital-intensive infrastructure for a country with just about 560 million reserves. Experts say the international prices need to rise above $50 per barrel to support such investments.

On paper, the 824-kilometre pipeline comes along as a key component of the Sh2.5 trillion Lamu Port-South Sudan-Ethiopia-Transport (Lapsset) Corridor project whose construction is underway in Kililana, Lamu West.

The Treasury has also allocated Sh370 million for the “early monetisation of first oil project” for the year starting July 1.

The project had received another Sh500 million in the current financial year.

The Turkana oilfields already produce about 2,000 barrels of oil per day as part of an early production system.

The oil, produced by British oil explorer Tullow Oil, is trucked from Turkana to the port city of Mombasa. The first cargo of 250,000 barrels was shipped out of the country on a tanker last August.

Tullow and Toronto-listed Africa Oil, which holds a 25 percent stake in the blocks, first discovered crude oil in the Lokichar basin in 2012.

Tullow estimates the fields contain 560 million barrels in proven and probable reserves and expects them to produce up to 100,000 barrels per day from 2022.

Also affected by the budget cuts in exploration and distribution of oil and gas whose budget has been slashed by more than half from Sh1.76 billion to Sh770 million.