Kenya may have to impose a high tariff to transport crude on the South Lokichar-Lamu pipeline to ensure the country recoups its investment.
This is coming to light as it emerges that Kenya’s crude reserves are estimated at only 500 million barrels, with only about 400 million barrels considered recoverable, even as the government awaits the conclusion of the Front End Engineering Design (FEED) study. This realisation now hangs like a dark cloud over the $2 billion project.
British firm Wood Group Plc was awarded the FEED contract in April and is expected to deliver its report in the first quarter of 2019 according to Tullow Oil’s latest trading statement.
“Tullow, its joint venture partners and the government of Kenya remain focused on targeting a final investment decision in late 2019 and first oil in 2022,” said the statement.
It added that a decision has been taken to include the Twiga field where more crude has been discovered to add onto the Ngamia and Amosing fields found in the foundation stage development.
Notably, Tullow, which discovered crude in Kenya has chosen to use industry jargons on its public disclosures of the actual recoverable crude at the South Lokichar basin in Northern Kenya.
The firm put the recoverable resources from a minimum of 240 million barrels of oil (mmbo), an average of 560 mmbo to a maximum of 1.2 mmbo from an overall discovered deposits of up to four billion barrels.
Based on these estimates, the firm is stating the recoverable crude from the discovered deposits stands at only 560 mmbo.
This, in effect, means that at a throughput of 100,000 barrels per day, the pipeline will operate at full capacity for 10 years during a time in which the government is expected to earn as much as $1 billion in corporate tax.
Oil experts reckon that unless Tullow discovers more crude in Blocks 10 BB and 13T, the pipeline will not be profitable unless the government imposes a relatively high tariff.
A tariff is normally imposed to cover the costs of constructing and operating the pipeline, raising the necessary financing, paying any required taxes and generating a reasonable rate of return for investment.
“Profitability of the pipeline is dependent on throughput,” said a report by the Kenya Civil Society Platform on Oil & Gas.
It added that based on conservative estimates of 100,000 barrels per day throughput and operating costs of $56.7 million annually, the government will be forced to impose a minimum required tariff of $12.50 per barrel for the facility to be profitable.
“Significant reduction in the pipeline tariff could come from a reduction in capital costs, a reduction in the costs of financing and investment incentives like tax holiday,” states the report, adding that this is highly unlikely.
According to the report, the forecast high tariff was a decisive factor in the decision by Uganda to opt for the Tanzanian route.
“Uganda recognises that significant upstream revenues are at risk as the pipeline tariff increases,” it notes.
A pre-FEED study on the Uganda-Tanzania pipeline puts the capital costs at $3.5 billion with operating costs at $88 million per year.
Being a considerably longer pipeline at 1,445km with a substantially higher throughput of 200,000 barrels per day, the two countries have entered into a commitment to set the tariff at $12.20 per barrel for the 24-inch pipe.