Holding the Baby

Kenya: Tullow partner pullout at South Lokichar highlights stranded fossil assets risk

By David Whitehouse

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Posted on May 30, 2023 04:00

The decision by TotalEnergies and Africa Oil to withdraw from the South Lokichar oil project in Kenya shows the risk that new fossil-fuel investments may become stranded assets.

“The elephant in the room is that fossil fuels have become stranded assets,” given the global aim of a transition to renewable energy, Nairobi-based energy economist Daniel Thuo Njoroge tells The Africa Report.  “There are very few entities which will want to finance new fossil fuel projects,” says Njoroge, an advisory board member at the Africa Utility Forum.

Tullow and Africa Oil first discovered crude oil in the Lokichar basin in Turkana County, northwestern Kenya in 2012, but commercial extraction has yet to start. The strategic partner which Tullow has been seeking to develop the project has yet to be found, and Africa Oil and TotalEnergies seem to have run out of patience. Tullow said on 23 May that the partners are pulling out, leaving it with 100% ownership versus 50% previously.

Shares of Africa Oil rose on the news. The Canadian company, which in 2022 took an impairment charge of $170.6m for its South Lokichar stake, will now reduce the value of its holding to zero.

The statement from Tullow labours to present the partner withdrawals as a positive development which “creates more optionality” and “streamlines project delivery”. Of course, if the partners weren’t needed, then they wouldn’t have been there in the first place. The Africa Report approached Tullow to ask about prospects for attracting new partners. The company declined to make any comment beyond its statement.

Njoroge says that there is still some potential in oil development in Africa for use in the petrochemicals industry as opposed to combustion engines. But the onus is on fossil fuel companies like Tullow to “go back to the drawing board” and come up with innovations which make fossil-fuel production cleaner, he says. “That mandate lies with the industry.”

Renewable exports

The fact that work on the East African Crude Oil Pipeline (EACOP) from Uganda to Tanzania still hasn’t started shows that financiers are aware of the dangers of making new commitments to fossil fuels, Njoroge says. Standard Chartered bank in April said it won’t take part in financing the pipeline, which it is estimated will produce seven times the current carbon emissions of Uganda. The continent’s largest bank, South Africa’s Standard Bank, is still assessing whether it will take part.

The reluctance to risk new fossil investments can benefit Kenya, given its global leadership in renewable energy, Njoroge says. Geothermal, hydro, wind, and solar power accounted for 81% of Kenya’s electricity generation in 2021, and the country aims to reach 100% clean energy by 2030. The country “can and will” become a significant exporter of renewable energy through Africa’s regional power pools, with all parts of the continent being potential markets, Njoroge says.

Whether time is best spent on fossil or renewable energy development is a dilemma for governments globally, with trade-offs involved for each country, Njoroge says. In Kenya’s case, he argues, the solution is clear. “The best trade-off is for Kenya to concentrate on renewable energy.”

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