Why there’s not much to smile about Kenya’s Sh1.2b oil windfall

The discovery of crude oil in Turkana in 2012 was seen as the next big thing in Kenya’s ambition to becoming a middle-income country.

It came as a blessing that embodied the hopes of all Kenyans as the country joined the league of oil-producing nations.

So much so that the National Treasury has come up with a Sovereign Wealth Fund whose monies shall come from the Central Bank reserves. It had been proposed that the reserves would come from trade surpluses and revenue generated from exploiting natural resources.

Top on the list of natural resources was the crude oil. “With the discovery of mineral and petroleum deposits in Kenya, coupled with the enhanced exploration efforts by the government, it is expected that the national government is going to get additional revenue from the exploitation of these resources,” said Treasury in the draft regulations on the fund.

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Thus, any trifling development in the budding sector has been widely publicised. Curiously, this was not the case in August this year when some decent petrodollars hit the country’s coffers.

Although it would have offered a much-needed flicker of hope at a time when the country is enveloped by a cloud of economic gloom, the government chose to let the chance pass by.

The money sneaked into the country without the attendant pomp and fanfare. Under the Early Oil Pilot Scheme (EOPS), Kenya earned its first billion shillings wealth from its oil findings in August, a major milestone given that Uganda which discovered oil deposits 2004 before Kenya is yet to ship out even a drop of its black gold.

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Regardless of the mute celebrations, Treasury still went ahead to factor the Sh1 billion earnings in its export earning bill but gave no details on this newfound cash windfall. The last time the country celebrated its oil finding was when it was transporting it from Turkana oil wells to an oil terminal in Kipevu, Mombasa County and during its export.

But Kenya is not celebrating. The partners in Project Oil Kenya continue to grapple with the challenges of moving forward to commercial production and have dogged by delays.

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With the increased cost of exploration and logistics, the Sh1.2 billion could be just a myth. The country might as well have paid more than it earned to get the oil into the global market.

Tullow Oil estimates that together with its partners, it had invested over Sh200 billion ($2 billion) in Kenya in the search for crude oil. However, Kenya might have come too late to the oil party.

Petroleum Principal Secretary Andrew Kamau said about Sh200 billion has been spent on exploration alone, which means the country still has a long to go before it can recoup it investment and leave a surplus for the government. While Kamau was cagey about how much has been spent on EOPS, previous estimates have put it at $70 (Sh7,000) per barrel.

This translates to Sh1.68 billion in producing the 240,000 barrels which earned the country Sh1.2 billion. This means that the project is in the loss-making zone, and there are no winners when it comes to sharing of the proceeds.

The revenue from oil would be shared on the basis of 75 per cent for the national government, county government (20 per cent) and the local community (five percent).

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And with a barrel of crude oil going at a sumptuous Sh112,000 in 2012 when the country made its findings, it means the country could have raked in almost double what it received two months ago.

The highest deal was in 2008 when a barrel of oil averaged Sh14,000 ($140). Although oil consumption is projected to grow in the coming decades, due to rising petrochemicals, trucking and aviation demand, the share of renewables is going to take a big share of the energy mix rising to 40 per cent by 2040 from the current 25 per cent.

This is according to the International Energy Agency, a Paris-based intergovernmental organisation that provides policy advice to 28 member countries on energy. The crude oil Kenya exported in August on a pilot basis has substantially pushed up the volumes of petroleum products that the country exports. The country exported 240,000 barrels of oil in August under the Early Oil Pilot Scheme which had been purchased by China National Chemical Corporation (ChemChina) at Sh1.2 billion ($12 million).

This saw Kenya join the league of oil-exporting countries, an achievement that was celebrated by President Uhuru Kenyatta.

The aggressive campaign for people to move away from fossil fuels, including oil and carbon, has however seen number businesses and households opt for renewable energy, from electric cars to green homes.

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For Kenya, just as Ghana, the oil discovery and the financial windfall it promised appeared to usher in an era of economic imprudence. According to the International Monetary Fund (IMF), the discovery of oil which was supposed to catapult Ghana into a middle-income country instead brought about heavy borrowing, profligate spending, and exposure of the economy to the oil price crash of 2014. Could Kenya also have fallen victim to “presource curse”?

The one-off Sh1.2 billion transaction in August had the impact of pushing up the value of petroleum exports to Sh1.76 billion in August, compared to the monthly average of Sh250 million between January and July this year, according to data by the Kenya National Bureau of Statistics (KNBS).

Kenya re-exports refined petroleum products to her neighbouring countries, with Uganda accounting for the bulk of the cargo. Other countries such as Rwanda and the Democratic Republic of Congo are also taking substantial amounts.

