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Kenya's oil pipeline plans stall amid political tension

A project to build an oil pipeline from reserves in the north of the country to the coast is inching forward - slowly

A landslide victory for the incumbent Uhuru Kenyatta in Kenya's election re-run, held on 26 October, has done little for prospects of political stability in the country. However, a government decision to commission a feasibility study for a $2bn-plus oil pipeline project gives hope for firms planning to start exports from the South Lokichar basin.

The election re-run followed an annulment of an 8 August vote before Kenya's Supreme Court confirmed the result. The court cited concerns over transparency and vote verification. Opposition leader Raila Odinga refused to participate in the re-run, and encouraged his supporters not to vote. So, while Kenyatta won 98% of the vote, the turnout was just 39%the lowest in Kenya's history and well down on the 79% of the August poll.

Odinga said his coalition does not accept the result and has promised protests, but has so far not said he will take measures aimed at overturning the result or calling on Kenyatta to negotiate with him.

If the outcome of the election does signal some sort of return to normality in Kenyan politicswhich is by no means certainthen the path could be open for oil developments to push ahead.

In particular, Tullow Oil and its partners in the South Lokichar basin, including Africa Oil and Maersk (now being taken over by Total), will be hoping that a key pipeline goes ahead.

The 820km pipeline would carry 80,000-120,000 barrels a day from the Lake Turkana region of northern Kenya to the coast near Lamu.

Just prior to the election, Kenya's energy ministry said it had signed an agreement with Tullow and its partners to carry out a feasibility study for the pipeline, which it said would cost $2.1bn and was scheduled to be completed in the first quarter of 2021. Tullow has said it could make a final investment decision on the development in 2019.

No guarantees

However, commissioning a feasibility study is not a guarantee that the pipeline will get built and, with the political atmosphere in Kenya still tense, these timings look tentative.

Tullow has carried out an extensive exploration programme in the South Lokichar basin, in which 14 prospects have been drilled and 11 oil accumulations were discovered.

The company's current reserves estimate for the South Lokichar basin is around 750m barrels of oil.

The pipeline proposal had made little progress in the months prior to the elections, after a plan to feed oil exports from both Kenya and Uganda to Lamu fell through last year. That happened when the Ugandan government decided to run its own pipeline to the coast in Tanzania, citing lower costs.

Tullow, which was instrumental in discovering Uganda's reserves and still has a stake in them, had favoured the Uganda-Kenya pipeline route, but now puts a positive spin on the setback.

Tullow's chief financial officer Les Wood told Petroleum Economist that a Kenya-only pipeline could prove faster to develop than a joint project, once it gets the go-ahead. He suggested that Kenya could emulate Uganda, where lead-developer Total has been able to push ahead rapidly with the pipeline to Tanzania. It looks likely that government agreements will be signed, a symbolic foundation stone will be in place and a final investment decision made on the oil development early next year.

Wood said the election uncertainty had not affected Tullow's preparation for further exploratory drilling, more details of which are expected in the next few weeks.

In the short term the focus will be on a much-delayed "early oil" project. Championed by the government, to take 2,000 b/d of oil from Tullow's existing limited test production more than 1,000km to the coast by road and rail for shipment on to Asian markets.

The government sees this as a way of giving Kenyans in general, and local communities around the oilfields in particular, a tangible sign that larger oil exports and the associated benefitsare on the way. But the Nairobi authorities asked for the scheme to be put on hold, as pre-election tension mounted. Tullow is now preparing to instigate the scheme around the end of this year or early next year, should it get government and parliamentary assent.

For Tullow, there are few direct financial benefits to the early oil scheme. "It's not a revenue generating project, it's really about covering the costs," Wood said, adding that the capital expenditure on the project was relatively small at around $10m. However, the early oil scheme will at least give the company the opportunity to carry out dynamic reservoir testing, enabling it to fine tune larger-scale production later.

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