The country ought to sell its resource by at least $70 to earn a profit
yet global crude prices have slumped to $60, spelling doom to
exploration and production plans. PHOTO| FILE| NATION MEDIA GROUP
Last week, Saudi Arabia and the cartel that controls oil output
globally ruled out checking falling crude prices saying they are ready
to even accept $20 per barrel.
The
Organisation of the Petroleum Exporting Countries (Opec), whose lead
producer is Saudi Arabia, resolved to maintain a production ceiling of
30 million barrels per day, sending the global crude prices tumbling and
worsening a plunge in prices that has already dropped by about 50 per
cent since June.
Saudi Arabia, which
has previously acted to balance demand and supply, seems determined to
retain its market share. This is in the wake of an aggressive production
by US, which has since 2006 increased output by over 40 per cent, but
at a cost which is three or four times more than that of extracting oil
in the Middle East.
By last week,
prices for fuel to be delivered in February touched $55.90 a barrel.
Buyers were paying $100 per barrel earlier this year.
Some
experts say there is little doubt that Opec is seeking to drive new
producers, in particular North American shale ventures, out of business.
“Things
could need one year, two years or three. We don’t know what will happen
in the future. What is certain, however, is that high-efficiency
producers will rule the market,” Saudi oil minister Ali al-Naimi said.
As the big producers fight for survival, Kenya economy is expected to be in the mix of things.
“Kenya
will be a significant beneficiary of lower oil prices in the near term,
given the sizeable contribution of oil to its total imports,” says Ms
Razia Khan, Standard Chartered head of African research.
Of immediate benefit to the country will be cheap pump prices, giving a relief to motorists, farmers and industrialists.
In
the last four monthly reviews of the price of fuel, the Energy
Regulatory Commission (ERC) has cut pump prices of all petroleum
products, attributing it to a drop in global crude prices.
The
regulator says it expects the decline in fuel prices to continue, at
least through the first quarter of 2015 due to the trend in global
prices experienced so far and retirement of most freight contracts that
local oil marketers have relied on to import fuel.
GLARING MISMATCH
Since
the closure of Mombasa-based refinery in September last year, Kenya
imports refined oil products, a reason that the ERC says accounts for
the glaring mismatch between the rate of reduction of crude oil prices
globally and the measly drop in pump prices.
In
an ideal economy, falling pump prices should translate to significant
cut in cost of goods and services such as public transport. This is,
however, unlikely to happen.
“We do
not have an effective competition system in our country. Therefore, the
reduction in the cost of production has not been felt by consumers,”
said Ms Joy Kiiru, economics lecturer at the University of Nairobi.
However farmers preparing for the planting season starting March will reap benefits as diesel prices fall further.
Electricity
consumers have also been benefiting from the cut in prices. Last month,
the fuel cost component of the electricity bills dropped by 28 per cent
to Sh3.47 from Sh4.79 per unit in October. It was highest in August at
Sh7.22.
Although government
attributes the drop to addition of geothermal power to the grid, it is
noteworthy that the decline is happening at a time when global oil
prices are on a downward trend.
“Supply
is lower than demand in Kenya and therefore there is no threat that can
force suppliers to cut prices. The Competition Authority of Kenya has
the task of ensuring that there is an environment that encourages
competition so that the gains in the cost of energy can be passed on to
consumers,” added Ms Kiiru.
The
shilling is also likely to benefit from muted demand for the dollar to
import fuel thus helping it gain some of the ground it has lost,
especially over the past three months which has seen it trade at a low
of Sh90 to the greenback.
“Reduced
fuel prices allow for additional net disposable income therefore
increased consumption, savings and investment expenditure. This in turn
will have a positive impact on aggregate output and demand growth,”
investment bank Dyer and Blair says in its latest market analysis.
The bigger impact will, however, be felt in the new economies being built around oil exploration and production.
The fate of Kenya’s resource remains unclear in light of falling global prices of crude oil.
Experts
are now raising questions over the viability of the local resource,
whose exploitation, they say, may not be profitable at the current crude
oil prices which are now at about $60 per barrel, the lowest in the
last five years.
