Related Articles
Forward article link
Share PDF with colleagues

Kenya enters the oil business

The East African country exports its first consignment of oil while Tullow prepares for 2020 FID

Tullow signed heads of terms with Kenya’s government in June, having agreed the key commercial principles for the development of discoveries in blocks 10BB and 13T in the South Lokichar Basin, near Lake Turkana. 

“We are looking to sanction the project in the second half of 2020,” says Mark MacFarlane, Tullow’s executive vice president for East Africa. “The contentious issues, if there were any contentious issues, have been agreed.” 

Kenya’s Turkana oil reserves, discovered in 2012, are estimated at 560mn bl. Tullow owns a 50pc stake in the project, while its partners, Canada’s Africa Oil Corp and Total, each hold 25pc. Combined, they have invested $2bn. 

Turkana is in Kenya’s remote, undeveloped interior, with the region’s people mostly engaged in pastoral farming. Oil will be transported from the 433-hectare oil production and processing facility to Lamu port in northern Kenya via an 820km pipeline. 

Part of the project delay is due to Kenya’s National Environment Management Agency ordering further community consultations, as part of environmental and social impact assessments (ESIAs). 

“The best way to minimise the security threat is to get the local communities on board” MacFarlane, Tullow Oil

ESIAs for the pipeline and the upstream facilities will likely be submitted in September and December respectively, says MacFarlane. The environment agency will then decide if further work is needed on them before construction can proceed. 

Building the pipeline and the oil facilities will take approximately 36 months, says MacFarlane, so production will likely start in late 2023 and could eventually reach 100,000bl/d. Tullow’s 2017 full-year results presentation had predicted FID would be taken in 2019, with first oil in in 2021-22. 

Three major building contracts will be awarded—requests for tenders for the upstream and midstream facilities will likely be issued in 2020, while a well construction contract is currently under tender, says MacFarlane. 

Also on Tullow’s to-do list is finalising a water supply agreement to pump water from neighbouring West Pokot County to South Lokichar, which MacFarlane says will likely be concluded over the next six to nine months. Tullow’s June trading statement acknowledged that this was taking longer than originally forecast. 

Tullow estimates the costs of the Kenyan upstream facilities at $1.8bn and the pipeline at $1.1bn. The pipeline will be financed through project financing obtained from lending banks. The upstream facilities will be funded through Tullow and its partners’ equity capital. Tullow plans to sell a 15-20pc stake in the project before FID but will remain the operator. 

Potential disruption

Kenya’s first oil shipment set sail from Mombasa on 26 August. The consignment of 200,000bl of low sulphur crude, produced under an early-oil pilot scheme (EOPS), was sold to Chinese chemicals firm ChemChina UK for KES1.2bn ($10mn). 

That scheme proved controversial, with domestic media reporting in 2018 that activists forced road shipments of crude from Turkana to Lamu to be halted for around two months over fears that local communities would not receive a sufficiently large share of state oil revenues. 

Under a petroleum bill subsequently signed into law in March 2019, the central government will receive 75pc of state oil revenues, local government will get 20pc and the communities living where oil is located will take 5pc. “It is settled,” says MacFarlane when asked if there could be further trouble with Turkana communities over oil revenue distribution. 

Turkana community leaders initially wanted 50pc of Kenya’s oil revenues, plus a monthly stipend for each family affected by oil operations. The revenue sharing agreement between Kenya and the oil companies has not been disclosed publicly at the request of the government. 

“A key issue will be the absorption capacity of the community—to what extent are they ready to efficiently utilise the funds?” says Patricia Vasquez, an extractive industries expert working in East Africa and Latin America. 

“There is a lot of variation in the security environment across the length of the planned pipeline” Rodrigues, Control Risks

Turkana is Kenya’s third-poorest region, official data shows, with more than half the local economy relying on agriculture and per capita income less than one fifth of Nairobi’s. According to a 2013 academic report, around 55pc of Turkana residents live below the poverty line. 

“Turkanas are not afraid of fighting for what they want,” says Vasquez when asked if construction or production disruptions were possible. A key question will be whether the share of the funds going to both state and local governments, rather than allocated to the Turkana communities, is seen to be used efficiently, she says, “to avoid disagreements down the line”. 

Kenya’s parliament is looking to conclude a so-called ‘local content’ bill that will require oil companies to purchase supporting services such as accommodation, foodstuffs, logistical supplies and expertise from local people and companies— with the aim of further reducing the chance of unrest. 

Security fears

“There is a lot of variation in the security environment across the length of the planned pipeline,” says Patricia Rodrigues, east African analyst at risk consultancy Control Risks in Nairobi. “As you move along the pipeline towards the coast, the biggest threats will be from militant groups—the closer you get to the Somali border, the higher the threat will be.” 

There have been “some challenging discussions” between the participating oil companies and Kenya’s government over how the state intends to secure the pipeline, says Rodrigues. “There is acknowledgment that the environment is challenging, but the partners are committed and we assess the project will go ahead. It is just that more preparations need to be put in place from a security perspective before it can start.” 

The pipeline will be buried up to two metres below to the surface. “To excavate that will be quite difficult. The various passive and active surveillance [measures] we have on the pipeline will ensure the pipeline has integrity,” says Tullow’s MacFarlane. “Based on our experience in Turkana, the best way to minimise the security threat is to get the local communities on board.” 

560mn bl Estimated oil reserves Turkana

Over the summer, Kenya’s land commission began a physical survey of the proposed pipeline route. As of early September, the surveyors had walked approximately 510km of the course. “The purpose is to understand exactly where the pipeline will be sited, who has an interest in that land and to determine compensation,” says MacFarlane. 

“For the work that the surveyors are doing, we have the support of the Kenyan police force to give us the necessary security. When we get close to the Somali border, which is still some 30-50km away, we will consider what additional security is required to make sure that people are safe.” 

Land purchase suspension 

In March, a Kenyan court issued a temporary halt on compulsory land purchases to acquire acreage in Turkana needed for oil exploration and production. “Land disputes will most likely always be there—Turkanans are pastoralists that need community land to graze cattle,” says Vasquez. 

“Finding common ground between that traditional way of life and the nascent oil industry has proved to be difficult, particularly when the local population has yet to see the much-awaited revenues from oil.” 

Most of the pipeline will be laid along community land, says MacFarlane. “We don’t know if any compulsory (land) acquisition will be required—we do not expect many kilometres [of the land on which the pipeline will pass] to be owned by individuals, corporations or even counties,” he adds.

 

Also in this section
Investors warn complacent gas industry
11 November 2019
Firms need to step up climate change efforts in new ESG environment
Capital demands African regulatory stability
11 November 2019
Financial fundamentals and sustainability considerations will also be key to attracting the project financing required to develop recent discoveries
KRG keeps registering growth
8 November 2019
Isolated from instability in the south, the pioneers of the north’s independent oil industry are quietly pushing ahead