How Kenya could be digging itself into the 'oil curse'

The decision by the Government to cancel for the second time the Early Oil Pilot Scheme (EOPS) on Thursday has left in its wake questions on whether Kenya's discovery of crude is turning out to be the curse of black gold.

While Energy Cabinet Secretary Charles Keter put up a brave face blaming the last minute decision to pull the plug on lack of regulatory framework just hours before the massively publicized deadline, underneath were signs of brewing trouble.

Just a day before the postponement on Thursday a letter from Tullow Oil threatening to pull out of the scheme due to insecurity that had been sent to the Government was leaked to The Standard.

But during the press conference on Thursday the British explorers played by the Government’s narrative that the sudden decision to pull out of the early oil plan was as a result of a delay in the passing of the Petroleum and Energy Bill.

“The country is in good shape from an oil and gas perspective and it gives us lessons which is exactly why the early oil scheme was mooted,” said Tullow Oil Kenya Country Managing Director Martin Mbogo.

Below the surface, however, is a simmering wrangle between the State and the County Government of Turkana whose tell-tale signs began in March when President Uhuru Kenyatta publicly clashed with Governor Josephat Nanok.

“Someone can dare stand here and accuse Uhuru of wanting someone’s oil revenue, I rebuke you, you devil,” the President said in Lodwar.

And three weeks ago one company upgrading the road to Lodwar suspended works after three of their employees were attacked. Tullow has also protested that its employees cannot access its oil fields which have been invaded by ‘unknown people.’

Meanwhile, Turkana leadership has vowed no single barrel of oil will leave the fields unless their grievances are settled. “The reason given by the President about the percentage that Turkana (County) Government cannot absorb the funds is a big joke. It is actually a slap on our faces. The Jubilee leadership is not one that has the people’s interest at heart,” vowed County Executive in charge of Pastoral Economy and Fisheries, Lynus Nakiporo.

“The Turkana people want 30 per cent of the oil revenue. That is 10 per cent to the community and 20 per cent to the county government. If President Uhuru Kenyatta does not sign it, all oil operations will be suspended.”

The bone of contention? How to share the expected petro dollars. Turkana leadership has been pushing for a 10 percent of the revenue to go to the community while the government is pushing for 5 percent.

So far Tullow has discovered 750 million barrels of oil. Saturday, a barrel of crude oil was trading at $52 (Sh5,391). This means Kenya has $39 billion (Sh4.043 trillion) worth of oil in its belly. This could soar to $52 billion (Sh5.391 trillion) at the end of the year according to projections which show the crude find will hit a billion barrels.

This means that the 10 percent the Turkana leadership wants to go to the community translates to Sh520 billion or 50 times what the arid country receives per year from the national government.

And with a consensus not forthcoming, the national government has opted to push it through Parliament instead of discussing with the community, a move it insists is in accordance with the law.

“If you see in terms of benefit to Turkana the amount of money which has gone there is a lot of money. The people supplying food and working there are from Turkana and at the end of the day the project benefits them first,” Keter said. “And right it’s a political season anybody can say anything. That is why we are saying to avoid all these issues we rather hold on for another two to three months for the Bill which is before Parliament so that nobody can say the government is arm twisting the local communities.”

While it looks like a small dispute between levels of government, similar scripts have played out across Africa where resource rich countries have struggled to harness their full potential in what is now commonly referred to ‘the curse of Africa’

In Equatorial Guinea, which produces over 300,000 barrels of oil per day, three quarters of its residents are living below the poverty line. At the Niger Delta, chaos, armed gangs and kidnappings targeting oil companies and people who work for them has become the order of the day.

And the Democratic Republic of Congo which could be the world’s most mineral rich country has also witnessed the bloodiest conflict since the Second World War. The guns are yet to fall silent and more than five million people have died so far.

Yet, while Kenya has been racing to become an oil producer in five short years since discovering the black gold in 2012, observers say a lot of tell-tale signs of trouble have been showing up and being swept under the carpet as fast.

