Early Oil a loss making venture, civil society argue

Plans by the government to produce and export oil by June next year will end up being a loss making venture, the  Kenya Civil Society Platform on Oil and Gas (KCSPOG). The argued that the early oil plan benefits are impeded by low oil prices and poor infrastructure that will lead to negative income to the government and Tullow.

Charles Wanguhu, the coordinator of the platform affirmed that using the road network is a viable option when prices are very high and there is good infrastructure to support the venture.

The barrier to the exploitation of Turkana oil continues to be oil export infrastructure. The only viable approach to the full development of the oil fields is a pipeline to the coast, the report says.

The government and Tullow argued that early oil is beneficial because it will be a valuable precursor to full field development, it will help establish commercial, infrastructure and logistical arrangements and it will provide important oil reservoir information. In addition, they say it will establish an international market place for Kenya’s crude oil, test management of community concerns and issues, and stimulate critical infrastructure development in Turkana County.

In a report titled, Early Oil, Turkana Marginal Benefits / Unacknowledged Costs, the civil society group affirm that the massive infrastructure requirement including  exporting oil by road in distance covering more than 800 kilometres will culminate in massive loss of revenue that could be saved by developing the relevant infrastructure such as a pipeline and a mini-refinery.

Last week, Petroleum principal secretary Andrew Kamau had argued that the early oil plans should not been seen as a profit making venture rather an opportunity at proving Kenya’s capacity to export crude oil and preparing the market for full production.

According to Tullow’s plans, the first step of the journey will be by truck, 320km from Lokichar to a transfer depot at Eldoret. Tullow estimates that the round trip will require just over 3 days with around 30 loaded trucks making the journey each day. In Eldoret, they will be transferred by crane onto train wagons, with two isotainers per wagon, and transported to the refinery in Mombasa. Shipping time is expected to be about three days in each direction. The final stage of the process is the transfer of the oil from the isotainers into heated storage tanks at the Mombasa refinery.

The Mombasa refinery has been closed since 2013. But reports suggest that the government has approved the payment of $5 million to buy out its partner ESSAR of India. This would enable government to use the refinery for the storage and export of Turkana crude.

The report says

 the facility, to be managed by the Kenyan Pipeline Company, will require additional investment. While the existing storage tanks have heating coils, they may need refurbishment. The existing Kipevu oil import terminal will need to be converted to handle crude for export.

Major road upgrades will be required including rehabilitation of the road between Eldoret-Kitale and onwards to Lokichar and the replacement of the Kainuk Bridge. Although there are medium term plans for a full upgrade to the A1 road system, initial plans suggest a shortterm fix with the tarred surface from Lokichar to Kitale expected to last only around three years. The road upgrades are estimated to cost around $50 million over a period of 12-18 months.

Crude oil will be held in the heated tanks until a sufficient volume has accumulated – likely around 120 thousand barrels. It is believed that a heated tanker will then transfer it to a refinery in East Asia (i.e. India or Malaysia).

At a media briefing, Charles Wanguhu asserted that the total volume of oil produced and exported will be about 900,000 barrels at a combined capital and operation cost of around $63 million (Sh6.3 billion) in two years.

At $46 per barrel, the revenue will be $34 million (Sh3.4 billion), which is a loss of $29 million (Sh2.9 billion).

The maginitude of the loss could however drop to Sh1.3 billion if the global crude prices rise to $56 per barrel.

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