Kenya’s slippery path to oil exports

Tuesday September 6 2016

Oil drilling in northern Kenya. British Oil explorer Tullow has announced a fifth oil discovery in Kenya raising the country’s prospects of becoming an oil producer. PHOTO/FILE.

Oil drilling in northern Kenya. PHOTO/FILE.  NATION

By EDWIN OKOTH, @Edwincowino [email protected]

Kenya’s dream to export crude oil by June next year may neither generate cash nor ease the price burden currently being shouldered by consumers of petroleum products.

If plans go as expected and production starts, Kenyans will demand nothing short of a major reduction in fuel prices. The end result will be pressure on the government to assuage the burden of the long suffering motorist or farmer whose visits to the pumps have always been painful.

Analysts believe the transport model that will involve trucking crude from the fields in Turkana and later by train from Eldoret to Mombasa, a distance of 1,089 kilometres, will not make economic sense.

The initial 2,000 barrels per day are seen as being largely disadvantageous to Kenya on economies of scale making the idea of land transport untenable.

Experts in and out of government who spoke to Smart Company, said the plan is largely pushed by the need to run ahead of Uganda in exporting crude oil as well as make a political statement that Kenya has joined the league of oil exporters.

It is not also lost on observers that the fallout between the two countries over a planned oil pipeline is still fresh in many people’s minds. Uganda opted for Tanzania leaving Kenya scratching its head on how to deal with the issue.

“Even if it was 4,000 barrels per day, it would be embarrassing to talk about that volume for export in the same sentence. The capital injection to keep the oil heated until it reaches its destination, the trouble with having too many trucks on the road carrying crude and the Pandora’s box it will open with communities demanding their share of exported crude, is not worth it. I don’t think we are walking this path with eyes open,” an oil expert who sought identity protection told Smart Company.

So sensitive is the subject that most sources sought anonymity owing to the government’s deep interest to see Kenya join the league of oil exporters by June 2017.

Petroleum Principal Secretary Andrew Kamau declined to comment on the question of whether the model made any commercial sense or whether it is just an experiment. He only referred us to a recent media publication on early oil via a text message.

A fortnight ago, British firm Tullow Oil Chief Operating Officer Paul McDade told President Uhuru Kenyatta at State House Nairobi that the firm will begin producing 2,000 barrels of crude oil daily and have stocks ready for export in June next year.

The move raised hopes of Kenya becoming an oil exporting country, justifying State House’s plan to have the crude transported by road under the early oil pilot scheme.

“Following President Kenyatta’s directive that exportation of Kenya’s first oil be expedited, Tullow Oil has this afternoon confirmed that it will start oil production in March next year,” State House announced in a statement.

Tullow’s count of the Turkana oil reserves so far stands at 750 million barrels, which is commercially viable at the current international crude prices.

However, it is the government’s hope of harvesting the much-needed dollars from exporting the crude that remains in doubt with the model in question.

Besides, there has not been any comprehensive feasibility study or any tangible data provided to support the rush to begin transporting the crude by road and rail to Mombasa.

Tullow Oil, which had announced plans to reduce its capital expenditure this year to $900 million from last year’s budget of $1.7 billion, and further to $300 million by 2017 should the prevailing low crude prices persist, is likely to generate some Sh3.4 billion annually before factoring in the cost of production, transportation and profit margins assuming the international crude price remains at $46.19 a barrel (as it was by end of last week).

The big question remains whether wananchi stand to benefit from any cheaper petroleum products if Kenya proceeds with this model. Should the country have waited to have the pipeline in place before engaging in the trade? Would it have been better to revamp the Kenya Petroleum Refinery Limited and have the little crude refined locally with added values including production of petrochemical and job creation? What are the risks involved in carrying the crude on land, more than 1000 kilometres away?

“Who has ever entered into oil business without a pipeline? Add the costs of keeping the crude heated and transporting it by  road or railway transport and tell me whether you have some business, by the way aren’t we investing in pipelines to avoid having these trucks on the read” another expert who has been engaged in the previous plans told Smart Company.

