Nation Prime

How government sabotaged crude oil plan

By ALLAN OLINGO
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By PAUL WAFULA
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Monday February 24 2020

The government failed to meet key milestones in the last six months of 2019 that would have hastened the country’s realisation of its dream to be an oil producer.

From tendering, Environmental Impact Assessment (Esia), commercial contract negotiations, to project financing negotiations and water and land agreements, the oil project has been dogged by delays.

Key government agencies, including the petroleum ministry, the National Land Commission and the National Environmental Management Authority (Nema), have been slow in decision-making.

Project documents exclusively seen by the Nation reveal that the agencies missed deadlines, pushing back the Final Investment Decision (Fid) and wasting valuable time and money.

Regardless, the taxpayer will still have to cough up the hundreds of billions of shillings the project has already gobbled up.

OIL DOCK

The government failed to put in place a full negotiations team last September, which would have seen it sit at the table with Tullow Oil and its joint venture partners, Total and Africa Oil.

The documents show that as of October, the Kenya Ports Authority (KPA) and the Lamu Port-South Sudan-Ethiopia-Transport Authority (Lapsset) had not confirmed the availability of Berth 3 in Lamu to be exclusively used by the Kenyan oil pipeline from Lokichar.

The agreement on the storage solution at the port had not been reached either.

Transport and Infrastructure Cabinet Secretary James Macharia told the Nation that the Cabinet had already approved Berth 3 to be an exclusive oil dock, allowing the design for a 900-kilometre Lokichar-Lamu pipeline to end at the port.

“We hope to have berths 2 and 3 ready by the end of the year. The ministry has the Cabinet’s approval to take charge of Berth 3 and link it with the Lamu-Turkana pipeline to enable us to ship out our oil,” Mr Macharia said.

DELAYED APPROVAL

Between June and September last year, only two milestones on the project had been achieved, including the upstream feed design, which was updated with value engineering outputs.

The government also approved the midstream Engineering Procurement Construction (EPC) strategy in August.

Another milestone was the submission of the debt term sheet by Tullow and its partners in October.

However, the government failed to approve this, which meant that the project could not issue a Pipeline Integrity Management System (Pim) and commence the market sounding.

As a result, the agreement on credit support for the project, which was due in November, was not met.

The delays in approvals from partners and government agencies slowed down the project’s timeliness, pushing back commercial oil production by two years.

“The slower-than-expected decision-making within certain arms of government created difficulties within various boards to commit. A perfect example is the heads of terms (HoT), which took a whole year to approve, yet when you look at the document we submitted and the one approved, the changes were so minimal,” Tullow Kenya Managing Director Martin Mbogo told the Nation in an interview.

CONTRACT NEGOTIATION

“In this sector, capital is expensive. We need to hasten decisions so that we can lock in investors and attract as much foreign direct investment (FDI) as possible,” he added.

The NLC failed to complete all land surveys by October last year while the project teams also failed to deliver the draft land lease agreements for key installations in Lokichar.

This means that the March 2020 deadline for NLC to have commenced land enquiries and locked down lease agreements remains a pipe dream.

In October, the project team submitted the midstream Esia report to Nema and drafts of the core long form agreement to the Petroleum ministry.

These touch on the Host Government Agreement (HGA) as well as transportation and pipeline shareholder agreements.

However, the Nation understands that the negotiations for the above contracts, which were due to start in October, did not materialise as Kenya had not constituted its negotiating team.