Tullow Oil Plc has hinted that Kenya cannot produce oil at a cost below $25 a barrel, indicating the extent of the country’s exposure to plummeting crude prices.
Even at that price, the oil exploration company said that it would only recover its cost of investment –capital and operational expenditure- as well as the cost of transporting crude, meaning that the oil should be priced higher for the company and government to make profit from its sale.
The break even price is important as it determines the level at which an oil producer can stay in the market when prices are sinking.
This comes as international crude prices remain at prices last seen in 2003, with a barrel averaging $30.
In Thursday’s trading, US benchmark crude West Texas Intermediate for March delivery fell to $26.90 a barrel while Brent crude for April delivery fell to $30.52 a barrel owing to increased output from members of the organization of petroleum exporting countries (Opec).
LOW PRICES COULD PERSIST
Both World Bank and the International Energy Agency have warned that the low crude prices could persist this year, with the Bretton woods institution indicating that oil prices will only hit an average high of $37 a barrel in 2016.
The low prices are expected to be sustained by increased output from Opec members, reduced demand from China resulting from a slowdown in the growth of the Asian economy and the entry of Iran in the crude market following the recent lifting of sanctions against it by the west.
Analysts say that while the minimum price of $25 a barrel offers only a thin margin to the oil company, it gives confidence to investors in the proposed crude pipeline traversing northern Kenya to the Lamu port, which could be fully utilised in future when oil prices pick up.
“This is important news that suggests Kenya’s oil is viable even at the current low global prices albeit at a razor thin profit margin. It means that infrastructure can actually be developed along the proposed northern Kenya pipeline route to the port city of Lamu. Kenya is one of the few low cost developments available in the world,” said Standard Investment Bank in a research note.
Tullow considers the Kenyan resource “world class oil resilient to low oil prices”.
On Wednesday, Tullow said that it will prioritize oil production in West Africa and drive further reductions in operating costs and capital expenditure.
The British oil explorer also plans to reduce its capital expenditure this year to $900 million from last year’s budget of $1.7 billion, putting into question the prospects of achieving the government’s target of pumping the first oil in September this year.
Tullow intends to further slash its capital expenditure to $300 million by 2017 should the prevailing low crude prices persist.