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Kenya's oil: trucking along

With the country's contentious elections out of the way, Tullow hopes that development of its oil reserves will now progress

Tullow Oil has reported "significant progress" on the field-development plan that would lead to oil exports from Kenya's Lake Turkana region. But with a modest early-oil pilot scheme still to start and continuing community relations problems in the region, the project's path may not necessarily be smooth.

In an 11 January operational update, the London-based exploration and production company said some $80m of its $460m total capital expenditure associated with operating activities in 2018 would be allocated to pre-development spending in Kenya. The focus is on developing already-discovered resources in the South Lokichar Basin on the southern side of Lake Turkana in a remote part of northern Kenya.

Tullow said that, following Kenya's recent controversial presidential elections, it had now re-engaged with government representatives on the overall approach and timelines for pushing the development forward. An Environmental and Social Impact Assessment for the overall field development is on track to start in Q1 2018.

The company estimates that South Lokichar, where 14 exploration prospects have been drilled and 11 oil accumulations discovered, holds around 0.75bn barrels of oil, which could be produced viably at around $55 a barrel. A new assessment of discovered resources and plans for development of the South Lokichar basin will be revealed when the company's full-year results are released on 7 February, Tullow said.

A pipeline with a capacity of 80,000-120,000 barrels would take the oil to the sea for export, probably at Lamu, 820km (510 miles) away on the northern part of the coastline. Prior to last year's elections, Tullow had put a price tag of $2.1bn on the pipeline project and said a final investment decision could be taken in 2019, with a view to achieving completion by 2021.

Political obstacles

President Uhuru Kenyatta is back in power following the October polls, which were called after reports of voting irregularities in the August elections. Tullow and its partners Africa Oil and Maersk will be hoping that the government will now prioritise oil development, given its potential importance to the economy.

However, politics still threatens to throw up obstacles. For months, Tullow has been trying to launch an early-oil scheme. This involves transporting 2,000 b/d of oil from test production more than 1,000km by road to the port of Mombasa for export. The scheme has little benefit to Tullow. But the government is promoting it as a way of demonstrating to relatively poor Kenyans in the area—and to the country as a whole—that more lucrative large-scale oil production is on the way.

Thus far, though, no oil cargo has moved because of differences in opinion over how the spoils of oil exports should be shared out. Local activists, unhappy at the revenue allocation for their communities, blocked roads and interfered with production facilities. The government then put the scheme on hold as tensions rose during the election campaign.

Now, efforts are underway again to launch the early-oil scheme. Tullow says initial injectivity testing has started on the Ngamia-11 well and oil production and water injection facilities are ready to enable production to start in Q1 2018. Crude oil will be stored until approvals are granted and work is complete on the transfer of crude to Mombasa.

But the timetable could be under threat again, as the government appears to have rowed back on a concession to local communities on how oil revenues would be split.

In November, draft legislation indicated that the government had yielded to a demand for a 30% share of future oil revenues to be distributed locally. However, Andrew Kamau, principal secretary for petroleum at the Ministry of Energy, told Reuters in mid-January that this wasn't the case. The new bill—due to be introduced to parliament in February—would allocate only 15% of the revenue to the local government and 5% to the community. The remainder would go into the national purse. The government said "typographical errors" were to blame for the withdrawal of the original draft law.

Kumau also said that the government had invited engineering and design bids for pipeline construction. But it remains to be seen how the revised legislation will go down in the Turkana region.

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