Early commercial production of crude oil discovered in Kenya would require massive funding and alter the existing plans for petroleum infrastructure development in East Africa.

The plan would enable exploration companies and the government to earn money for up to four years before a pipeline system — for which the optimal route and funding options are under consideration — is laid.

“Early-commercialisation-early-cash does not preclude construction of a crude oil export pipeline. Money to be earned in initial phase will enable certain tasks to be undertaken,” said oil exploration industry sources.

Tullow Oil Plc which discovered the crude oil, referred all questions pertaining to viability of early commercialisation to Ministry of Energy and its partner Africa Oil Corporation of Canada did not respond to an e-mail enquiry.

Hydrocarbons Management Consultants said the viability of the initial phase would be determined by how Kenya navigates the cost of heating oil using expensive electricity against a backdrop of low oil prices.

“The cost of heating would not exist if South Lokichar’s oil had characteristics similar to the Bonny light crude of Nigeria referred to as sweet as it is not waxy,” said Hyrocarbons lead consultant Rober Shisoka.

Bonny light from Bonny Island attracts a premium as it has low sulphur content. Bonny light yields more high value products like liquefied petroleum gas, petrol, diesel and kerosene when refined. A barrel of Nigeria’s Bonny light in June averaged $62.06.

Mr Shisoka said the South Lokichar basin is a water scarcity zone and the government will need first to establish a reliable source of water for off-the-ground operations. He said these expenses could be overwhelming in view of low production in the initial phase and low crude oil prices.

A reliable supply of cheap electricity will be a key driver of operations both early commercialisation of the South Lokichar basin oil and construction of a crude export pipeline to Kenya’s coastline. 

Fluctuating price

The cost of oil on December 14, declined to $36 a barrel and the persistence of a low price environment has the potential of pushing initial production phase beyond 2016 by making project funding difficulty.

“The price at around $35 is the lowest since 2008. Prices could remain depressed as Iranian crude comes back on the market with the end of United Nations sanctions in early 2016. Kenya will thus compete with other producers,” Mr Shisoka said.

Nigeria and Angola, who are among Africa’s biggest oil producers, are looking for new crude buyers in Asia due to a decrease in imports from the US. China, Japan, India and South Korea are the biggest consumers of oil products in Asia.

Kenya is not the only country in Africa that has found waxy crude oil. South Sudan and Sudan are also producers of waxy crude oil. The two countries produce the Dar Blend and Nile Blend types of crude oil.

North Sea Brent crude, which is the international benchmark, averaged about $61.48 per barrel in June 2015. Dar Blend from South Sudan and Sudan is normally discounted at about $10 a barrel from Brent. Kenya crude is expected to attract prices slightly higher than the Dar Blend because it is light and waxy like the Nile Blend.

Dar blend from South Sudan and Sudan, which is heavier by being more waxy and containing a high sulphur content averaged $58.

Waxy crude oil depending on viscosity (weight) produces lower end items like naptha, heavy fuel oil, industrial oil and bitumen. Modern refineries in Asia convert lower products to high value items on demand.

The low-end products that are converted (industry term — cracked) are naphtha to LPG or petrol, or heavy fuel oil and industrial oil to diesel or dual kerosene (DPK) for splitting to jet A- I for aviation or paraffin for domestic use.