Kenya has rejected a fraction of the compensation sought by British oil explorer Tullow Oil and its partners amounting to Sh16 billion ($150 million) for the firm’s eight-year work in the Turkana County oil fields.
Tullow has disclosed that the government has dismissed the Sh16 billion out of the Sh204 billion compensation bill that the firms had presented to the Ministry of Petroleum.
Oil firms were to recover their exploration costs over the years once production and sale of the commodity start, which in Kenya’s case is planned for 2022.
However, Tullow required a commitment from the government that Kenya owes it $2 billion (Sh213 billion) and wants to use the pledge to sweeten the offer for sale of its stake in the country.
“The ministry audit has suggested that eight percent of this expenditure (around $150 million – or Sh16 billion) does not qualify for Cost Recovery. The partners and the GoK will now work together to agree on a final number,” Tullow Kenya Managing Director Martin Mbogo told the Business Daily in an e-mail. “The final audit reports received so far indicate the partners have spent $2.04bn since 2010.”
A lack of agreement on the compensation could force Kenya and Tullow to go for arbitration in the UK in line with the crude oil exploration contract.
The exploration bill has been the subject of speculation for years following delays by the government to hire a firm to audit the costs.
Kenya hired a Cairo-based audit firm, Swale House Partners, in 2016 for the audit, whose findings have seen the State declare a compensation bill of $1.89 billion owed to Tullow and its partners – the Toronto-listed Africa Oil and the French oil major Total.
Tullow and 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.
Now, Tullow and Total aim to reduce their stakes in Kenya’s first oil development, with a joint sale that could see Tullow exit Kenya.
Tullow, which operates the project, plans to sell a significant chunk of its 50 percent stake in the blocks. Buyers of the stakes would require clarity and commitment from Kenya on the compensation bill, which will also influence the buyout prices.
Kenya had projected to start commercial oil production in 2022, but several hurdles - including Tullow’s recent declaration of force majeure on the project - have added uncertainty on the grand project.
Force majeure means unforeseeable circumstances like war, strikes and epidemics that prevent a party from fulfilling a contract, shielding them from legal suits.
“Tullow and its partners have called Force Majeure because of the effect of restrictions caused by the coronavirus pandemic on Tullow’s work programme and recent tax changes. Calling Force Majeure will allow time... for the Joint Venture and Government to discuss the best way forward,” Tullow said.
Total and Tullow Oil had agreed with the government to develop a crude oil pipeline from Lokichar to Lamu on Kenya’s coast, setting the stage for commercial export of crude oil from the Turkana fields.
The exports were also to kick off reimbursement of Tullow investments from exploration to the output of oil.