The games the oil industry plays in Kenya

By Mbatau wa Ngai | Published Tue, December 20th 2016 at 00:00, Updated December 19th 2016 at 20:05 GMT +3
Industry analysts are also cautioning that time is running out for the Executive and Parliament to draft and pass legislation that guarantees the country reaps maximum benefits from the expected exports.PHOTO: COURTESY

Kenyans should be wary of viewing the anticipated oil exports as a silver bullet that will solve the country’s economic problems.

Just look at the demonstrated failure by the Organization of Petroleum Exporting Countries (Opec) to substantially raise global crude oil prices despite holding endless talks on the matter.

The Vision 2030 Delivery Secretariat’s views, reported last month, that Kenya is betting on its nascent oil industry to account for more than 10 per cent of gross domestic product (GDP) within a few years may, therefore, require some moderation.

Industry analysts are also cautioning that time is running out for the Executive and Parliament to draft and pass legislation that guarantees the country reaps maximum benefits from the expected exports.

Waiting until the country exports its first crude oil may be too late because oil companies would, rightly, accuse the Government of changing the rules in the middle of the game.

It is instructive that a report commissioned by the World Bank warns that Kenyans’ hopes of reaping huge dividends from planned crude oil commercial production by 2020 may be dashed unless major reforms are undertaken. The report identifies the areas requiring urgent attention as tightening of legislation, environmental and social protection mechanisms, among others.

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The Government’s failure to address the country’s lack of capacity in human resource trained specifically for the sector is particularly disturbing since oil exploration and oil discoveries haven’t happened overnight.

Revelations the country relies on ‘borrowed’ laws and regulations to govern the sector instead of developing its own are particularly disturbing in view of the now widespread studies that show many multinationals employ professionals to avoid paying more than the minimum in taxes.

Making promises

Yet, beyond making promises that are rarely followed up, the Government seems to have been caught napping. Be that as it may, what is important now is for the Government and the country’s top public universities to join hands with Kenya Pipeline Company and National Oil Corporation to launch a programme that will train the required personnel in the shortest time possible.

This might require sending graduates to train in countries that have fully developed their ancillary services sector.

The Government should also put a premium on training forensic industry auditors whose responsibility would be to help oil multinational companies operate within the laws and regulations governing the sector. These forensic auditors would also help the country understand the oil industry’s paradoxes that have baffled analysts.

A perfect example is the industry’s statement in February that the country could still make a profit, albeit a marginal one, were global crude oil prices to remain at an average $25 (Sh2,500) per barrel. It then changed the narrative in October and said the break-even point was $55 (Sh5,500) per barrel.

Interestingly, no mention was made of the country’s crude oil production costs, which in the February announcement were pegged at $25 per barrel. These figures propelled Kenya to the top 10 cheapest oil production countries, well ahead of its peers in Angola and Nigeria, whose costs stand at $35.40 (Sh3,450) and $31.50 (Sh3,150) per barrel, respectively.

Equally perplexing, was the announcement in October that trucks would be used to ferry crude oil from oil fields in Lokichar in Turkana to Mombasa for storage awaiting export. Earlier reports from the same individuals and institutions had explained that locomotives would be contracted from Rift Valley Railways to move the crude to Mombasa.

But what came as something of a surprise to many was the conclusion that far from expecting to turn a profit, these early exports might end up costing the country billions of shillings.

Perhaps, the country may be better served were it to await the discovery of more oil reserves and the construction of the proposed oil pipeline to Lamu.

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