Tough challenges lie ahead as Kenya kicks off oil production

Toyota Tsusho oil pipeline
Kenya puts the crude oil recoverable reserves at about 1 billion barrels. PHOTO/FILE
Although oil exploration in Kenya dates back to the 1950s, the last five years have been the most significant with the discovery of crude oil reserves in March 2012 in Lokichar, Turkana, by Tullow Oil.

The British firm in conjunction with African Oil Company has since made other discoveries in the south Lokichar basin and northern Kerio Valley – totalling about 1 billion barrels of viable oil deposits in the area.

The government is quite eager to start exporting the crude oil and has an early pilot scheme in place, where Tullow Oil will produce and store 2,000 barrels per day beginning this month ready for transportation by road from Lokichar to Mombasa as from June.

Kenya is targeting India and China as a market for its crude oil where several buyers have expressed interest based on the oil’s quality. The oil is low on sulfur, which makes it easy and inexpensive to refine.

In August last year, the government approved a decision to revive the Kenya Petroleum Refinery in Mombasa enabling the country to produce petroleum for export and own consumption.

This will be of great benefit since petroleum is Kenya’s single largest import commodity. Saving on foreign currency will increase the country’s reserves consequently strengthening the shilling.

Discovery of oil in Kenya has caught the country off guard. There is shortage of skilled personnel in the sector forcing the government to hire foreigners from Ghana and Nigeria given that they have a lot of experience in oil and gas exploration and production.

Additionally, Kenya lacks the infrastructure to produce and export oil at scale. The Lokichar basin is about 850km from port of Lamu which is the most likely export point.

The lack of a pipeline to ferry the crude oil to Lamu is a major setback and the situation was worsened by Uganda’s decision to cancel a deal on the construction of a cross border pipeline preferring to channel its crude through Tanzania instead.

However, Kenya is not giving up on its bid to be at the top of the pile of oil producing countries and to become East Africa’s energy hub by 2019.

The construction of the pipeline remains on course after the country entered into a joint development agreement with its partners Tullow Oil, Maersk and African Oil Company.

Venturing into production and exportation without a pipeline has, in the meantime, raised eyebrows among industry experts with most wondering whether it economically viable.

The 2,000 barrels will require at least 20 trucks per day to ferry the crude oil to the coast and approximately two months to attain the required capacity to fill one shipping tank.

A 2016 World Bank funded report by Price Water House Coopers urged for a pipeline first approach where the government is required to construct the 865km pipeline and an offshore jetty to pump the oil into ships.

The pipeline would easily channel up to 120,000 barrels per day, which makes more business sense due to economies of scale.

At peak production, oil exportation is expected to earn the government foreign currency to the tune of $9 billion per year which translates to 16 per cent of the GDP.

Such an injection into the economy will help curb the ever rising public debt currently standing at Sh4 trillion.