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Coronavirus puts a damper on Kenya’s oil project as firms notify govt they will fail to meet contractual obligations

By Macharia Kamau | May 17th 2020 at 00:00:00 GMT +0300

Kenya might take longer than expected to start implementing the commercial phase of its oil project owing to the coronavirus outbreak.

This could further push ahead the date when the country exports its first barrels of crude oil produced commercially.

This is after the joint venture firms preparing to start production of oil in Lokichar, Turkana County invoked clauses in their contracts with government noting that they cannot deliver on their end owing to Covid-19, which had been unforeseen, and the subsequent restrictions.

Other factors the firms have cited include the crude oil prices plunge, which complicates the returns for the companies and the government when seeking funds to invest in the project.

Investors are wary of putting money in oil projects when prices are at their lowest in decades.

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In a statement released yesterday, Africa Oil Corp, one of the joint venture partners in Turkana told investors in an update that Tullow Oil had notified the Kenyan government that it might not meet all the contractual obligations owing the impact that the coronavirus has had on the industry.

Africa Oil noted that the restrictions such as travel aimed to control the spread of the disease as well as low oil prices that will make it difficult for players to raise capital are some of the factors contributing to the partners notifying the government that they might not fully meet their obligations.

"Africa Oil announces that Tullow Oil Kenya B.V., the operating partner on Blocks 10BB and 13T in Kenya, has today submitted notices of force majeure to the Kenyan Ministry of Petroleum and Mining on behalf of the joint venture partners in these blocks,” said the Canadian based firm in an update to shareholders.

"These declarations are the result of impact of the Covid-19 pandemic on the operations, including Kenyan government’s restrictions on domestic and international travel, and recent tax changes that adversely impact the project economics."

"These are exacerbated by the recent unprecedented crash in global crude oil prices. Declaration of force majeure allows time for an improvement in the operating environment and for the joint venture partners, to discuss with the government of Kenya the best way forward for this strategic project.”

This adds to the numerous delays that the project has faced, which has seen the players move the date when Kenya will export first cargo of commercially produced oil to 2024. It could now take longer before Kenya starts earning from the oil.

The new development will likely result in the players further push forward the Final Investment Decision (FID), which has been pushed forward severally.

At FID, the joint venture partners are expected to commit resources as well as agree on award of key construction contracts. Only after FID can the partners award contracts for such critical aspects such as pipeline construction.

Tullow had earlier this year said the FID would take place later this year, having pushed it forward from early 2019.

The project was earlier expected to get to first oil – when the first cargoes produced during the commercial phase would be expected – in 2021.

The project, however, experienced delays that resulted in pushing the date for first oil export to 2022 and later to 2023. To achieve first oil in 2023, the players needed to reach FID this year as well as award major contracts, including for the construction of a pipeline to Lamu this year, to see it completed in late 2023 and in time for first exports.

Tullow has in the recent past faced challenges that became more pronounced in December last year when the firm’s chief executive and director of exploration were kicked out. The board accused them of overseeing a series of blunders in the different Tullow’s operations, particularly, mistakes that led to the decline of oil production in Ghana.

The firm would then report a loss for the year to December 2019. Its losses worsened in 2019 and amounted to $1.7 billion (Sh170 billion) from a profit of $85 million (Sh8.5 billion) in 2018.


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