Early oil exports important for Kenya

An oil rig at the Ngamia 1 well in Turkana County. PHOTO | FILE

The last four years have been the most remarkable period in Kenya’s oil and gas industry since exploration began in the country in the early 40s.
During this period, over 45 oil and gas exploration wells have been drilled, more than the total number of wells drilled since the 1940s.

At the same time, Kenya has also undertaken extensive policy, legal and institutional reforms in line with the new Constitution. This review has seen the approval of several Bills by Parliament including the Petroleum Bill 2015, the Community Land Bill 2015, and the Energy Bill 2015.

These important Bills not only align the oil and gas sector to the provisions of the Constitution but also set out the industry’s regulatory structure and ensure that it is managed in a transparent and equitable manner, with all production sharing agreements (PSC) ratified by Parliament.

The Bills additionally ensure protection of the environment, local community participation and provide a framework for managing the fiscal opportunities and risks of oil revenues expected once commercial production begins.

The industry provides an important building block for the continued growth of the country. Indeed, oil and gas is one of the eight key sectors supporting the economic pillar of our government’s Vision 2030 national development plan.

To ensure continued progress in Kenya’s oil and gas industry, the government, in collaboration with the Turkana County administration and the Kenya Joint Venture partners (Tullow Oil, Africa Oil and Maersk Oil) is now working on the Early Oil Pilot Scheme (EOPS).

EOPS will specifically exploit five wells to produce oil, with phase one targeting production of 2,000 barrels per day. The oil will be transported from Turkana to Mombasa by road in insulated tank-tainers.

Trucking of oil by road is widely practised in the US, Canada, India, Russia, and Kazakhstan, among other countries.

At current oil prices, EOPS is not expected to generate significant revenue. The project that most resembles Kenya is the Cairn India oil project. The crude oil produced at their Rajasthan fields is waxy and is transported in the world’s longest continuously heated pipeline.

Before this pipeline was built, Cairn India transported between 20,000 and 30,000 barrels of crude oil per day by road over a distance of 750 kilometres to Kandla port.

In October 2009, Cairn India exported their first 208,000 barrels of oil on board a Singapore registered ship. This is a parcel size similar to the one envisioned in the EOPS.

Critically, EOPS is an enabler and not a replacement of the Full Field Development (FFD), which will include among other LAPSSET (Lamu Port South Sudan Ethiopian Transport) developments, a crude oil pipeline from Turkana to Lamu carrying between 80,000 and 150,000 barrels of oil per day.

Although it will be a small scale project, EOPS will mark the first major milestone in Kenya’s oil and gas industry: producing and exporting crude oil for the first time in the country’s history.

So why are we undertaking this pilot scheme? First, EOPS will be key in establishing logistical and technical infrastructure (e.g. roads, bridges) and other key arrangements crucial for supporting FFD.
Establishing these aspects beforehand will allow the operators to identify and manage risks associated with large capital-intensive projects like FFD and so reduce potential delays.

The EOPS will also provide an opportunity for both the national and county governments to gain enabling experience and capabilities necessary to facilitate FFD.

Second, EOPS will provide important technical well data that will greatly assist in planning for FFD. This data will help the operators of the project understand the behaviour of oil reservoirs and how they transform as they produce oil.

This is also known as the appraisal phase. During the last appraisal phase, over 60,000 barrels of crude was produced and is currently stored at Lokichar.

With the drilling of five new wells, it is necessary to produce more crude oil in order to understand the reservoirs better and increase Kenya’s recoverable reserves from the current 750 million barrels to over one billion barrels.

This can only help improve the viability of Kenya’s crude export pipeline.

Provide revenue

This crude oil will have to be stored somewhere. The only two alternatives are to build more tanks at Lokichar or use the existing tanks at Kenya Petroleum Refineries in Mombasa.

We have chosen to use the already existing asset and provide revenue to the refinery. Third, EOPS will help establish Kenya as a crude oil exporter and provide valuable information on the international market for Kenyan crude.

Since our oil will be a new product in the global market, EOPS will help introduce it to the international crude oil market in a low key way and provide an understanding of what potential buyers are prepared to pay for the oil product.

Finally, EOPS will create employment and business opportunities that will assist in building the capability for Kenyans and local business, thereby positioning them to maximise on the opportunities created by FFD.

For these reasons, the EOPS is an important technical project which will be a key enabler for FFD which is some years away.

It should be clear that EOPS will not immediately solve the challenges faced by communities in Turkana. However, EOPS will act as a stimulus for tackling some of these challenges and unlocking immediate benefits.

For example, the government has allocated Sh3.2 billion towards tarmacking the road from Eldoret to Lokichar, alongside funding a modern 600km highway from Eldoret to Nadapal.

The section between Lochuma to Nadapal has already secured financing from the World Bank. This important upgrade will open up Turkana County, improve transport options for its inhabitants, and ease access both of Turkana goods to wider Kenyan markets and for consumer goods to Turkana. These infrastructure projects will also put Turkana on Kenya’s tourist maps by easing travel.

