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Project Oil Kenya delayed despite fresh agreement

The FID timetable has slipped due to environmental and social impact consultation hold ups

The Kenyan government reached agreement with Tullow Oil, Total and Africa Oil on 25 June over a planned development of oil discoveries in the north of the country known as Project Oil Kenya. But Anglo-Irish operator Tullow's announcement on the following day that it was postponing a final investment decision (FID) until 2020 underlines that there is still much to be done.

The partners signed heads of terms (HoT) with the government covering the main key fiscal and commercial principles for the development of discoveries in blocks 10BB and 13T in the South Lokichar Basin, near Lake Turkana.

The agreement provides "a framework and commercial certainty required to move ahead with negotiating the fully termed upstream and midstream long-form agreements" required before FID, Kenya's Ministry of Petroleum posted on Twitter.

The two sides agreed that the Amosing, Ngamia and Twiga fields should be developed as the foundation stage of the development, along with a 60,000-80,000bl/d central processing facility. Tullow had said the development could potentially produce 100,000 bl/d.

The HoT also covered "physical incentives", including the construction of an 800km pipeline from the remote Turkana region to a planned export terminal at Lamu on the northern coast. In 2018, Tullow estimated the cost of developing upstream facilities at $1.8bn and the pipeline at $1.1bn.

Tullow Oil then stated in an operational update on 26 June that "the completion of the Feed studies for both the upstream and midstream… provide increased confidence in the project's capital expenditure estimate and construction timetable."

However, it added "despite this progress, the Partners and the Government of Kenya are reviewing the most likely timeline to FID which Tullow now expects in 2020".

FID delay

The decision to delay FID indicates that the project is not running quite as smoothly as the HoT agreement might suggest. The company cited government setbacks in securing water rights and in its acquisition of land for the upstream and pipeline developments.

It also stated that Kenya's National Environment Management Agency (Nema) had requested additional community consultations as part of environmental and social impact assessments. These will be submitted in the second half of 2019, which was "later than anticipated," according to the firm.

The project had met opposition from communities in the Turkana region over revenue sharing arrangement and possible environmental issues, such as depletion of the area's scarce water resources to supply the oil project.

Early oil scheme exports

The Early Oil Production Scheme (EOPS)—which involves trucking small quantities of oil already extracted in the testing phase of the project 1,000km to Mombasa for export—was disrupted by community protests at its start in August 2018.

Tullow reported better news on the EOPS project, stating that production increased from 600 bl/d to 2,000 bl/d in May. More than 150,000 bl of oil has been delivered to Mombasa, and it expects the first export cargo to be sold and lifted in the third quarter.

Source: Petroleum Economist

The EOPS had been touted as a way of testing the market for Kenya's low-sulphur crude and highlighting problems that need to be ironed out before the main development—but it has also proved to be a useful source of positive news for the government.

Positive news about EOPS is helpful for public opinion as oil exports, following the FID's delay, are now only scheduled to start in 2023 at the earliest—and even this depends on whether the government can deliver on land acquisitions and water rights.

Time is of the essence

The company will be keen to sign off on the project soon, given global oil market volatility and the political challenges facing environmental opposition to fossil fuel projects in Kenya.

In late June, Kenya's National Environmental Tribunal blocked plans to build a 1,050-megawatt coal-fired power station near Lamu, from where the oil exports are due to depart.

The tribunal ruled that Nema had failed to carry out proper environmental impact assessments when it approved the Chinese-backed plant's construction and called for further assessments. Environmental groups have suggested the plant would increase Kenya's carbon emissions sevenfold.

From an environmental perspective it may be easier for the oil project to gain support domestically, given the oil will be consumed abroad.

MPs have questioned, in parliament and elsewhere, the oil project's overall economic and social benefits.


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