Low oil prices dim hope for economic boom in Kenya

Tuesday January 12 2016

The oil rig at Ngamia 1 in Turkana County on April 5, 2012. PHOTO | STEPHEN MUDIARI |

The oil rig at Ngamia 1 in Turkana County on April 5, 2012. PHOTO | STEPHEN MUDIARI |  NATION MEDIA GROUP

By OTIATO GUGUYU
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Kenya’s prospects of being an oil producing country were lifted when one discovery after another was made in 2012. This attracted a number of multinationals keen to cash in on the emerging sector.

However things have dramatically changed following the unprecedented decline in oil prices which have hit $32 a barrel, the lowest since 2004 after China devalued its currency.

The exploration firms that were jostling to have a piece of Kenya’s promising sector have since scaled down their operations significantly with some entirely bolting out.

Analysts say the price could sink further in the coming days despite earlier views that the two year oil out would finally pick up this year.

The analysts however say the dark clouds of dismal oil prices have a silver lining in terms of the prices of products.  

A rise in oil prices, they say, could have exposed consumers to higher costs of products. 

Nonetheless, Kenya stands to lose immensely as the low fuel prices mean that the dream of joining the league of oil producers is ebbing further as it becomes less economical for first-time oil producers.

“Last year some firms suspended operations and investment in the sector went down over concerns that when prices are too low they may not be able to cover for costs,” said Mr Kwame Owino,  the Institute of Economic Affairs boss.

Mr Owino said Kenya, whose estimates for profitable production were calculated at a minimum of $50 a barrel, may have to postpone its ambitions until global prices recover.

TURKANA OIL EXPLORATION

Kenya already has existing exploration contracts around Lake Turkana and adjacent areas and activities are expected to continue on these blocks despite the price shocks.

The investors in Turkana are also preparing for production of already discovered oil in the area with President Uhuru Kenyatta giving a State House logistics team one month to work out modalities of crude oil transportation from Turkana oilfields to Mombasa for processing starting September this year.

However new business is doubtful as investors in the sector are uncertain on when the falling oil prices will reverse course to make production in new areas viable.

Director, Petroleum Focus Consultants George Wachira says marketing oil and gas globally will remain a challenge until over-production is contained and prices strengthened.

“Viability thresholds for many oil and gas projects across the world will remain difficult to achieve at current prices.  I understand Turkana investors and the government are planning for early production and export of small volumes of oil via road and rail for early cash,” he said.

Mr Wachira said that full scale exports can only happen when the pipeline infrastructure is in place hopefully by 2020.

The American government last week expressed interest in funding construction of the oil pipeline linking Northern Kenya oilfields to Lamu upping its stake in the Lappset project.

The Sh2.4 trillion project was initially designed and planned to be funded by Chinese, but Americans have now expressed interest. US Ambassador Robert Godec said his government would help secure funding amounting to Sh1.4 trillion for the oil pipeline.

The initiative is meant to open up northern Kenya and link landlocked South Sudan and Ethiopia to the Lamu port.

Mr Owino said such projects might need to be re-thought as banking on oil to pay for the big infrastructure projects might not be viable under the uncertainties surrounding crude geopolitics.

However Mr Wachira said resources have already been committed to the projects and despite the fortunes of the black gold sharply declining they may have to be completed.

“The pipeline is a long-term project that must be implemented to realise returns on the money already spent in the Turkana exploration and I believe it will be implemented in good time once the route is agreed,” Mr Wachira said.