Oil Exploration in Kenya to Generate Revenue

Stakeholders from Kenya’s oil and gas sector have sounded the alarm on the lopsided attention on proceeds from oil exploration to warn of hidden risks to the fiscal obsession. The cautionary advice comes as both government and its citizenry continue to battle the management of expectations from the impending decision on the full-scale exploration of the country’s crude deposits.

The conversation on the country’s oil and gas sector needs to tilt to beyond just revenues to incorporate the assessment and audit of existing exploration activity.

According to Wanguhu, the country may exhaust revenues from the sale of early oil in the reimbursement of funds consumed during the exploration as the stated figure moves northwards of Ksh.220 billion.“We need to manage our expectations on what the revenues mean. Early oil may actually make no money especially if the prevailing market prices for crude persist. We might lose money as we seem to be already spending more than we are looking for from the sector,” he said.

Wanguhu also warns that a buildup in expectations before a final investment decision by Tullow – the chief exploring firm – is likely to end up in desperation which could afford the entity, the opportunity to reap a better deal from government.Moreover, there exist real risks to environmental preservation in the oil-rich county of Turkana, this as the production of crude is expected to utilize water as a raw material from the moisture-scarce region.

It takes a minimum of 4 barrels of water to produce one barrel of crude oil. Tullow plans on using water from the Turkwel basin.Revenue share from the proceeds of the yet to be exported crude have until now dominated the conversation around oil exploration in the Lokichar Basin in Turkana County, months ahead of the expected appraisal of the project.

The battle to control monies from the project saw the interruption of the transportation of crude to the port of Mombasa under the Early Oil Pilot Scheme (EOPS) barely a month into the launch in late June 2018.

This is as residents took up arms as they demanded a greater share of exploits from the project in an impasse that cost taxpayers over Ksh.400 million.

It was not until the settlement of the tug of war in the distribution of gains from the project where the county government and communities got a share of 20% and 5% of proceeds respectively that exploration activities resumed under the now legislated Petroleum Act.

In addition to the Petroleum Act, the government is already moving through its executive arm to fasten the legislation of the Local Content Bill and the Sovereign Wealth Fund to further strengthen the division of revenue from oil and gas proceeds in the future.

Further to the creation of a regulatory framework to govern the sector, the state is moving to establish new entities to manage operations in the sector under full-scale production.

The obsession of oil revenues by both government and oil-rich communities is equitable to putting the cart before the horse given the pending appraisal of ongoing oil exploration activities and the final investment decision (FID) by Tullow.

As per the Chief Executive Officer to the Kenya Land Alliance Odenda Lumumba, “Expectations come from real life situations. Communities have been given some outrageous promises some of which rest in the purview of government such as the delivery of public goods and not in exploring firms,” he said.

The appraisal of the project is scheduled for June 2019 as the government through its Petroleum Ministry moves to sift through 18 firms who have expressed interest in taking up Kenya’s first batch of crude, aiding in establishing the  commercial value for the near 600 million barrels of oil-reserves.

In the meantime Tullow oil remains on course to make a final investment declaration by the close of the year having initially delayed the FID on two previous occasions in 2016 and 2018.

According to the British based exploration and production company latest investor update in March, the FID awaits the completion of among other aspects the pipeline & upstream front end engineering and the submission of an environmental and social impact assessment.

Meanwhile the construction of an 800 kilometers pipeline between Lokichar and the Lamu port at the estimated cost of Ksh.200 billion is anchored on the project’s final investment decision as is the cross-listing of the National Oil Corporation (NOCK) at the London Stock Exchange (LSE) and the Nairobi Securities Exchange (NSE) respectively.

The government hopes to through the cross-listing raise a total of Ksh.100 billion (USD1 billion) to support the state corporation’s participation in the upstream oil and gas segment.