Going gets tough for local firms as Tullow Oil contracts dry up

Gari Thompson (Left) vice president of East and Southern Africa for Tullow oil and Energy Cabinet Secretary Charles Keter (Right) signing agreements

Kenyan firms that had started reaping from oil discoveries made in Turkana suffered a major blow last year following a huge decline in revenues.

This is after oil exploration took a hit following a dip in the global prices of oil and a subsequent reduction in investments by firms prospecting for oil.

Companies contracted by Tullow Oil, which is by far the most successful oil explorer in Kenya and the region, saw revenues go down by a massive 62 per cent last year as the firm cut its exploration budget for the second year in a row.

The British firm spent $28 million (Sh2.8 billion) in hiring Kenyan contractors in 2016, which is in comparison to $75 million (Sh7.5 billion) in 2015. In 2014, the firm paid out $81.5 million (Sh8.2 billion).

Oil prices started declining in mid-2014, hitting a low of $29 per barrel in January last year. This in turn led to many exploration and production companies cutting their budgets, with fears that a fall in oil prices might hurt their returns. Kenyan firms supply different goods and services to Tullow Oil, ranging from food, transport and security, mostly at its operations in Lokichar, Turkana County.

Tullow said it had spent about $90 million (Sh9.27 billion) in contracting different suppliers for its Kenyan operations, with a third of this going to local suppliers.

“In Kenya, the trend of increasing the proportion of Tullow‘s capital expenditure targeting local suppliers continued. In 2016, 31 per cent of overall supplier spend was on Kenyan businesses, up from 25 per cent in 2015,” said Tullow Oil Corporate Counsel and Company Secretary Kevin Massie in the firm’s recently published annual report to shareholders.

“However, lower oil prices in 2016 led to lower capital spending and a significant reduction in operational activity, reducing the overall amount spent on both local and international companies.”

Going forward, local firms might see earnings start going up again as Tullow resumes drilling as it prepares to start oil production and export on a pilot basis.

Tullow resumed drilling in Kenya in December when it drilled the Erut 1 well in Block 13 T in Turkana. It plans to drill another four wells in the course of this year.

The firm, together with the Energy Energy and Petroleum Ministry and its partners in the Turkana blocks, is also preparing to start production and exporting oil on a pilot basis this year.

Through the Early Oil Pilot Scheme, Tullow Oil will produce 2,000 barrels of oil a day and move them by road to Mombasa for export. The production and transport of the crude is set to begin in April, with the first cargo set to leave Mombasa by June this year.

The company said it plans to spend an estimated Sh22.5 billion in Kenya on the pilot scheme as well as preparations for commercial production by 2020. Transporters might be among the major winners as the firm resumes spending on local suppliers. 

It is about to contract a logistics firm to move the crude to Mombasa using specialised containers.

The Sh22.5 billion tender has been split into a pre-development expenditure of $100 million (Sh10 billion) and exploration and appraisal spend limited to $125 million (Sh12.5 billion).

In the report, Tullow said it would spend $100 million (Sh10 billion) on preparing the oil fields in Turkana to start production and export on a commercial scale, which is expected to commence by 2020.

It also expects to spend Sh12.5 billion ($125 million) on drilling of four wells in the course of this year, with the possibility of drilling another four depending on the results of the first four wells.

“A four-well exploration and appraisal programme commenced in mid-December in the South Lokichar Basin with the drilling of the Erut-1 well. The well is nearing completion, with a result expected shortly,” the firm said.