Despite the admission by the Ministry of Energy that the Early Oil Pilot Scheme would be a loss making venture and one that would entail a logistical nightmare of moving crude by road from Turkana to Mombasa, the State still pushed on.

The Kenya Civil Society Platform on Oil and Gas (KCSPOG) last year published a report, which said the early oil programme would incur losses of more than Sh4 billion. Among the factors that it had considered then included the low price of oil in the international market, the logistics of moving the cargo over long distance and the low volumes of oil produced during the pilot at 2,000 barrels a day.

“Part of the loss will come in the form of heavy investment needed to develop the infrastructure to transport and store the waxy crude for shipment overseas,” it said in October last year. “The total volume of oil produced and exported will be about 900,000 barrels at a combined capital and operation cost of around $63 million (Sh6.3 billion) in two years. At $46 per barrel, the revenue will be $34 million (Sh3.4 billion), which is a loss of $29 million (Sh2.9 billion).”

But at stake were bragging rights on who among Kenya and Uganda would be the first one to export oil. Uganda discovered oil in 2010 but has never exported a single barrel.

So high are the stakes that there was a brief diplomatic tiff between Kenya and Tanzania that led to the confiscation of passports belonging to Kenyan Energy Ministry officials including Keter at the Tanga Port in March last year.

Yet, despite the determination to evacuate oil from Turkana to Mombasa before Ugandan crude hits the international market, the Government only realised this week that it is important to wait till the Petroleum Bill gets passed by Parliament.

Observers note that there is little truth to this and in fact other factors have been at play that include the politics of the day, the state of security in Turkana and West Pokot as well as the general preparedness among the actors.

Charles Wanguhu coordinator Kenya Civil Society Platform on Oil and Gas (KCSPOG) says while the Bill will be essential in governing oil exploration and production in the country when it becomes an Act, it had little to do with the suspension of the early oil programme.

“The pilot could have proceeded as it was a pilot and not the commercial production, which would be difficult to oversee without a comprehensive legal framework, especially when it came to the issue of revenue sharing,” Wanguhu says. “The Cabinet Secretary needs to be honest. It is very unlikely that the suspension of the pilot program was due to the delayed passing of the Petroleum Bill.”

The Ministry of Energy has downplayed the challenges and saying the pilot would start before end of this year, with expectations that it could happen as early as September. “We will do it before the end of the year and run the programme until the pipeline is done. We are ready, the construction of the road (between Lokichar and Kitale) is ongoing and the joint venture partners have awarded contracts for transportation and other activities,” said Keter.

The Bill, which delves into different aspects of the upstream sector, had been debated and passed by Parliament but the President declined to assent and instead referred it back to the House with a recommendation to reduce the revenues that would be due to the Community once production starts.

MPs from Turkana had managed to convince Parliament to push the community revenue to 10 percent before it was rejected by the President.

However, it is still unclear who will hold the revenue on behalf of the community with some quarters pushing for the national government to have that responsibility. Others want the county to be given the privilege and the third group is pushing for the establishment of a trust fund in what is turning out to be a battle of interests.

Both the Government and Tullow are also still cagey on divulging the financial details of the contracts signed between them raising more questions on the whole process. “The constitution mandates us, it is not a secret they (contracts) are not classified. When the time comes we will say what is in there not only for Tullow but all the exploration companies in Kenya,” says Keter.

KCSPOG says it would be a miscalculation launching the project at an election year. “The pilot scheme should be stopped now that the Ministry of Energy has seen the risks associated with it, especially the political and security risks, and the fact that it will not give much information that is not already known,” says Wanguhu.

“Instead the Ministry and the joint venture partners should focus on full field development,” he says. In its operational update released on Thursday, Tullow stayed clear of all the controversies facing the oil exploration process and instead dwelled on the developments it has made.

“In parallel to the upstream development work, the Joint Venture Partners and the Government of Kenya continue to progress commercial and finance studies for the proposed export pipeline, and preparations are under way for the Environmental and Social Impact Assessment (ESIA),” it said.