Why Kenya cannot sell oil starting September

Kenya’s dream of becoming an oil producer in the next nine months is increasingly getting dampened as multiple factors lay fresh hurdles on an already crowded field of bottlenecks that the country has to deal with.

On Tuesday, the US State Department said that Washington’s envoy to Nairobi Robert Godec did not pledge support on the funding of a pipeline from Lokichar to Lamu that would be used to transport the crude.

TULLOW DECLINED

Meanwhile Tullow, the company prospecting for oil in the Turkana region, has declined to be drawn into the government scheme while the price per barrel of crude oil in the international market continues to tumble.

On Friday it was trading at $29. This is the first time it dropped below $30 since 2003 and 72 per cent lower than it was in March 2012 when Kenya announced it had struck oil.

(READ: Sharp drop in crude prices busts Kenya’s oil sector boom)

Morningstar Inc, a Chicago-based research and investment management firm, has put the break-even price for oil from Lokichar basin at about $50 per barrel.

In its Trading Statement and Operational Update released on Thursday, Tullow said a final decision is expected to be made in 2017.

“The draft Field Development Plan was submitted to the Government of Kenya in December and will inform discussions as we progress towards a potential final investment decision of both the Kenya and Uganda upstream development projects in 2017,” it said.

OIL TRANSPORTATION

Further the company appears to be against the idea of transporting the oil by road as per the government plan.

Currently, the road from Kitale to South Sudan, where the oil was supposed to pass, is in a sorry state and the government has for the past six years been unable to get a donor to fund its construction.

Said the company: “In August 2015, a bilateral agreement was reached between the Presidents of Uganda and Kenya adopting the Northern Kenya route for the regional crude oil pipeline, subject to certain conditions.

These conditions, which include ensuring that this is the lowest cost route, are being worked on by both governments in conjunction with the Kenyan and Uganda upstream parties.”

However, the Ugandan government has another deal with French oil marketer Total which has been insisting that the pipeline passes through Tanzania.

For maximum efficiency, Tullow, which has other oil fields in Uganda, has been campaigning for the oil from the two countries to pass through one joint pipeline.

Energy CS Charles Keter could not be reached for comment as he had accompanied Deputy President William Ruto to the Hague.

His petroleum legal adviser, Daniel Kiptoo, told the Sunday Nation that the minister was the only person who could comment
about these new developments.

ANOTHER PARTNER

With the clarified US position on the pipeline, Kenya has to find another partner as China is yet to make a decision.

The pipeline was initially designed to be funded and constructed by the Chinese.

It is believed the decision by the US to retract its intention to help fund the pipeline is as a result of a barrage of criticism it received after it recently declined to allow a similar project on its own soil.

Last week, TransCanada Corporation, a Canadian company, took the US government to court seeking $15 billion in damages for a decision made in November last year by President Barack Obama to decline the construction of a cross-border pipeline between the two countries.

While rejecting its construction, Mr Obama said his decision was based on the fact that an oil pipeline would contribute to global warming.

In a hard hitting editorial, The Wall Street Journal, one of the most respected publications in the US, asked why the Obama administration was giving Kenya special consideration.

“Has Mr Godec checked with Secretary of State John Kerry or, perhaps more important, anti-oil Democratic financier Tom Steyer? Kenya and Northeast Africa could certainly use the investment and jobs that would come from the oil project,” it said on Monday.

“Then again, so could the United States. What’s with the double standard on pipelines?” it said.

US DECLINED

The US embassy in Nairobi said that recent media reports that Ambassador Godec had pledged US financial support for a pipeline were inaccurate.

In a statement on Wednesday, the US said that Mr Godec did not say the US government would help finance the construction of the pipeline.

“He expressed support for a proposal by a consortium of American companies to participate in the Lamu Port-South Sudan-Ethiopia-Transport (Lapsset) Corridor Project, which conceptually includes an oil pipeline component,” said the statement.

In addition to these challenges, a number of oil explorers have already said they plan to scale down operations locally while others have exited the market.

UK’s Tower Resources, Afren Oil, Australia’s Pancontinental Oil and Marathon Oil of the US have all exited Kenya due to a poor environment that makes it difficult to raise funds for exploration.

Tullow, on its part, said that for the 2016 financial year, it will continue with its drilling programme.

The firm is drilling a well in Kerio Valley and expects to complete the work in February.

“Cheptuket-1 will likely complete drilling in February after which the PR Marriott Rig-46 will demobilise.”