A dream deferred: How Tullow woes, Covid derailed Jubilee oil export plan

President Uhuru Kenyatta flanked by Deputy President William Ruto when he flagged off the crude oil trucks during the Inauguration of the Ngamia 8 Early Oil Pilot Scheme, Turkana County. [File, Standard]

When the Jubilee government came to power in 2013, Kenya had just discovered oil in Turkana County a year earlier and was exploring ways to exploit the resource.

A decade later, and with the Jubilee administration now on its way out, the country is still exploring how to become an oil exporter.

Tullow Oil and the Petroleum ministry say a lot has happened between 2013 and 2022, paving way for Kenya to benefit from the 'black gold' found in the Lokichar basin.

Kenya exported 200,000 barrels of oil under the Early Oil Pilot Scheme (EOPS) which was to test the reaction of markets to the country's oil dream. It is unlikely that this would count as having ushered the country into the league of oil exporters.

Different factors have over the ten years caused the delay of the project.

Among these include government bureaucracy, challenges with communities that have resulted in the stoppage of works as well as internal problems that Tullow experienced in 2019, whose height was the exit of its then chief executive.

Covid-19 also threw a curve ball to Project Oil Kenya and even resulted in a three-month suspension of work at the oil fields in 2020, with Tullow then noting that government restrictions had made it difficult to get personnel in and out of the sites.

More recently has been the search for a strategic partner by Tullow and its joint venture partners that is now taking longer than initially expected. The strategic partner is expected to inject fresh resources - including capital into the project that the area expected to see the project's next phase take shape.

"In Kenya, the joint venture partners continue to make good progress with the farm-down to a strategic partner and the approval of the Field Development Plan (FDP) for Project Oil Kenya. The project is expected to be a key driver of growth, value and diversification for Tullow," said the company in an operational update two weeks ago. "Tullow is confident that it will make substantial progress in the second half of the year."

In a call with analysts following the publication of the operational update, Tullow chief executive Rahul Dhir said the company had hoped to bring in a strategic investor way before the elections. With the elections and the transition thereafter, the onboarding of a new partner might take longer.

"We have been in the process of bringing in a strategic partner. We had said we would get it done way before elections or post elections... we have had a lot of engagement with the government of Kenya but really with the parliament, not in session it is certainly going to affect the time," he said.

Tullow expects that after identifying the strategic partner and making the Final Investment Decisions (FID), it will take 36 months or three years to construct all the necessary infrastructure before Kenya can export oil commercially.

Crude oil pipeline

This could mean that should Project Oil Kenya get everything in place and start the construction of key infrastructure including a central processing facility at Lokichar and the crude oil pipeline to Lamu, the earlier Kenya can export would be around 2025.

By then, the next administration would be halfway into its first term in office.

Tullow together with its partners and the Petroleum ministry has done a lot of groundwork in Turkana as well as along the route that the crude oil pipeline will take to Lamu. Just two weeks ago, officials from the National Land Commission and other agencies were holding public participation (barazas) on the oilfields.

The State has also put up laws in place, such as the Petroleum Act 2019, that is expected to guide how the resource is exploited, including having in place a formula to share revenues that will accrue from the sale of oil.

It has also started a process of setting up a sovereign wealth fund that would ensure Kenya's future generations benefit from natural resources extracted today.

Kenya exported oil when it implemented the Early Oil Pilot Scheme (EOPS) between 2018 and 2020. On June 2018, President Uhuru Kenyatta launched EOPS by flagging off trucks transporting crude oil from Lokichar to Mombasa. The oil was stockpiled at storage facilities at the Kenya Petroleum Refineries Ltd (KPRL) and later exported.

The president would the following year in August flag off the ship tanker that carried Kenya's first, and to date, the only oil export cargo of 200,000 barrels. After exporting the first batch, the project was expected to continue moving oil by road, storing it at KPRL and exporting when it had gathered adequate volumes.

This was however not to be and Tullow pulled the plug on EOPS in June 2020, noting that the project was running on a two-year contract that ended June 2020.

The firm said it had achieved the objectives of the project, which was primarily to offer learnings that would inform the implementation of the oil project at the commercial scale.

"During 2020, EOPS successfully completed two years of production and all the required reservoir and production data gathering was completed as planned... the reservoir and production data gathered during EOPS is now being used in redesigning the full field development concept," said the company in its annual report for the year to December 2020.

The consignment was sold to ChemChina at Sh1.2 billion, translating to about Sh6,600 ($60) per barrel using exchange rates at the time. The price that the Kenyan oil fetched was encouraging as it was then at about the same level as major blends such as Brent.

After exporting the first cargo of 200,000 barrels of oil in August 2019, the firm continued trucking crude from Turkana to Mombasa. This is such that by the time of stopping the project, it had accumulated another 180,000 barrels at the KPRL tanks.

The oil is still stuck there. Tullow has recently said it is in talks with the State on how to go about disposing of the oil.

Despite the successes claimed by Tullow and the government in EOPS - offering invaluable insights, the pilot phase was criticised by lobbies and analysts, terming it an unnecessary and expensive undertaking that will have the effect of reducing Kenya's earnings once commercial production starts.

They said the early oil project required heavy investment but most of the infrastructure and equipment used for the pilot would be useless in the commercial phase.

These include the refurbished facilities at KPRL as well as the isotainers - specialised containers - that were used to transport the Lokichar's waxy oil provided by private sector firms contracted to truck the cargo to Mombasa.

This meant that the project incurred deep losses that would be recovered once commercial production starts, reducing the profits due to Kenyans.

It however led to improved road infrastructure in parts of Turkana County.