Legal hurdle stands in the way of multi-billion-shilling oil exports project

Wednesday March 7 2018

Oil exploration in Turkana

Oil exploration in Turkana. As British oil explorer Tullow sets up equipment in Turkana oilfields to separate crude oil from impurities ahead of early export, the government has opened a national debate on how the newfound petrodollars should be shared. FILE PHOTO | NATION MEDIA GROUP 

NEVILLE OTUKI
By NEVILLE OTUKI
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As British oil explorer Tullow sets up equipment in Turkana oilfields to separate crude oil from impurities ahead of early export, the government has opened a national debate on how the newfound petrodollars should be shared.

The Ministry of Petroleum expects the oil receipts to beef up the country’s foreign exchange reserves, strengthening the shilling and making imports like cars and machinery cheaper in local currency terms.

However, the ministry says this will not happen until the Petroleum Bill, which lays out the framework for exploiting the new wealth, goes through public scrutiny before it is discussed by Parliament. 

PUBLIC PARTICIPATION

“We are awaiting for the law to be in place to kick off early exports of crude oil. The Bill is in the public participation stage as part of the constitutional requirement to incorporate Kenyans’ views in national matters,” Petroleum Principal Secretary Andrew Kamau said.

Mr Kamau added the receipts will strengthen the government’s quest to improve people’s living standards through the ‘Big Four’ development plan.

“In terms of direct benefits to you and me, we are talking food security, affordable housing, manufacturing and accessible universal healthcare,” said Mr Kamau.

Kenyans’ expectations, however, vary with some pointing at African countries that slid down the destructive path often referred to as the oil curse while others have adopted a wait and see stance because of the frequent shifting of export timelines.

Others are expectant - fuel pump prices will drop significantly once the country joins the league of oil exporting economies.

“Expectations are high when it comes to the oil. I’m not saying it’s a bad thing but we need to manage it,” said Mr Kamau.

SH216 BILLION

Early estimates indicate Kenya is set to reap about Sh216 billion per year, at peak oil production of 100,000 barrels daily, based on the prevailing global crude prices hovering around $60(Sh6,000) per barrel.

Turkana oilfields have an estimated lifespan of 25 years from production date.

Based on the current prices and recoverable deposits, the country could earn about Sh5.4 trillion in the period, accounting for three quarters of Kenya’s Gross Domestic Product (GDP).

Such commercial production will, however, only start from 2021 after laying of a Sh210 billion pipeline to Lamu port – 865 kilometres - the cost of which is expected to be recovered from oil sales.

Tullow, which says it has sunk about Sh101 billion in wells exploration alone since 2012 is also expected to defray such incurred costs from the oil receipts.

AUDIT FIRM

The Kenya government is expected to hire an independent firm to audit Tullow’s expenses.

Tullow last month began works to connect its wells across the fields to an early production facility using small pipes.

The equipment separates crude oil from other fluids like water and gas that are pumped out together from deep wells.

This is in readiness for early small-scale exports meant to test the receptivity of Kenya’s crude oil in the international market.

None of the countries in East Africa has an operational refinery following closure of the Mombasa port refinery in 2013 over inefficiencies.

The early production facility for separating crude impurities will be put to use after two years. Trucks will in the intervening period transport 2,000 barrels of the black gold by road daily to Mombasa Port for early exports.

TURKANA TO COAST

It will take one week for trucks to do a round-trip covering a distance of about 1,000 kilometres from the remote Turkana fields to the Coast for storage, pending shipment to overseas markets.

Thereafter in 2021, with the construction of a crude oil pipeline snaking its way from the Turkana scrublands to the coastal town of Lamu, Tullow will set up a permanent central processing facility. 

The larger equipment will ‘clean up’ more crude volumes of up to 80,000 barrels daily to be transported through the pipeline for commercial exports.

This is called the full field development phase, a direction the country is moving toward after last year’s signing of a pipeline development pact between the government and the British explorer.

Kenya’s oil reserves in Turkana fields alone are estimated to be four billion barrels, but only up to 1.2 billion barrels can be recovered for commercial exports, according to Tullow managers. Additional reserves are estimated to lie underneath Kerio Valley.