The partners at the Lokichar oil blocks expect to sell another 500,000 barrels in February next year. They will invite bids for the next cargo next month. Tullow, the operator of the blocks, said it has continued with the production and trucking to Mombasa of 2,000 barrels of oil per day.

According to the KNBS numbers, the revenues are at nearly at par with those of coffee which earned Sh1.4 billion in August.

However, the commencement of commercial production of oil promises to increase this substantially and could surpass other key exports such as tea and tourism.

The money, however, did not have a major impact in terms of increasing export earnings, with other sectors suffering harsh economic times has resulted in seesaw in earnings.

While both Government and the joint venture partners – the other firms in the partnership (Total and Africa Oil) – bask in the success of the first leg of EOPS, major hurdles still lie ahead.

Unlocking the value of the about 500 million barrels of oil in the underbelly of Turkana County lies in the commercial production that is expected to result in first exports and the usher the flow of petrodollars.

There have however been delays in setting the stage for the commencement of the implementation of the commercial phase, including pushing the all-important Final Investment Decision to between July and December next year.

The signing of the FID was at first set for this year. Earlier this year, Tullow said it expected that the Final Investment Decision would be made in 2020, a somewhat vague date but in a statement this week said it would be in the second half of next year. Land acquisition, access to water that will be used for drilling activities and delayed go-ahead from the environmental watchdog have partly been to blame for the delay.

The National Environment Management Authority (NEMA) in May declined to issue an environmental impact assessment licence to Tullow Oil for failure to comprehensively consult the Turkana community.

This may have stalled progress as the firm went back to the community for further consultations.

Tullow has since submitted the Environmental and Social Impact Assessment (ESIA) for the pipeline and expects approvals early next year.

 It is however yet to submit ESIA for works relating to the upstream work it will undertake in Lokichar, which it said would be submitted to NEMA by end of this year.

Such impact assessments establish how a community and even the environment would be affected by a project and recommends measures to cushion them from adverse effects. “The FID for Project Oil Kenya continues to be targeted in the second half of 2020,” said Tullow. Reaching the FID mid-2020 and the different works taking anything up to 36 months might mean that the earliest that Kenya can export oil on a commercial basis will in mid-2023.

“The midstream ESIA has been submitted to NEMA with approval expected in the first quarter of 2020. Consultations for the upstream ESIA are ongoing, ahead of the ESIA being shared with NEMA before the end of the year.”

Through the National Land Commission, the Government set out to acquire a total of 6,348 hectares (15,600 acres) of land held by the community and individuals in the Lokichar region as well as along the pipeline route that traverses six counties.

Tullow has said that it is also nearing completion of getting access to water that it will use in its operations at Lokichar.

“The Government of Kenya continues to provide strong support on land acquisition, and the National Lands Commission has now completed over 75 per cent of the midstream land surveys and valuations. This work is now complete in four out of six counties affected. A draft framework agreement for use of water from the Turkwel Dam has been prepared and is currently being negotiated,” said the firm.

The companies are also set to start discussions on how to finance the about 900-kilometre pipeline between Lokichar and Lamu Port that will be used in transporting crude oil for commercial exports.

Tullow said there are already discussions with prospective lenders. Other than the push and pull that Tullow has had with Government agencies, its partner Africa Oil appears to be experiencing difficulties.

In its results for the nine months to September published Wednesday, the firm might not be in a position to put in the amount that will be required in the next phase of the Project Oil Kenya and said it could consider selling its stake.

 The Canadian headquartered firm has a 25 per cent in the Lokichar oil blocks. “The Company’s current working capital position may not provide it with sufficient capital resources to complete development activities being considered in the South Lokichar Basin (Kenya),” said the firm, which spent Sh2.8 billion on the blocks over the period to September.

“To finance its future acquisition, exploration, development and operating costs, AOC (Africa Oil Corporation) may require financing from external sources, including issuance of new shares, issuance of debt or executing working interest far mount or disposition arrangements.” It noted: “There can be no assurance that such financing will be available to the Company or, if available, that it will be offered on terms acceptable to AOC.”

Kenya too has the challenge of having just the Lokichar fields as the only place where large quantities of oil have been found.

This is despite the numerous areas that have been set apart as having the potential for oil and gas, and even having companies assigned blocks in these areas.

Experts note that the country needs to intensify oil exploration in the country to ensure that the revenues can flow for more than the 20 years that the Lokichar reserves might last.

“Despite the successful commissioning of the maiden oil tanker and becoming an oil-producing country, Kenya needs to focus further on exploration to ramp up the volume of recoverable reserves. Our proven reserves are roughly 600 million barrels with projected production estimated to be 100,000 barrel per day at full capacity, which would mean Kenya’s reserves will be depleted in 20 years,” said Danie Muasya, resident country representative and upstream manager at Shell International Exploration and Production in Kenya in an analysis for the Petroleum Institute of East Africa.

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