Kenya Joins League of African Oil Exporters as Challenges Lurk Within

Nairobi – Kenya, East Africa’s largest economy became the regions first exporter of oil this early August when a consignment of 200,000 barrels were sold to ChemChina, a Chinese firm. But analysts warn the African state will have to wait a little longer to reap benefits from the expected oil proceeds.

“Symbolically, it was an important milestone to mark the start of a new industry. Commercially, I think the benefits are still way off,” says Eric Musau, Executive Director of Research and Operations at Standard Investment Bank, a local firm.

While Gerald Muriuki, a research analyst at Genghis Capital ltd., a local investment firm says it’s too early to celebrate.

“There is still a lot to be achieved before celebrations. For one, the reserves and production is very small for it coalesces around the 80,000-100,000 bpd figures. Second the investors have to recoup their investments which run into billions of Kenya shillings. Third, the contentious issue of revenue sharing between the local government where the oil is located and central government remains a sticking point. And fourth, the cost of transporting the oil, currently by road is bizarre. Also with no local refinery available it will mean the product will need to be shipped for refining, which means an extra cost.”

The Chinese firm, through its London based trading arm, ChemChina UK Ltd coughed out $12 million for the oil consignment and was selected “following a competitive tender process through which an invitation to bid was issued to prospective buyers on 26th July 2019 and to which there was strong response with eight bids received from international firms representing European and Asian refineries,” Kenya’s ministry for Petroleum and Mining said in a statement this Aug 15.

Meaning Kenya’s crude was sold at an average of $60 per barrel, compared to yesterday’s – August 15 – international market prices where Brent crude oil was trading at $58 following a sustained decline, pressured by mounting recession concerns and a surprise boost in US crude inventories.

“Its premium kind categorized as sweet and light, among the best. This is due to its low sulphur content and density. This usually fetches a bit higher prices,” says Muriuki in regards to Kenya’s brand of oil. ChemChina – also referred to as the China National Chemical Corporation – operates in six different sectors, including oil processing, agrochemical production and tire and rubber production.

Information on its website says it has nine refineries with a combined annual crude oil processing capacity of 25 million tonnes. Initially Mr. Kenyatta announced August 2 the oil, found in Turkana, located in North Western Kenya would be stored at East Africa’s only known refinery, the Kenya Petroleum Refineries Ltd (KPRL), a 59-year-old establishment based in the coastal town of Mombasa.

In 2013 the KPRL halted operations after plans for a $1.2 billion upgrade were abandoned on the advice of consultants who judged the refinery to being economically unviable. The government took it over in 2016, converting it into a storage facility.

Mr. Andrew Kamau, Principal Secretary at the petroleum and mining ministry says crude oil deposits discovered in Kenya are insufficient to justify construction of a refinery.

Kenya discovered commercial oil in 2012 in its Lokichar basin within Turkana, which Tullow Oil, a British firm, estimates contains an estimated 560 million barrels in proven and probable reserves. Tullow has said this would translate to around 60,000 to 100,000 barrels per day of gross production.

This has proven to the world that a refinery would make money only when it has a refining capacity of at least 400,000 barrels a day, “and we have 80,000 barrels a day, so where are we going to make money on that? We can import cheaper from India,” says Mr. Kamau.

Besides, Tullow Oil, other partners in the blocks with crude oil discoveries are Africa Oil Corp and Total. Tullow entered Kenya in 2010, after signing agreements with Africa Oil and Centric Energy to gain a 50% operated interest in five onshore licenses.

The East African region Tullow has a track record of discovering significant oil resources. The Group first started exploring in Uganda in 2006, successfully opening the Lake Albert Rift Basin, which has discovered resources of some 1.7 billion barrels of oil.

To date the Kenyan government has signed agreements with oil major Total, Tullow Oil and Africa Oil Corp to develop a 60,000-80,000 barrels per day crude processing facility for oil discovered in Turkana. Tullow and Africa Oil first discovered crude oil in the Lokichar basin in 2012, which Tullow Oil estimates contains roughly 560 million barrels in proven and probable reserves. Tullow has said this would translate from 60,000 to 100,000 barrels per day of gross production.

In addition to the processing facility, a crude oil export pipeline from Lokichar to Lamu on Kenya’s coast is also part of the deal. “The infrastructure installed for the Foundation Stage will be utilized for the development of the remaining oil fields and future oil discoveries in the region, allowing the incremental development of these fields to be completed at a lower unit cost,” Tullow Kenya said in a statement.

Uganda discovered commercial oil in 2006 while Kenya found theirs in 2012. At one point the two countries had agreed to export their oil through one joint-venture pipeline passing from Western Uganda via Turkana to Lamu. However, this plan was dropped in 2015 when Uganda instead decided to build their pipeline to Tanga jointly with the Government of Tanzania.

The 821 km Turkana-Lamu pipeline is planned to pump up to 120,000 barrels per day, while the 1445 km Uganda/Tanzania pipeline is planned to throughput 216,000 barrels per day .Uganda is also simultaneously planning to construct a new 60,000 barrels per day refinery near the oilfields for completion around 2022. Within Kenya, petroleum exploration began in 1954 when British Petroleum (BP) and Shell began exploring hydrocarbons in Lamu, an Archipelago of small Islands situated on the country’s Northern Coast line, near neighbouring Somali, a country that has to date taken Kenya to the International Court of Justice (ICJ) in The Hague beginning 2014 over a maritime dispute involving a contested area said to possess oil deposits.

President Kenyatta announced the breakthrough on his twitter handle with a concise message: “We are now an oil exporter, “expressing confidence that the oil trade would help grow the economy and end poverty.

“So, I think we have started the journey and it is up to us to ensure that those resources are put to the best use to make our country both prosperous and to ensure we eliminate poverty,” said President Kenyatta.

Aware of the protracted disagreements on how the oil proceeds should be distributed, the President has publicly acknowledged the attendant problems that may arise to a nation if the resources are mismanaged.

“The economies of countries that have failed to manage their resources have also suffered the ripple effect of a hungry and poor citizen. It is my hope and prayer that together we shall work so that such is not visited upon us,” he says.

Understandably, opting to embrace anonymity, Mr. Kenyatta has pointed out two unnamed African states that have undergone painful experiences due to mismanaging the mineral, saying Kenya would do everything possible to avoid calamity. “The negative competition for oil and other natural resources has seen hitherto two peaceful countries go to war. It has seen brothers take up arms against each other as mothers bury their children with no hope for the future,” he says.

Within the African continent, Angola and Nigeria have witnessed bloodletting as a consequence of disagreements over how to share the oil spoils. “I pray that we will view the discovery of oil and gas as a blessing that we will manage effectively and efficiently for the benefit of not just the present generation but importantly the future generation.

“I call upon our leaders to ensure peace and stability in the region to ensure any disagreements that might arise are resolved in an amicable and sustainable manner. I stand ready to work with all leaders to ensure that we achieve this,” says the President.

Kenya has entered into a joint partnership with the Tullow oil and Africa Oil Corporation to develop a crude oil refinery in Turkana including constructing of an 821km oil pipeline from Lokichar to Lamu, a development which is expected to turn Kenya into becoming a major oil exporter by 2022. The proposed refinery can processes 60,000 to 80,000 barrels of oil per day, and the partners can now source funds for the construction of the pipeline to ship the crude out of the region.

“The agreement provides a framework and commercial certainty required to move ahead with negotiating upstream and midstream long-form agreements ahead of the Final Investment Decision (FID),” says Mr. John Munyes, the Cabinet Secretary for Petroleum, Kenya.