Kenya to make Sh3b loss from early crude oil exports, warns report

Oil rig drills at the Ngamia-1 block. A report warns of major revenue loss during early oil extraction. (PHOTO: COURTESY)

Kenya is expected to make about Sh3 billion in losses from the early crude oil trade.

A civil society group has raised questions why the Government is aggressively pushing on with a loss making venture at a time when oil prices are at its lowest.

According to the report, Early Oil from Turkana: Marginal Benefits and Unacknowledged Costs, the cost of producing oil under the proposed scheme far outweighs revenues expected to be earned. Under the plan, the Government is looking at transporting 2,000 barrels of oil per day to Mombasa.

There is a consideration to double this volume to 4000 barrels per day once the transportation system has been proven. The initial plan was to use trucks from Turkana to Eldoret, then transfer it to the Rift Valley Railways (RVR), where the oil will be moved by rail to Mombasa.

Plan shelved

This initial plan, however, appears to have been shelved after the Ministry of Energy hinted at change of plan and that the oil may be transported by road all the way to Mombasa, further pushing up the costs.

But according to the Kenya Civil Society Platform on Oil and Gas (KCSPOG), these volumes are too low to make any economic sense at this initial stage of oil resource extraction.

“In the absence of a significant increase in either oil price or export volumes, the Early Oil from Turkana is a money-losing venture,” Mr Charles Wanguhu, the KCSPOG coordinator said when launching the report analysing the costs and benefits of the early oil pilot scheme.

The Government had last week admitted that the country’s venture would be profitable if crude oil prices are above $55 a barrel. Andrew Kamau, Principal Secretary at the State Department of Petroleum said the country will begin small exports of crude for a pilot project next summer, but acknowledged that the State does not expect the venture to generate profits.

Kenya has an estimated 750 million barrels of recoverable reserves in onshore fields but lacks a pipeline to transport its crude from the arid northwest to an export terminal on the east coast. According to the report, road transport will be more expensive and suggest that the Government would rather wait until the pipeline is complete. The Government estimates to spend Sh200 per barrel more on road transportation costs alone than if it was on pipeline.

“Our estimates show that the costs will be much higher,” he said. Some of the costs include Sh220 per barrel on leasing the isotainers, a special containers used in transporting oil. Road transport will also attract Sh1,050 per barrel compared to rail transport, which will cost Sh650 for every barrel moved to the port.

There will also be another Sh225 cost on storage for every barrel. At the end of the scheme, the Government, according to the KCSPOG is looking at transporting about 900,000 barrels of oil. This will see the overall costs stand at Sh6.3 billion. With oil prices at Sh4,600 per barrel, the total revenue will be Sh3.4 billion. This translates to a loss of Sh2.9 billion. Assuming that the country fetches the best prices of Sh5,600 per barrel, which is unlikely, given that the Turkana oil is waxy and will be sold at a discount price, the revenues will increase to Sh4.3 billion.

Political mileage

But even with this revenue, taxpayers will also be staring at a loss of Sh2 billion. “The scheme may also prove a distraction from the long-term benefits of working towards full field development and a pipeline from Lokichar to the coast,” he said.

The civil society group suggests that since the project does not have an economic value, the Government must be pushing it for political mileage despite the risks involved.

“It would appear that matters external to economics are a significant driver behind the push for early oil. In an election year, the official launch of oil could be heralded as a key milestone for the government,” the report notes.

Other risks cited include managing the high expectation of the local community who expect to earn a share of the proceeds despite the venture initially being on a loss. The other risk is election that will happen next year.

“The National Cohesion and Integration Commission identified 19 counties at risk of violence in 2017 and six of these are located on the proposed route of the early oil scheme,” the report notes.
There will also be logistical risks as the route chosen is complex and untested besides the risk of transporting inflammable cargo by road.