According to
analysts at Standard Chartered Bank, the current prices of crude are
below the minimum price at which the country can pump its oil and make a
profit.
“It is not yet certain how
much a lower oil price will impact on oil exploration in Kenya.
According to industry estimates, $70 per barrel might be needed for
Kenya’s oil to be viable,” a briefing by the bank released early this
month notes.
Already, falling crude
oil prices have pushed a number of international oil and gas companies,
including those already operating in Kenya, to hint at cutting
exploration budgets.
Analysts caution
that this plan could slow oil exploration in Kenya and consequently
interfere with the timelines set by government to start oil production.
“The
prices are predicted to slide further as Opec’s most influential
members refuse to cut production. It also means that the justification
for oil exploration in Kenya could be impaired,” said Dyer & Blair
in its December analysis of the East African economies.
GLOBAL EXPLORATION
In November, Tullow Oil announced that it would reduce its global exploration and appraisal budget to $300 million by 2015.
The company’s capital expenditure budget for next year is expected to be about $2 billion subject to approval by its board.
Tullow
Oil and its partner, Africa Oil Corporation of Canada, made the first
oil find in Kenya in March 2012 and are responsible for most of the
discoveries that have been made to date.
Swala
Energy, an Australian oil and gas explorer with focus on Nyanza, has
shelved plans to raise Sh378 million citing unfavourable market.
Given
that part of the funds were meant to finance its exploration programme
in Kenya, the plan is likely to impact negatively on its business
locally.
The impact of delayed shift
to production will see Kenya lose Sh67 billion, which according to a
report published by the Institute of Economic Affairs (IEA) at the start
of this month, estimates that this is what Kenya stands to earn every
year from oil exports.
The research
by IEA, which took into account international oil prices of between $60
and $100 per barrel quoted Sh360 billion as the revenue the country
could earn, based on reserve estimates of between 600 million and 2.9
billion barrels.
The government
estimates the amount of crude oil deposits discovered to date to be in
excess of 600 million barrels, which the industry says meets the minimum
threshold for commercial exploitation.
However,
the impact of this resource on the country’s wealth creation plan could
be bigger as some of the big projects in the pipeline could stall.
Already, construction of a refinery and pipeline have been lined up.
Last
month, Kenya, Uganda and Rwanda reached an agreement on the choice of
Toyota Tsusho as the consultant to carry out feasibility study and
initial design for a 1,300-kilometre crude pipeline between Hoima, in
Uganda, and the proposed port at Lamu.
The
multi-billion dollar pipeline is set to be completed by 2017. Another
crude pipeline that seeks to link oilfields in northern Kenya and those
in South Sudan to the proposed Lamu port is also set to be constructed
under the Lamu Port-South Sudan-Ethiopia Transport (Lapsset) project.
There is also a plan by the government to invest in a proposed refinery to be built in Uganda.
As
an equity partner, the government is eyeing dividend from the revenue
generated by the refinery, a project that is being undertaken by Uganda
on the strength of its oil deposits, which have already been proven to
be commercially viable.
“Movements in
international prices of crude oil are temporary. We cannot stop
planning for our projects because of the current trends in crude prices.
Lapsset came even before we discovered oil and the government’s
analysis of the project took into consideration all extraneous
variables,” Mr Hudson Andambi, senior superintending geologist in charge
of petroleum at the ministry of Energy told Smart Company.
Despite
government’s display of confidence, experts say the falling prices will
remain edged on the minds of the planners and financiers as slowed
exploration poses the risk of underutilising the planned infrastructure.
The
crude pipelines’ viability, for example, is anchored on vibrant
exploration which is expected to translate into more discoveries of oil.
Standard
Chartered Bank warns that with the trend in the oil market and its
effect on the upstream oil and gas industry, the government may be
forced to shelve plans to introduce capital gains tax on the sale of oil
assets.
The bank says the proposed
tax, which is expected to take effect from next month, may hinder
development of oil and gas in Kenya since international oil companies
are already faced with the need to cut exploration budgets as they adapt
to declining incomes due to the changes in global market for crude.
Government
estimates it will make at least Sh7 billion from capital gains tax,
which if shelved could hit this year’s budget which has bet big on Sh1.1
trillion in tax revenue.
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