Early oil losses narrow on increase in cost of crude oil

A truck carrying crude oil from Lokichar,Turkana arrives at Changamwe KPRL storage facility in Mombasa last year. [Standard]

A sharp rise in the price of oil in the global market over the last three years has helped the Government cut losses it would have incurred in implementing the Early Oil Pilot Scheme.

While the State has been clear that the pilot is an experiment that would be loss-making, the price of oil has gone up since the pilot was initially announced in 2016 when a barrel of Brent Crude Oil was Sh4,500 ($45) and today when the price is well above Sh6,000.

State House on Thursday said the first batch of 200,000 barrels of oil produced in Turkana and stacked at the Kenya Petroleum Refineries Limited’s (KPRL) storage facilities will fetch Sh1.3 billion ($13 million).

This would mean the Kenyan crude has been sold at an average price of Sh65 per barrel, which is at par with current prices of crude oil, a premium for a relatively new product to the market that had initially been expected to be sold at a discount.

The Government and Tullow have not indicated the cost of production, but earlier estimates by a local non-governmental organisation had placed it at a Sh7,000 per barrel.

This would mean producing the 200,000 barrels would have been at a cost of Sh1.4 billion and that revenue of Sh1.3 billion, the project’s losses are much lower than initially projected, owing to the higher price of crude oil today.

In 2016, after the Government announced that Tullow would be embarking on EOPS, the Kenya Civil Society Platform on Oil and Gas (KCSPOG) published a report that said the project could make revenues of Sh4.3 billion throughout the entire life of the pilot scheme if sold at Sh5,600 ($56) per barrel.

Sold at a discount

This is against estimated project cost of Sh6.3 billion and would have translated to a loss of Sh2 billion.

Assuming that the country fetches the best prices of Sh5,600 per barrel, which is unlikely, given that the Turkana oil is waxy and will be sold at a discount price, the revenues will increase to Sh4.3 billion.

The organisation’s estimates were based on assumptions that the pilot would be undertaken over two years and producing a total of 900,000 barrels. It was also at a time when oil prices were low and KCSPOG assumed a best scenario of oil prices increasing to Sh5,600 ($56), but the prices have surpassed this to $62 per barrel as of Friday.

“The economics of the base case with production of 2,000 barrels of oil per day over two years are not positive. The total volume of oil produced and exported would be around 900,000 barrels.

Combined capital, operating and transportation costs would be around $63 million. With oil prices at $46 per barrel, total project revenue is only $34 million (Sh3.4 billion). Assuming higher oil prices of $56 per barrel, revenues increase to $43 million but are still well below project costs,” said KCSPOG in the report.

Among the costs that were factored included leasing isotainers (the special tankers used in transporting oil) estimated at Sh220 per barrel, transporting the oil on road Sh1,050 per barrel and Sh225 for storage for every barrel.