Why Kenya’s 2022 crude oil Export plan hit the rock


Had everything gone according to plan, Kenya would be set to begin its commercial export of crude oil on a large scale next year, after success in export of a consignment in 2019, which was obtained from the pilot phase of the project.

Instead, yesterday, the firm announced that it is now shifting attention and over 90 per cent of its resources to West Africa, with Tullow Chief Executive Rahul Dhir saying the company will be channeling resources to projects it considers to be productive in a move to cut costs.

“After a year of significant change for Tullow, we are now executing a robust, cash generative business plan which is focused on our most productive assets,” said Mr Dhir.

Tullow Oil also once again watered down the value of its stake in the Kenyan oil project by Sh46.8 billion on low global oil prices, casting doubt over the project’s future.

The company has also reduced capital injections in Kenya, and has allocated Sh548 million for the project this year compared to Sh4.4 billion last year and Sh7.6 billion in 2018.

The Africa-focused oil explorer said that it is buying time to see if its efforts to drill oil in Kenya would still be worthwhile at low global oil prices as it assesses options on whether it will have to discard the project entirely.
Tullow has already disposed of its assets in Uganda to Total for Sh62 billion ($575 million), leaving Kenya as the only country the firm has an interest in outside of West Africa.

Tullow owns a 50 per cent stake in two blocks in the oil-rich South Lokichar basin, blocks 10BB and 13T, while French oil firm Total and Canadian-based Africa Oil equally hold the remaining stake.

Tullow and Total were reported to be looking for suitors to buy half of their stakes in the project early last year but failed to find a suitor.

The licences for the joint venture partners was extended by the government until December of this year.
Economist Churchill Ogutu says that when the valuation of an asset drops, firms owning the asset take their time to decide on what to do with the asset, but that the companies would be reluctant to dispose of the asset on the lower prices and instead wait for the value to level up.

“If they (Tullow) were to sell their stake in the project now, it would mean they would do so at lower prices due to the lower valuation. This means that if they want to bail out and fetch a good price for their assets, they might wait until oil prices recover to do so,” Mr Ogutu said.

Kenya had identified the South Lokichar basin as the anchor of the onshore oil drilling project, a region Tullow estimates to contain 560 million barrels in oil reserves with a capacity to produce up to 100,000 barrels per day.

The government aimed to use the Early Oil Pilot Scheme (EOPS) to collect technical data that would be used to formulate a Field Development Plan (FDP) and also debut Kenya’s oil to the international market.

The firms also aimed to get funding to build a crude oil processing facility in the area to process the find, build a Sh120 billion pipeline from Lokichar to Lamu and also acquire land and water access rights before they commit to the project.

Tullow, which is facing liquidity issues even as it records year-on-year losses and mounting debt, termed the pilot scheme a “success” at its end last year despite continually missing targets to make a final investment decision on the project which would secure the project’s future.

Tullow has placed blame over delay in committing to the project on government’s delay in gazetting land for the project, slow progress in giving it access to waters from Turkwell Dam and river and delays by the National Environment Management Agency (Nema) to approve the project’s Environmental and Social Impact Assessment (ESIA) report.

“Tullow and its joint venture partners expect to complete a revised assessment of the project by the second quarter of 2021.

In parallel, the joint venture partners are also working closely with the government of Kenya on securing approval of the Environmental and Social Impact Assessments and finalising the commercial framework for the project,” Tullow said in its results statement on Wednesday.

Tullow stopped trucking oil from Turkana to Mombasa in November 2019 citing damage of roads in the area by rain, but the process has not resumed since.

But the government is still optimistic on the project and plans to sell 1.2 million barrels of oil and drill 75 oil wells in Lokichar by 2023.

Treasury has allocated Sh270 million for oil exploration and distribution this year, while Sh253 million was given for the same last year.

Meanwhile, Sh200 million was used in 2019-2020 for preparatory works on the proposed Lokichar-Lamu crude oil pipeline, while Sh400 million was also allocated for the project this year.

Tullow sought compensation of Sh204 billion from the Ministry of Petroleum last year for exploration costs incurred on the project.

Kenya has gazetted 63 oil blocks with almost half already floated to foreign multinationals while 35 remain up for grabs while the licensees have already dug up 94 oil wells.

Petroleum Cabinet Secretary Munyes and his Principal Secretary Andrew Kamau could not be reached for comment to discuss the merits of the project.

Source: Nation

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