Early oil: Valuable lessons or waste of taxpayers’ money?

Kenya will in a few months export another cargo of crude oil from the Turkana oil fields under the Early Oil Pilot Scheme, a move that will be repeated for up to seven times before it comes to a close in March 2021.

Tullow Oil and the Ministry of Petroleum said the pilot project has offered deeper insights into what the community issues are as well as an understanding of the reservoir. The pilot project has also provided an opportunity to get market reactions to Kenya’s crude.

But has it? A local lobby on oil and gas noted that the project does not offer any new knowledge, with much of the information being sought by the Government and Tullow Oil together with its other joint venture partners in the project (Total and Africa Oil) already out in the public.

This includes the community concerns, information on the oil wells that underwent extensive testing in 2015 as well as the quality of the Kenyan oil and the market reaction to it.

The Kenya Civil Society Platform on Oil and Gas (KCSPOG) also noted that despite heavy investment, most of the infrastructure and equipment being used for the pilot would be useless after completion of the project as the commercial entities will use a different route and not the one that the pilot is using.

The lobby also noted that the refurbishment of some of the facilities at KPRL to enable the refinery to host the Turkana crude as well as modification to allow for it to be loaded on to a ship will be of little use after the two-year experiment.

The isotainers – specialised containers – that are being used to transport the waxy oil, according to the lobby, might also not be of much use after completion of the pilot.

“While the Government continues to indicate that the scheme was critical to the full field development, it is still unclear what benefits have accrued... a line often used is that the scheme will provide important technical data, gauge reception of our oil by refineries while providing community benefits including jobs linked to the trucking of oil,” said KCSPOG Coordinator Charles Wanguhu in an analysis of the pilot oil project.

“On the technical data to be gained from the wells, it is noteworthy that the wells used already have undergone extended testing of data that is now claimed to be gained by EOPS. On gauging reception, it is indicative that the buyers were already ascertained before the first ship sailed, again the data on the qualities of our oil was known before EOPS started.”

He said the Lokichar-Mombasa route is not the proposed route for the full field development. “In the full field development, the proposed pipeline is from Lokichar to Lamu... the refurbishments at the refinery shall serve no purpose for the full field development, while the trucks may have limited use for transportation of goods related to the development. Upon completion of EOPS, the trucks will be redundant especially if you add the push to transport all goods by SGR.”

The ministry said the project is so far a success and had enabled Tullow Oil and its partners, as well as the Government, identify certain issues that could have stalled works when they start the implementation of the commercial phase.

These include complaints by the Community that led to about eight weeks of stoppage of work at the oil fields, including transportation of crude oil, which resulted in a shut down of Tullow Oil’s field operations. Work resumed after agreement with the community that entailed setting up of a grievance addressing mechanism.

“We wanted to find out what are the community issues and sure enough, this will probably be the most successful thing that we found out because, within 30 days of starting the project, we experienced a two-month stoppage of works. We were able to address the issues by setting up structures such as the grievance system chaired by the Turkana County Commissioner to address the issues as they crop up,” said Andrew Kamau, the Principal Secretary in the State Department of Petroleum.

“The ministry also hired eight liaison people that will sit with the community and find out what the issues are. Without EOPS, we would have been finding out about these grievances when major production work starts.”

The PS added that the losses would have been bigger had such a disagreement with the community come at a time when the commercial development of the project had already kicked off, and it would have meant larger losses, giving an example of costly equipment used in the full field development phase. It is not uncommon, according to the PS, to have equipment that attracts a daily charge of Sh100 million ($1 million).

“If you are closed for two months with equipment attracting such daily charges, you see the kind of cost that we would have to incur. This would be money that would be recovered from the money earned when the oil is sold and would mean reduced earnings for the country. I would rather take a loss now when we are producing 2,000 barrels a day than at full field development when we will be producing 80,000 barrels a day,” he said. Last year’s stoppage is estimated to have cost Sh400 million in machine and staff downtime.

KCSPOG noted that the players – the joint venture partners and the Government – have always known the issues that the community has always had considering there have previously been major stoppages.

The disagreements have on several occasions seen Tullow’s operations being disrupted, with the first of these being in 2013, another in 2017 and the biggest being last year.

The fall in prices of crude oil in the global markets is also of concern as it would deepen the losses that the pilot project would be making. While it was expected that EOPS would be a loss-making venture, a rise in oil prices over time has meant narrowing the losses. The 200,000 barrel cargo was sold to ChemChina for Sh1.2 billion, which would mean a barrel of oil was sold at an average of Sh6,000 ($60).

The price of oil has gone up from around Sh4,500 per barrel in 2016, when the pilot was initially set to start, to current levels of about Sh6,000 ($60).

At a recent briefing, Tullow Oil said that the project will not be money-making and the little revenues accruing from the sale of the pilot crude oil would be used to recover costs. It, too, added that the pilot has been of enormous benefit.

“We have always stated that this was not to be commercial but absolutely important to be able to test a number of things that will be useful in future development. One of these was to test the subsurface in terms of what the reservoir looks like and what it will take to get the oil to the ground.

What we have done is take advantage of this to do some of the things that would have been required to be done but on a much larger scale,” said Tullow Oil Country Manager Martin Mbogo.

“The benefits of EOPS have been enormous. It has also enabled some opportunities to test logistics that will be used in the full field development and also played a part in helping the enactment of the legislative framework.”

“It is an indication of what the market feels about our crude. It is quite encouraging and it shows that when we have a bigger cargo at full field development at about one million barrels per shipment, we could be at parity with Brent Crude which is where we want to go,” said Kamau.