A World Bank-funded report prepared by audit firm PricewaterhouseCoopers last year to support the government in developing a petroleum master plan urged for pipeline first approach.

“Investors in the upstream sector in Kenya will only take place if they are confident in the ability to take their product to the market. For crude oil, this equates to an accessible oil pipeline system that can take the production to the coast for sale in the international market,” PWC said.

Rift Valley Railways, which is expected to lift the crude from Eldoret to Mombasa, confirmed being in discussions with the government to agree on the costs of hauling the oil.

Costly delays

It also remains unknown how much in capital investments the concessionaire will need to put in new insulated wagons to carry the crude and the resulting additional cost they will have to charge to make profits in the venture.

The model will also involve a series of costly delays due to the low production capacity. The 2,000 barrels translating to about 318,000 litres will require at least 20 trucks daily to ferry to the train which may have to wait longer before taking it to the coast.

At the coast, it will take at least two months to have capacity enough for one shipping tank. The Changamwe station where KPRL is situated is also 13.5 kilometres away from the Kilindini Harbour adding to the transport headache of how the heated crude will set off the coast for export.

Should the oil firms find the project not viable, the government will find itself in a similar fate to Jomo Kenyatta Greenfield expansion plan where the contracts were to be terminated mid-way. Truck and railway transporters, such as the Chinese contractor will slap the state with heavy penalties for terminating contracts.

With the 865-km oil pipeline, it will be very easy to move between 80,000 and 120,000 barrels of oil daily filling tankers faster and making business sense from it. The deal would have been sweeter had Uganda stuck to the joint pipeline venture.

Another capital requirement for a jetty to pump the crude onto a ship remains. The venture according to experts will need at least 20 months to complete at about Sh10 billion and needs to be offshore for the big ships. This makes the June 2017 deadline a business irony.

Kenya is also making the hurried and expensive entry into the oil market at a time when the global oil prices have remained low and unstable. Major countries engaged in oil business have been badly hit including Nigeria, Angola and even Venezuela.

The Experts believe the government may be shooting herself on the foot with the heightened expectations as the communities will begin demanding their share of oil prospects when the venture will not be profitable.

Documents from Auditor-General Edward Ouko show that the government earned Sh503 million last year as dues from oil exploration. The revelation is expected to elicit demands from the local communities who will expect it to be spent on projects such as hospitals and schools.

Turkana resident in 2013 caused chaos demanding for jobs from Tullow forcing police to be deployed on oil fields, after non-locals working for the company were evacuated.

An Oxfam report released in May said Kenya still faces the risk of losing billions in tax revenues from her oil production with 85 per cent of firms awarded the oil deal operating in tax havens.

“The overwhelming majority of the companies that hold rights to petroleum blocks in Kenya have at least one subsidiary listed in a tax haven or low tax jurisdiction. In fact, only five companies listed below appear not to make use of tax havens or low-tax jurisdictions as part of their corporate structures,” Oxfam said it the report titled, ‘The use of tax Havens in the Ownership of Kenyan Petroleum Rights.

The hurried move has had its side benefits though, the Sh3.2 billion Leseru-Lokichar Road, which is expected to connect the remote Turkana site to Eldoret, is nearly complete. The Cabinet also approved plans to replace the Kainuk Bridge to enable larger trucks move huge quantities of crude oil.

It also remains unknown who exactly will buy Kenya’s waxy oil which is expensive to refine as the global market grapples with a glut that has more than halved the prices of crude oil in the past three years.

Crude oil prices have remained volatile in the face of an oversupply, plummeting at some point this year to $30 a barrel from more than $100 in 2014 before recovering to the current $46 a barrel.

Another school of thought contends Kenya should have sought to establish her own refinery and change the narrative of other African oil producers who have stuck with the idea of exporting crude and importing refined products.