“As with all oil projects, only a fraction of the total size of the oil in a basin prior to the start of production can be commercially recovered,” Tullow Kenya country manager Martin Mbogo said in an interview.

FOUR MILLION BARRELS

“In the case of Kenya, the total oil size figure is four billion barrels out of which we estimate between 240 million and 1.23 billion barrels of this oil will be commercially recovered,” he added.

Tullow last month said it will be pumping additional Sh293 billion into the Turkana operation to achieve commercial scale needed to start exporting Kenya’s oil in four years’ time.

Tullow, which has already spent more than $1 billion (Sh101 billion) in exploration activities over the past six years, said in a trading update that it plans to invest the additional amount in the development of the oil fields and building of a pipeline linking Turkana to Lamu.

Kenyans have been advised not to expect oil cash windfall soon from the early small-scale exports.

Neither should they expect an immediate drop in fuel pump prices once the exercise takes off, given the country will continue importing refined petroleum even as it sells crude oil.

EXPORT LOGISTICS

The early export plan will test the exports logistics in the global market, not to make a profit, ahead of a full-blown, commercial exports schedule in 2021 after the country constructs a pipeline to carry huge volumes of crude oil.

Full-scale commercial operations is expected to significantly boost State coffers, especially if the resurgent international oil prices remain at current levels or rise further.

“From a technical perspective, Tullow is ready to commence early oil pilot scheme trucking. However, we have to wait till we get consent from the Kenyan government. In the meantime, oil produced is being initially stored until all necessary consents and approvals are granted,” said Mr Mbogo.

The exploration firm had by last year already pumped out and stored 60,000 barrels of crude in Lokichar. The stored crude stock was produced in 2015 during extended well testing.

Tullow said it will take up to 60 days to haul the stored 60,000 barrels, using convoys of up to seven trucks daily to Port of Mombasa.

TULLOW PARTNERS

Tullow has been exploring and developing the Turkana oilfields jointly with partners; Canada-based Africa Oil and Danish firm Maersk. French major Total seeks to buyout the shareholding held by Maersk.

Failure to agree on the share of the revenue pie to be split out to the national government, the county government and the surrounding community remains a sticking point.

This delayed enactment of the Petroleum Bill last year, prompting pushing back the June 2017 date for early oil export.

The current draft Bill is a revised version of the 2017 one that has cut Turkana county government’s share of the oil money to 15 per cent from the initial 20 per cent, sparking off disquiet among local  leaders. The community surrounding the oil wells are also now entitled to a lower share of the pie at five per cent from the 10 per cent that was initially spelt out in the original document. The draft Bill hands the central government the remaining lion’s share of 80 per cent, proceeds of which a portion would be saved in a sovereign wealth fund for future use.

Whether the Bill, which is expected back in Parliament later this month, will get the MPs’ nod depends on the newly appointed Petroleum Cabinet Secretary John Munyes, a leader from Turkana, lobbying his local community to support the Bill.

REVENUE SHARES

It also depends on him persuading the national assembly that revenue shares are equitable given that the bill will set a precedent for resources found in other parts of the country. Mr Munyes did not respond to our requests for interviews over the matter.

In 2016, Parliament passed the original draft Bill but President Uhuru Kenyatta did not sign it to become law prompting the revisions.

Turkana crude oil is classified as light and sweet, meaning it has less sulfur – an impurity that has to be removed before crude is refined into petroleum, adding to processing costs. This type of oil is known to fetch higher prices in the global market because dealers find it easier to refine and it produces high-value products — petrol and diesel.

It is, however, waxy and sticky, making it heat during transportation, a quality that is expected to determine the design of the planned pipeline.

Kenya was forced to go it alone in building the pipeline after oil-rich Uganda, which originally agreed to partner with Kenya, opted for an alternative line through Tanzania.

Nigeria’s oil — bonny light — is among the best in the world while Gulf oil is of low quality and is classified as heavy and sour as it comes with lots of sulfur.

South Sudan’s dar blend is also classified as being of poor quality, reaping lower returns, while the country’s Nile blend is top quality.