Oil export is a major milestone for Kenya

Kenya is trying to place itself as the regional hub leading the development of oil in the region. FILE PHOTO | NMG 

By TONY WATIMA
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East Africa’s first oil cargo export has finally left the Port of Mombasa as Kenya seeks to test the reception of its crude oil brand at the international market under the Early Oil Pilot Scheme (EOPS).

This is a big milestone in the development of oil in Kenya because the Early Oil Pilot Scheme is an
experimental research project that wraps up the exploration phase and guides the progression towards the next phase, which is full field development.

Basically, it helps establish key logistical infrastructure that can be shared by communities and the project; provides important technical data about Kenya’s oil reserves; allows Kenya to be marketed and established on world oil market; enables national and county governments to gain technical experience; and also gives stakeholders critical insights into what developing oil in Northern Kenya entails.

But media coverage of the EOPS seem to portray Kenya as preparing for the Commissioning and Full Production phase. Its honestly premature to be talking about Turkana Oil being our leading foreign exchange now. Tullow Oil, the contractor, has set 2024, almost five years away, as the earliest date Kenya can expect to start reaping gains from the Turkana oil. So, the dynamics of Kenya’s foreign exchange earnings may have changed by then. Back to the Early Oil Pilot Scheme, the importance of this project phase is not being emphasised enough.

The cost of developing any resource is driven by the nature of the resource and its location, therefore understanding the needed technical and infrastructural capacity as well as policy reforms to facilitate the fast-tracking of the development of these resources is important. This is where the EOPS comes in - de-risking the project to significantly increase value.

So, a 2015 study by HIS energy found that nearly 75percent of oil fields discovered over the past decade are not producing today and many of them are in Africa. This means extended oil tests of the oil reservoir have to be done, and in Kenya’s case, Tullow confidently finds that the wells can pump 70,000 -100,000 barrels per day.

At that extraction rate uninterrupted, we will exhaust our Turkana oil reserves within 17-23 years. Also, Kenya’s oil demand is estimated to be at 110,000 barrels of crude oil per day. Pumping out 100,000 barrels a day means we will be in a position of self-sufficiency.

Kenya is also trying to place itself as the regional hub leading the development of oil in the region, setting up reliable infrastructure that can be relied upon by neighbouring countries.

The countries targeted in the plan is South Sudan and Ethiopia under the LAPPSET mega-project, and the EOPS provides a capacity assessment needed to make an appraisal of LAPPSET.

Lastly, it is estimated that customs delay, poor roads infrastructure and port congestion increases cost of onshore exploration by over three times.

So, one of the biggest onshore exploration challenges is supply chain cost, the structural link to the international market.

This is a proxy that can help assess the countries structural openness to business and investment and the EOPS provides useful information regarding onshore supply chain cost, apart from just de-risking the project, policy makers should be keen on.

The best example is when barely a month after EOPS was launched, the communities living around the road being used to transport the oil effected a blockade decrying of insecurity from armed banditry.

From an investor point of view, such a fat tail risk attracts extra premium for the financing of the project, thus increasing the cost of the project. Therefore, it calls on government to redirect focus by addressing such community concerns to mitigate such occurrence. So, as the EOPS continues to gather market and production data ahead of large-scale production, we should expect government to also identify controllable supply chain costs affecting the general economy to position Kenya as a competitive destination not just for petroleum production capital only.