Kenya has flagged off its first trucks ferrying crude oil under the Early Oil Production Scheme (EOPS), meant to gauge how the market receives the Turkana oil plus develop technical insight. According to Tullow Oil-the firm in charge of exploration- the earliest the country can start oil exportation will be 2021, mainly due to the infrastructure challenge in transporting the oil for export.
Since the early export involves low oil volumes with high production cost, and neither Tullow nor the government will enjoy profits in the Early Oil Production Scheme (EOPS). Here are the insights from the Early Oil from Turkana Marginal Benefits/Unacknowledged Cost report by the Kenya Civil Society Platform on Oil and Gas
Afterwards, the project is set to be expanded to full field exploration where a heated pipeline will have to be built to transport oil to the coastal region of Kenya for export. The pipeline will have a capacity to transport 75,000 barrels per day with a potential to double to 150,000 barrels per day if need be.
Expected production volumes
The base strategy is to produce and export 2,000 barrels per day for two years, a volume that is currently possible with the existing five wells in Blocks 10 BB and 13T of the Lokichar Basin. Tullow also estimates that the production can be brought up to 4,000 barrels per day, but will require five additional wells to be drilled, expanded processing and storage facilities as well as increasing pressure support for the oil reservoirs through injecting water injection capacity.
Transport for the early oil
In the EOPS period, the oil will be transported via heated tankers known as isotainers weighing 10 tonnes and holding up to 70 barrels of oil. Since the oil from the Lokichar Basin is waxy it will require to be heated and maintained at a temperature of 75-80 degrees Celsius in order to be effectively transported.
The entire journey from the Lokichar Basin to the Mombasa refinery will be 996 kilometres long and will involve 30 trucks making the trip daily that will take three days. A production capacity of 2,000 barrels per day will require 175 trucks with isotainers.
The oil will be stored at the Mombasa refinery, which at the moment requires refurbishment of its heating coils. Additionally, the Kipevu oil import terminal will need converting to handle crude oil for export. Although market for the crude oil is at this point not yet established the oil is expected to be transported to a refinery in East Asia.
Contrary to reports by a section of the media estimating early oil exports to start by May this year, the report approximates that infrastructure upgrades and social impact assessments are expected to move that date further off
Project viability
Project cost
According to the report, the early oil production scheme is not economically viable and can only be so if it continues towards full field development (full production). According to government estimates, oil transport costs by road might only be $ 2 higher than by pipeline. Which costs between $12 and $15 per barrel.
Contrary to that, the report estimates transportation by road/rail will eclipse the government estimated price. The costs include the cost of leasing isotainers ($2.20), road transport ($10.50), rail transport ($ 6.50) and port fees ($2.25) totalling at $ 21.45 per barrel.
Fiscal terms
Under an agreement signed in 2007/2008, for the full field oil exploration, Kenya will share profits with Tullow Oil based on the volume of oil produced. Tullow will take a maximum of 60 percent of the proceeds to recover their costs, the remaining 40 percent will be divided between the government and Tullow. Under this arrangement, even if Tullow is not making money, the government is still entitled to its share in the 40 percent ‘profit oil’.
The report suggests that since oil volumes for the Early Oil Production Scheme (EOPS) will be low, a majority of the earnings will go to the government as per the current agreement. However, since the government is the one pressing Tullow to commence the EOPS, and a deal for the terms of engagement is yet to be negotiated, Tullow will likely negotiate a better deal. Thus, the current government revenue projections of the EOPS are likely to be overestimated.
Additionally, under the agreement for the full field exploration (full production over the entire block), the government has an equity stake in the project-20 percent for Block 10 BB and 22.5 percent for Block 13 T. However, such an arrangement doesn’t exist for the EOPS where the government will have zero equity stake.
Economics
The report ascertains that the profitability of oil production in Kenya at the estimated basic production volume of 2,000 barrels a day over two years is non-existent. It is estimated that the total production over the two years will be 900,000 barrels of oil with will cost $ 63 million in capital, operating and transportation cost.
However, going as per the price of Brent crude oil as at September 2016, which $46 per barrel. The total revenue for the project will be $34 million, which is almost half the production cost. Additionally, even going by a high of $56 per barrel, revenue only increases to $43 million, which is still below production costs.
On the other hand, the government will still receive its share of ‘profit oil’, which is 40 percent of the production volume regardless of whether Tullow makes money or not. Under these conditions, expected government revenue will hit $ 9 million, however, the report predicts that these terms are likely to change as the terms are lopsided in favour of the government.
The report estimates that the project will break even if production volumes continue rising to 4,000 barrels a day up to 2021, and the price of oil averages at around $56 per barrel-which is not guaranteed. The report concludes that the benefits of the Early Oil Production Scheme will lose money for both the government and Tullow Oil until a heated oil pipeline is finished. Thus, the issue to consider is non-economic benefits which it says are abstract and do not justify the project to be worthwhile.
