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Kenya would be among cheapest world oil producers, Tullow says

By Moses Michira
Updated Fri, February 12th 2016 at 00:00 GMT +3

NAIROBI: Kenya would be among the 10 cheapest countries to produce crude oil, ahead of major exporters like Nigeria and Angola.

Tullow Oil, the UK firm prospecting for oil in Turkana among other areas, has reported the break-even point for Kenya crude is Sh2,550 ($25) per barrel – including the pipeline tariff to the sea port.

Low production costs translate to higher profits for a producer. Kenya's projected cost is lower than $35.40 (Sh3,600) in Angola and Nigeria's $31.50 (Sh3,204), both countries bleeding money as global prices slumped to near-record low of $29 (Sh2,949) this week.

At the prevailing prices, Kenya would still be making a profit if it were already producing and selling crude oil in the international markets. "This is important news that suggests Kenya's oil is viable even at current low global prices albeit at a razor thin profit margin," said Eric Musau, a research analyst at Standard Investment Bank.

He was quoting a presentation made by Tullow Oil after releasing its 2015 operating results. Being a low-cost crude oil producer could mean that Kenya can survive the sustained slump in prices, and still make a profit at the current levels.

Kenya's projected production costs are, however, almost three-fold the Kuwait's $8.50 (Sh864) and Saudi Arabia's $9.90 (Sh1,007) – the two least-cost oil producers in the world, according to findings of a Norwegian oil and gas consulting firm, Rystad Energy.

UK and Brazil are ranked as the most expensive oil producers at $52.50 (Sh5,340) and $48.80 (Sh4,963) a barrel, respectively. Tullow projects that it would spend an additional Sh15 billion for its projects in both Uganda and Kenya despite the low crude oil prices, which could remain depressed for at least the rest of 2016.

Only a further price fall, which some analysts have predicted following the suspension of sanctions against Iran, could discourage further private investment in developing the country's oil fields.

"It means that infrastructure can actually be developed along the proposed northern Kenya pipeline route to the port city of Lamu. Kenya is one of the few low cost developments available in the world," Musau adds on his research note to clients about the prospects in the domestic oil exploration industry.

Tullow's projections would calm fears that the sustained crush in crude oil prices had discouraged prospective investments in the development of oil fields. The UK explorer had in late 2014 announced that it was slashing its explorations budget by more than 70 per cent to $300 million (Sh30,516), on concerns on the tumbling oil prices.

Most affected in the budget cuts would be off-shore projects where costs are a multiple of the expenses for prospecting on land. In 2016, the firm has announced that it would be 'actively' managing its current equity positions and exposure to drilling costs across the portfolio.

"A number of farm-downs are under way across the portfolio and this work will continue in the coming year. In 2016, our main focus will be to continue to selectively replenish and high grade the exploration portfolio for future growth," Tullow said in its projections.

Some crude oil producers are making losses with continued production for the market already in doubt in various countries. Last month, Brazil's State-owned Petrobras announced sharp cuts on capital expenditure and crude oil production till 2019 amid the extended decline in oil prices. The country could have been better off importing the commodity rather than mine its own.

A slump in global oil prices have also impacted Tullow, pushing its reported earnings to Sh100 billion in net losses, mainly on lower revenues.

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