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Which way for the Early Oil project?

By Joan Letting and Macharia Kamau | Published Sun, May 13th 2018 at 00:00, Updated May 12th 2018 at 17:59 GMT +3
Workers walk past storage tanks at Tullow Oil's Ngamia 8 drilling site in Lokichar, Turkana County, Kenya, February 8, 2018.

In summary

  • Plan was shelved last year to iron out various challenges that are yet to be resolved

Close to a year after the Government was to start shipping crude oil from the fields of Turkana on a test basis, the Early Oil Pilot Scheme (EOPS) is still in limbo.

The project, that was to start in June 2017, appears to face the same challenges that it did when the Ministry of Energy and Petroleum pulled the plug on the plan (the petroleum function has since been moved and merged with mining).

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Lack of enabling legislation was then cited as the key reason that forced the Government to postpone the project. To date, it remains the key challenge.

Other than taking too long before it was tabled in Parliament in February, the Petroleum Bill is causing friction in the House and was suspended from debate two weeks ago.

Majority Leader Adan Duale argued that the Parliamentary Committee on Energy made too many alterations to the proposed law and also added new clauses at the committee stage. Mr Duale had sponsored the Bill.

The stand-off in Parliament might mean further delay in implementation of the pilot.

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Other factors that hinder the project include the poor road between Kitale and Lokichar as well as the concerns by the Turkana community and the county government.

Analysts fear that the prolonged delay in getting the project going would be costly for the country, with leased equipment attracting daily charges that run into millions, which will be recovered once commercial production starts by 2022.

Such equipment includes the early oil production facility as well as specialised containers and trucks that were to move the oil to Mombasa.

Market feedback

ALSO READ: MPs told to drop caps on oil cash

The EOPS is not expected to make any money but give vital market feedback to the Government and the joint venture partners in the Lokichar basin. 

While the Petroleum Bill was expected to go through Parliament shortly after last year’s elections, other factors have been at play that resulted in debate on the law taking longer than expected.

These include the repeat presidential polls and haggling on the proportion of revenues that communities will get once commercial production starts. The Bill proposes five per cent while various groups including Turkana legislators and professionals are pushing for 10 per cent.

Despite the challenges facing the pilot that appear insurmountable, the Government is optimistic that the pilot will begin in the course of this month.

Petroleum Principal Secretary Andrew Kamau said Tullow Oil will start moving the crude oil to Mombasa this month.

“We expect to start moving the oil this month. We are ready from our end,” he said.

Among the key things on the checklist and which Mr Kamau said are ready include an oil production facility that was put up in February this year in Lokichar, storage facilities at the Kenya Petroleum Refineries Limited (KPRL) as well as trucks and specialised containers that will be used to ferry the crude to Mombasa.

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Also critical is the road between Kitale and Lodwar that has perennially been in a bad state and there are concerns that other than the difficulties of moving on the rough terrain for truckers, it also poses a security risk. Firms contracted to build the road quit due to security concerns.

The PS, however, said the road is good enough and would serve the project in its early days.

“The road is motorable, we used it earlier this year to move tonnes of steel that was used to build the early oil facility,” said Kamau.

Following the installation of the production facility, Tullow Oil has said it is ready to start production and trucking the crude to Mombasa but added it is waiting for a go-ahead from the Government.

The firm in 2015 produced about 60,000 barrels of crude during an extended well testing programme, which is stored at its facilities in Lokichar and will be the first to be shipped to Mombasa by road.

“Oil produced is initially being stored until all necessary consents and approvals are granted for the transfer of crude oil to Mombasa by road,” said Tullow in an update to shareholders two weeks ago.

“Discussions between local and national government are on-going with expectations of being able to commence the trucking of oil in the coming months.”

Masibo Lumala, a senior lecturer at Moi University, cautions that if the delay continues, the country would not have much to show from the oil revenue.

“The cost of the process per day is huge. If Tullow continues to make losses because we are slowing down their processes, we may not get much after the sale of oil. Delay of the process means a higher running cost,” he said.

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Dr Lumala noted that apart from investing in proper infrastructure, the Government should move with speed to have policies and legal structures in place to allow the process move smoothly.

He added that the legal frameworks would also provide a guideline to prevent the country from the oil curse.

“Some countries like Nigeria have had their revenue poorly managed and that has not been easy for them. The civil war in South Sudan has also been fuelled by oil. We do not wish to go that way and that is why we need to be proactive and handle the challenges before they become unbearable,” he said.

“We also need a national dialogue and an agreement so that the people are aware of the process and matters surrounding the resources,” added Lumala.

Sustainability strategist and a senior lecturer at Strathmore University Fred Ogola also said a delay in investment would translate to major losses.

“Most of the equipment they use is leased and some cost as much as $250,000 (Sh25 million) per day. The capital expense spent will be very high if the delay continues. This will lead to major losses and since Tullow has to recoup the billions it has invested, it will pass the costs on to the government,” he said.

“The lack of preparedness means that the taxpayers will not get value for their product,” said Dr Ogola.

He said the storage and inventory costs and the time spent will determine the revenue that the country will get after the sale of oil.

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“Any infringement on duties, obligations and rights would have penalties. If stakeholders are not handled in the right manner, the whole process will hit a snag,” he added.

In the statement to shareholders, Tullow noted that there is strong alignment between the Government of Kenya and the joint venture partners on the proposed development plan, adding that the project is on track for the Final Investment Decision (FID) in 2019.

“Work continues in the field at both Amosing and Ngamia where the planned extended injection and production testing commenced on schedule in the first quarter,” said the company.

Last week, Turkana leaders led by Governor Josphat Nanok vowed that the oil would only be transported after the national government assures the county and community of a combined 30 per cent revenue share without capping.

Revenue share

The Petroleum Bill had proposed a 20 per cent share of revenue to the county government but capped such that the county cannot get oil revenues that are more than its annual budget allocation, with concerns raised as to whether it had capacity to absorb the funds.

Mr Nanok said the county had the capacity to absorb the funds, adding that there was no need of capping or reducing percentage.

“We will have a law to guide us how we will spend the funds meant for the host community and county government through a trust fund. We will first of all ensure that our youth are educated and trained,” he said.

The governor pointed out that the Council of Governors had a memorandum on the Petroleum Bill which they will present to the National Assembly, the Senate and the President.

Last month, Deputy President William Ruto, while acknowledging that he was not a part of Parliament which passes legislation, said he would do his best to ensure that the people get what they were asking for. 

“There is a good sign. When we were voted in we decided that former Senator John Munyes would handle the petroleum docket because he comes from here and he understands the plight of the people,” he said.

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