Hard part begins for State and Tullow after discovery of oil

By Njiraini Muchira

A day after Kenya discovered oil, the reality has started to unravel that striking the black gold comes with great challenges.

Just like in neighbouring Uganda, which discovered oil seven years ago but is yet to taste the benefits of the resource due to various factors that include government disagreements with Tullow Oil Plc, the company that made the discovery here, Kenya risks facing similar challenges unless the Government handles the issue differently.

As the excitement of the discovery announced on Monday by President Kibaki cools down, Kenyans are now asking themselves hard questions on what the future portends with the common denominator being whether oil will be a blessing or a curse for the country.

Indeed, several questions are cropping up. These include who owns the oil, how will the revenues be shared, corruption factor, who will benefit, how to contain foreign interests particularly Chinese, US and British, how to deal with regional rivalry, where will the money for infrastructures like pipelines and refineries come from to tackling insecurity in Turkana and the wider North Eastern Province.

Bumpy road

According to petroleum industry experts, although the discovery has the potential to transform Kenya’s economy significantly, achieving this feat will require delicate balancing act anchored on carefully thought policies. "Oil often attracts problems and war. Kenya must develop watertight policies to make sure the resource is beneficial to the country," said Andrew Omolo, an oil industry expert.

The discovery by Tullow is the first major step in a bumpy road. This is because the company needs to complete drilling the Ngamia-1 exploration well to a total depth of 2,700 meters then carryout tests to ascertain the quality and quantity, something that will answer the question of whether the oil is of commercial viability.

Extreme heating

Initial tests indicate the oil has an API greater than 30 degrees and that its waxy like the oil in Uganda and South Sudan, meaning that transporting and refining the commodity will not be a big challenge because it will not require extreme heating. API gravity is a measure of how heavy or light petroleum liquid is compared to water.

With the quality established, the country will also need to know the quantity and Tullow Oil estimates the deposits could be bigger than the two million barrels discovered in Uganda. "We have no idea how many barrels are there but our hopes and wishes is two million barrels," said Tullow Oil Vice-President for Africa Business Tim O’hanlon.

It’s after establishing the quantities that the headaches for Kenya will start to emerge. Though so far Kenya has signed a revenue sharing agreement with Tullow Oil as part of the deal to ensure the company recoups its investments, the tendencies for international companies to short charge African governments have been real.

In Uganda, Tullow discovered oil only to get into conflict with the government when it decided to sell its assets to Total SA and China National Offshore Oil Corp at a cost of $2.9 billion. The company wanted to evade even the $472 million it was supposed to pay to the Ugandan government in capital gain tax.

Being the company that discovered oil in Kenya, Tullow is going to wield enormous powers on how Kenya decides to handle the resource particularly if it opts to extract the commodity instead of bringing in new partners by selling a stake in the operation like it did in Uganda. Speaking on Monday, Energy minister Kiraitu Murungi made reference to the fact that Tullow will wield significant influence.

"International companies are major risk takers. Justice will be done to the company that discovered the oil," said the Minister. Then there will be the issue of infrastructure. For Kenya to benefit from the oil, the country must commit billions of shillings in oil pipelines and refineries.

Eases burden

The fact that the country has one refinery in Mombasa and a pipeline network running from Mombasa to Eldoret and is also in the process of building a second refinery in Lamu and a pipeline to South Sudan eases the burden.

"We will need to have logistics in place to enable transportation and refining of oil and these will cost a lot of money," said Energy Regulatory Commission Director General Kaburu Mwirichia.