NewsEast & Horn AfricaOil and Gas: Kenya’s pipe dream

Tue,20Feb2018

Posted on Tuesday, 13 February 2018 15:27

Oil and Gas: Kenya’s pipe dream

By Mark Anderson and Sophie Mbugua in Nairobi

Turkana, in Kenya’s arid north, has the most to gain from an oil economy - Credits: TONY KARUMBA/AFP
President Kenyatta’s promises to turn Kenya into an oil-producing country before the recent elections have proved empty, revealing huge infrastructure gaps that will keep the project stalled for years to come

 

By now, rows of fuel tankers brimming with waxy crude oil should have been making their way to Mombasa’s port, ready for sale on the international market. Kenya’s President Uhuru Kenyatta promised last year that his country would win East Africa’s oil race, beating Uganda to become the first country in the region to join the oil-exporting club.

“We have started [towards oil production], and we are not moving back,” he said in August 2016. “We want to be at the top of the pile.” And for a while, Kenya’s private-sector ebullience and administrative ’can-do’ attitude seemed to be doing the job, with a new oil terminal designated to be built in the eastern coastal city of Lamu.

But a political impasse, low oil prices and a lack of infrastructure have poured cold water on what many saw as an overly ambitious plan, designed to win political favour ahead of a hotly contested general election on 8 August (see page 37). London-based Tullow Oil, which holds five Kenyan licences and had planned to export crude produced during testing of its wells, has yet to reach a final investment decision about its fields. That decision is not expected before the end of 2018.

Kenyatta’s promise to turn Kenya into an oil-producing country before the original 8 August polls bore the hallmarks of a calculated political move, anal­ysts say. “[Kenyatta] gains some considerable political capital if he presides over a country as it becomes an oil-exporting nation,” says Jacques Nel, an economist at NKC African Economics. “I think this is what he was aiming for.”

ROADS TO NOWHERE

Almost immediately, red flags were raised. For example, the scheme to ship the oil by road raised eyebrows when it was announced. Trucking oil is expensive and unsustainable at a time when the price of oil is hovering at around $50 a barrel, a steep decline from just a few years ago.

“There are not many countries in the world that can do oil production by road,” David Ohana, group managing director of downstream company KenolKobil, tells The Africa Report. “It’s simply too expensive.” Experts say that even if the price of oil were to double to $100, Kenyan producers would be unlikely to break even.

Opting for road transport was also a convenient way of bypassing the biggest obstacle to Kenya’s oil production: a critical lack of infrastructure. To solve this, the Nairobi government had planned to roll out an oil pipeline serving Uganda, Ethiopia and South Sudan. The Ugandan section was to run from the oilfields in the north of the country all the way to the city of Lamu, where a new port is being built. But that plan stalled after Uganda decided last year to send its oil through Tanzania, saying there were security concerns around the Kenyan route.

Those in the oil sector are still hopeful that the pipeline linking Kenya’s Turkana fields with Lamu will still be built in spite of Uganda’s withdrawal from the project and South Sudan’s civil conflict. “The construction of the pipeline is feasible, but further studies need to be done,” says Emma Gordon, an analyst at Verisk Maplecroft. “Kenya needs to find someone willing to invest in constructing the pipeline.”

Another option is being championed by French oil giant Total, which acquired a 25% stake in Maersk Oil’s oilfields at the end of August. Total is proposing to send Kenya’s oil through the Uganda-Tanzania pipeline.

“We want to sanction this project in the first half of next year, following an inter-governmental agreement between Tanzania and Uganda earlier this month," Total’s CEO, Patrick Pouyanné, told reporters in August.

Tullow Oil was the first to discover oil in Kenya’s northern Turkana region in March 2012. In the five years that followed, Tullow has proven to be an active player in pushing for oil production to get off the ground.

Tullow’s country manager for Kenya, Martin Mbogo, tells The Africa Report: “We remain confident that Kenya can be a successful oil exporter at current prices.” He adds: “So far all the people involved have made huge strides in understanding this new industry […]. We are positive about the success of oil production in Kenya.”

MAP

A NEED TO FOCUS

Today, the country’s reserves are estimated at about 750m barrels. Mbogo acknowledges that there is still a long way to go before production can begin. “The main challenge for oil production in Kenya is that the upstream oil and gas industry is new in the country,” he says.

Ohana of KenolKobil says “it will take 10-15 years to get oil production started if we do well”, noting that ground has not yet been broken on massive infrastructure projects. “Kenya can do it – I have no doubt,” he says. “If the government will focus on this, they will [start producing oil]. But I don’t see the focus.”

Kenya’s politics are keeping oil in the ground. The surprise annulment of Kenya’s August presidential election means that a re-run is now scheduled for 17 October, extending the period of political uncertainty hanging over the country.

There are also unresolved debates about revenue sharing from oil production. President Kenyatta has refused to give 10% of oil revenue to Turkana County, the sparsely populated and impoverished area where the oil is located, offering 5% instead. In contrast, opposition presidential candidate Raila Odinga said he would agree to give Turkana 10%.

Kenya’s Senate must approve the petroleum bill that is currently pending, before production can move forward. This bill will set out oil revenue sharing between the national and county governments, and local communities. But with opposition leaders currently boycotting parliament, Senate approval could take some time.

SECURITY CONCERNS

Disagreements over local content are common at the onset of production. “Kenya is experiencing the same community relations encountered in every new oil and gas country,” says Verisk Maplecroft’s Gordon. “The majority of the communities are uneducated and wouldn’t understand why the revenues aren’t flowing, which would expose the oil explorers to security risks.”

Security has deteriorated in some of the areas around Tullow’s projects in Turkana. Media reports suggest that Tullow is unable to send its staff to some areas because they have been attacked by angry locals who want a greater share of the oil revenue.

Andrew Kamau, principal secretary for petroleum, told reporters that security problems had stalled early oil shipments. “Everything is ready, but we have a few issues with security,” he said. “It will be difficult for us to give a go-ahead to the trucking companies because we would be risking the lives of the drivers.”

Both Kenya and Uganda have announced plans to build oil refineries. That would eliminate expensive shipping costs and lower the price of petroleum across the region. Kenya is spending about $50m a year on shipping to import refined petroleum from the United Arab Emirates. “If we have crude I think we should have a refinery,” KenilKobil’s Ohana says, adding that only one refinery would be needed to serve the region.

“The whole region will benefit from oil production because right now they have to freight it in,” Ohana says. “It could be a big boost to the economies – getting the oil cheaper. Then these countries will be flourishing.” 

 

From the October 2017 print edition

 



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