Experts warn Kenya against costly transport of crude oil by trucks
In Kenya's Early Oil Pilot Scheme, Tullow Oil and its partners Africa Oil Corp and Maersk Oil intend to produce 2,000 barrels of oil per day. TEA GRAPHIC |
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The Kenyan government has been urged to consider a pipeline for oil exports to reap maximum benefit from the proposed early production.
Lack of infrastructure, particularly pipelines, has made the deposits a headache for governments and companies that have invested in exploration.
“The Early Oil Pilot Scheme is not a money-making operation, we are simply proving our capacity to export crude oil and preparing the market for full production,” said Petroleum Principal Secretary Andrew Kamau.
The Kenyan government has been urged to consider a pipeline for oil exports to reap maximum benefit from the proposed early production.
According to oil and gas experts, the basic principle that defines the economic viability of crude oil production lies in cost effective and reliable means of transport.
“The most cost effective and reliable means to transport crude oil is by pipeline,” said Charles Wanguhu, Kenya Civil Society Platform on Oil and Gas co-ordinator.
Kenya, Uganda and Tanzania have discovered crude oil deposits and natural gas respectively and are still grappling with lack of the necessary infrastructure to facilitate production.
The discovery of crude oil in Uganda and Kenya in 2006 and 2012 respectively and natural gas in Tanzania in 2010 was seen as the beginning of economic transformation in the region.
Years later, lack of infrastructure, particularly pipelines, has made the deposits a headache for governments and companies that have invested in exploration.
For example, British company Tullow Oil and its joint partners have invested about $4 billion, and discovered about 1.7 billion barrels in Uganda while in Kenya recoverable crude is about 750 million barrels.
To recover the investments, Tullow Oil has been pushing for small-scale commencement of production before the necessary infrastructure, including the proposed pipelines, refinery and storage tank is in place.
An Early Oil Scheme developed by the company in Uganda in 2009 failed to kick off after it become evident that producing 2,000 barrels of oil per day and transporting it by road was too costly.
Uganda abandoned the scheme and is partnering with Tanzania to build a $4 billion pipeline from its oil fields to the port of Tanga.
Despite the failure in Uganda, Tullow is proposing a similar model in Kenya, where it wants to commence production in June next year.
In the Early Oil Pilot Scheme, Tullow Oil and its partners Africa Oil Corp and Maersk Oil intend to produce 2,000 barrels of oil per day.
The oil will be transported to Mombasa by road in what is seen as an important step towards full field development of the oil discoveries in Turkana County.
The government said the scheme is necessary as a precursor to full development and commercialisation of the crude oil business.
“The Early Oil Pilot Scheme is not a money-making operation, we are simply proving our capacity to export crude oil and preparing the market for full production,” said Petroleum Principal Secretary Andrew Kamau.
However, the decision to opt for road transport for the scheme in which 14 “tanktainers” will be transporting 980 barrels of crude for a distance of about 1,090 kilometres has raised concerns about the economic viability of the project.
Coming at a time when crude oil prices at the international market are still depressed at around $50 per barrel, analysts said that Kenya is embarking on a loss-making venture that could cost the taxpayer Ksh4 billion ($40 million).
“In the absence of a significant increase in either oil price or export volumes, the scheme is a money-losing venture.
The volumes are too low to make any economic sense at this initial stage of oil resource extraction,” noted Mr Wanguhu.
He added that the best route for Kenya is the full field development proposal that involves the construction of the 891km crude oil export pipeline from Lokichar to Lamu.
With the pipeline in place, the country will be able to commence production at around 75,000 barrels per day and increase over time to around 150,000 barrels per day.
“This approach is entirely consistent with good oil sector practice and does not require small scale early production,” Mr Wanguhu noted.
More investment needed
If the government opts for the scheme, it must invest $50 million to upgrade the 320km road from Lokichar to Eldoret and $14.5 million to upgrade the storage facilities of the Kenya Petroleum Refinery Ltd.
Upgrading of the facilities is necessary considering the waxy nature of the Kenyan crude, which must be kept heated to remain in liquid form.
Besides the cost implications estimated at $63 million for the two-year period of transporting the crude on heated tankers to maintain the oil at a temperature of 75-80 degrees, safety, health and environmental concerns have been raised.
“The economics of the base case with production of 2,000 barrels per day over two years are not positive,” stated Mr Wanguhu.
The total volume of oil produced and exported will be about 900,000 barrels in two years, which will amount to a loss of $29 million at an estimated crude price of $46 per barrel in the international market.