Early oil exports important for Kenya

Experts warn Kenya against costly transport of crude oil by trucks

In Kenya's Early Oil Pilot Scheme, Tullow Oil and its partners Africa Oil Corp and Maersk Oil intend to produce 2,000 barrels of oil per day. TEA GRAPHIC | NATION MEDIA GROUP

IN SUMMARY

• The Kenyan government has been urged to consider a pipeline for oil exports to reap maximum benefit from the proposed early production.
• Lack of infrastructure, particularly pipelines, has made the deposits a headache for governments and companies that have invested in exploration.
• “The Early Oil Pilot Scheme is not a money-making operation, we are simply proving our capacity to export crude oil and preparing the market for full production,” said Petroleum Principal Secretary Andrew Kamau.

SEE INFOGRAPHIC



The Kenyan government has been urged to consider a pipeline for oil exports to reap maximum benefit from the proposed early production.

According to oil and gas experts, the basic principle that defines the economic viability of crude oil production lies in cost effective and reliable means of transport.

“The most cost effective and reliable means to transport crude oil is by pipeline,” said Charles Wanguhu, Kenya Civil Society Platform on Oil and Gas co-ordinator.

Kenya, Uganda and Tanzania have discovered crude oil deposits and natural gas respectively and are still grappling with lack of the necessary infrastructure to facilitate production.

The discovery of crude oil in Uganda and Kenya in 2006 and 2012 respectively and natural gas in Tanzania in 2010 was seen as the beginning of economic transformation in the region.

Years later, lack of infrastructure, particularly pipelines, has made the deposits a headache for governments and companies that have invested in exploration.

For example, British company Tullow Oil and its joint partners have invested about $4 billion, and discovered about 1.7 billion barrels in Uganda while in Kenya recoverable crude is about 750 million barrels.

To recover the investments, Tullow Oil has been pushing for small-scale commencement of production before the necessary infrastructure, including the proposed pipelines, refinery and storage tank is in place.

An Early Oil Scheme developed by the company in Uganda in 2009 failed to kick off after it become evident that producing 2,000 barrels of oil per day and transporting it by road was too costly.

Uganda abandoned the scheme and is partnering with Tanzania to build a $4 billion pipeline from its oil fields to the port of Tanga.

Despite the failure in Uganda, Tullow is proposing a similar model in Kenya, where it wants to commence production in June next year.

In the Early Oil Pilot Scheme, Tullow Oil and its partners Africa Oil Corp and Maersk Oil intend to produce 2,000 barrels of oil per day.

The oil will be transported to Mombasa by road in what is seen as an important step towards full field development of the oil discoveries in Turkana County.

The government said the scheme is necessary as a precursor to full development and commercialisation of the crude oil business.

“The Early Oil Pilot Scheme is not a money-making operation, we are simply proving our capacity to export crude oil and preparing the market for full production,” said Petroleum Principal Secretary Andrew Kamau.

However, the decision to opt for road transport for the scheme in which 14 “tanktainers” will be transporting 980 barrels of crude for a distance of about 1,090 kilometres has raised concerns about the economic viability of the project.

READ: Kenya's early oil production awaits road upgrade

Coming at a time when crude oil prices at the international market are still depressed at around $50 per barrel, analysts said that Kenya is embarking on a loss-making venture that could cost the taxpayer Ksh4 billion ($40 million).

“In the absence of a significant increase in either oil price or export volumes, the scheme is a money-losing venture.

The volumes are too low to make any economic sense at this initial stage of oil resource extraction,” noted Mr Wanguhu.

He added that the best route for Kenya is the full field development proposal that involves the construction of the 891km crude oil export pipeline from Lokichar to Lamu.

With the pipeline in place, the country will be able to commence production at around 75,000 barrels per day and increase over time to around 150,000 barrels per day.

“This approach is entirely consistent with good oil sector practice and does not require small scale early production,” Mr Wanguhu noted.

More investment needed

If the government opts for the scheme, it must invest $50 million to upgrade the 320km road from Lokichar to Eldoret and $14.5 million to upgrade the storage facilities of the Kenya Petroleum Refinery Ltd.

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Upgrading of the facilities is necessary considering the waxy nature of the Kenyan crude, which must be kept heated to remain in liquid form.

Besides the cost implications estimated at $63 million for the two-year period of transporting the crude on heated tankers to maintain the oil at a temperature of 75-80 degrees, safety, health and environmental concerns have been raised.

“The economics of the base case with production of 2,000 barrels per day over two years are not positive,” stated Mr Wanguhu.

The total volume of oil produced and exported will be about 900,000 barrels in two years, which will amount to a loss of $29 million at an estimated crude price of $46 per barrel in the international market.

Experts warn Kenya against costly transport of crude oil by trucks