Halted Kenya's early oil plan could cost taxpayers dearly

Saturday July 01 2017

Kenya has suspended its early oil pilot scheme until Parliament passes the Petroleum Bill sometime in September. PHOTO | FILE


Kenya’s efforts to become the first East Africa nation to export crude oil have been halted by a series of setbacks to the country’s early oil pilot scheme (EOPS).

The government described the scheme as a key strategic project under the Vision 2030 blueprint, but it has now shelved it due to reasons ranging from security concerns due to bandit attacks to safety risks because of poor infrastructure, poor planning and lack of regulatory backing.

Energy Cabinet Secretary Charles Keter said the government would wait for the enactment of the controversial Petroleum (Exploration, Development and Production) Bill.

The Bill has been before parliament since September 2016, after President Uhuru Kenyatta refused to assent to it citing the contentious issue of revenue sharing between the national government, the county government, Tullow Oil and its joint venture partners, and the local community.

“The Kenya government has deferred the commissioning of the EOPS to allow for the next parliament to address matters raised in the presidential memorandum on the Petroleum Bill, 2015,” said Mr Keter.

He added that the scheme has only been temporarily halted and should resume in September when the next parliament passes the Bill. However, the reality is that the earliest the scheme can be in place is next year. The Petroleum Bill must await the formation of a new parliament after the August general election, and the constituting of the Energy Committee, and then go through the legislative process.


Huge losses

The EastAfrican has learnt that the scheme will expose Kenyan taxpayers to huge losses from the high investments that Tullow Oil and its partners have pumped in.

In January, Tullow announced plans to invest $213.5 million this year, of which $100 million would be spent on preparing the oilfields to start production and exporting of crude oil.

The government could face compensation claims due to breach of contracts with companies that were contracted to transport the crude oil from Lokichar to Mombasa. Last month, three companies — Oilfield Movers, Multiple Hauliers and Primefuels Kenya — were contracted to transport the crude. The companies already had trucks and tanktainers in Lokichar waiting to start transporting the crude for storage at the Kenya Petroleum Refinery Ltd facilities in Mombasa.

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“Taxpayers are going to pay dearly for the aborted EOPS. It was irresponsible of the government to sign binding contracts when it knew the scheme was ill-advised from the start,” Charles Wahungu, Kenya Civil Society Platform on Oil and Gas (KCSPOG) co-ordinator told The EastAfrican.

KCSPOG has been among stakeholders opposed to the scheme, which it termed a money-losing venture because it was being implemented when the price of crude oil in the international market was at a low of $55 per barrel.

READ: Controversy clouds Kenya early oil transportation plan

Tullow Oil said it still needs to determine the number of barrels it can produce from the oilfields in Turkana — a change of strategy as the initial plan for the EOPS was to export crude from the appraisal wells.

Though the firm had 60,000 barrels ready to be transported to Mombasa, the company said it needed to ascertain whether it would be possible to produce the 2,000 barrels per day to make the EOPS viable in Phase I, before increasing production to 4,000 barrels a day in Phase II.

Tullow Oil was planning to undertake an extended water-flooding pilot test in Ngamia oilfields to ascertain the level of crude oil for full scale production come 2022.

In the petroleum parlance, water-flooding is the use of water injection to increase the production from oil reservoirs. Its main aim is to determine how efficiently water is pushing oil to the production well in order to increase output rate and, ultimately, oil recovery.

“Results from the Ngamia water-flood pilot will assess sustainable production levels to inform the overall resource and full field development plan,” said the firm in its 2017 half-year trading statement and operational update.

Revenue sharing

More critically, the Bill must address the demands of all the interested parties considering the contentions in the original draft law that led to the suspension of the EOPS.

The Bill that President Uhuru refused to sign into law had stipulated that the local community gets 5 per cent of the revenue share, while the county government was to receive 20 per cent with the national government retain 70 per cent.

In his memorandum, the President wanted Parliament to reduced allocation to the county government to 10 per cent.

The contention over revenue sharing has been at the centre of security fears that have hit the EOPS. In the past few weeks a number of banditry attacks have been reported in Turkana, something that has been attributed to the local community uprising against the scheme.

Through the scheme, Kenya was hoping to join the rank of oil producing nations by transporting crude from Lokichar to Mombasa by road for storage and exporting after the volumes hit 250,000 barrels. Currently the country has about one billion barrels of recoverable crude.

The country was planning to use the EOPS as a valuable precursor to full field development by using it to establish commercial, infrastructure and logistical needs and establish an international market place for its crude.