How Rift Valley Railways lost out on Sh4m-a-day oil deal

**RVR was informed it had been eliminated from the deal that would have earned it more than Sh4 million every day.PHOTO: COURTESY**

Inside Rift Valley Railways’ downtown head offices, one man is still angry about being knocked out of a lucrative oil deal.

Isaiah Okoth, the man appointed chief executive of RVR in February, believes his company was used for months to come up with a plan to evacuate crude oil from Turkana’s Lokichar area to Mombasa, only to be later dumped.

“A decision had been made from the start that the oil was going to be moved by road,” Mr Okoth told Business Beat.

Months of planning and enquiries to prospective suppliers came to naught when a decision was taken at a meeting in late August.

RVR was informed it had been eliminated from the deal that would have earned it more than Sh4 million every day.

“We were kicked out even after committing my team in planning the logistics right from the onset,” said the RVR boss, adding that it would have been courteous for the Government to have been clear about its preference for road over the old railway line.

Proposals to double daily crude production to 4,000 barrels would have earned RVR more than Sh8 million a day.

INITIAL PLAN

Okoth was speaking for the first time since Andrew Kamau, the Permanent Secretary in the Ministry of Energy and Petroleum, told the country that early oil from Lokichar would be moved by road to storage tanks in Mombasa.

Mr Kamau also revealed that Tullow Oil, the UK firm that has been prospecting for oil for years in Kenya, had already produced 6,000 barrels of crude that were sitting aboveground in tanks.

“We are going to move the crude in about 14 trucks every day,” said Kamau, communicating a decision, dubbed the Early Oil Pilot Scheme (EOPS), that had been made six weeks earlier on August 20.

However, under an initial plan, the trucks were to carry the oil on an estimated eight-hour journey, covering 285 kilometres to Eldoret.

The crude would be moved in isotainers, or heated tankers, and a crane used to transfer the isotainers from the trucks onto the wagons of an RVR-operated train.

One such train has the capacity to move the freight delivered by 44 trucks, Okoth said of this plan that had been considered and approved, albeit only in principle as it would later emerge.

But now, under EOPS, the railway line has been knocked out, with the transport of crude to be done entirely by road. This, however, is the most expensive means of transport for oil. A pipeline remains the cheapest option the world over.

Among the reasons cited for RVR’s ouster from the freighting business is that its 110-year-old track and locomotives are prone to breakdowns, which would cause delays or spillages in the case of derailment.

Under the early oil plan, Tullow will dispatch 2,000 barrels (318,000 litres) of crude every day to Mombasa to begin with.

The crude oil will be ferried in isotainers, which weigh around 10 tonnes each and have a fluid capacity of 25,000 litres (157 barrels).

According to the Energy ministry, 14 trucks are expected to leave Tullow’s gates every day. Each will take about five to six days to make the trip from Turkana to Mombasa and back.

This means that there will be about 84 trucks on the road at any particular time transporting crude, which will start earning trucking companies a fortune six years before the country starts full-fledged production.

Last week, Tullow Kenya called for expressions of interest to truck the crude oil by road from Turkana to Kenya Petroleum Refineries Ltd (KPRL) facilities in Changamwe, Mombasa.

The firm also called for bids from firms that can lease it more than 100 insulated containers (isotainers).

Termination point

Okoth, with the backing of Transport Permanent Secretary Irungu Nyakera, unsuccessfully tried to convince the project partners, including KPRL, to use a road and rail mix, saying this would be cheaper, faster and safer.

RVR committed to get the commodity to Mombasa in 16 hours every three days, which would to allow trucks to deliver enough isotainers from the fields to the railway’s loading terminal in Eldoret.

The railway operator toyed with the idea of extending its rail track to KPRL premises, but the proposal was shot down.

As an alternative, RVR proposed to move the isotainers using trucks from its termination point – which is “within metres” of the Changamwe oil refinery.

Informal discussions between Tullow and RVR, in comparing the pricing, showed truckers would charge about $24 (Sh2,400) per barrel for the near 1,100-kilometre journey.

With the potential damage to the roads and safety considerations given that crude is both highly flammable and pungent, the rail seemed like a better option.

Further, it had prospects of helping RVR turn around its dwindling fortunes after years of struggling to win back the freight business it has lost to trucks.

But away from who won the transport deal, experts who have been involved in crude oil exploration and production have questioned the thinking behind the early oil production plan.

“It does not make any economic sense to move the crude by either road or rail if we are to invest additional billions in a pipeline further down the line,” said an industry expert who requested anonymity as he consults for the Government and oil-prospecting firms.

As it is, he said, delivery of crude to Mombasa, which is expected to begin in March 2017 before the start of exportation three months later, would only serve political mileage and give Kenya the feel-good status of being an oil-producing country.

After Uganda pulled out of a joint crude oil pipeline with Kenya that would terminate at a proposed port in Lamu and instead opted to join Tanzania, Nairobi was stung.

The expert claimed EOPS may be used to get back at Uganda, to show it Kenya is still the big brother and economic powerhouse in the region.

“Other than for pride, there is really no reason we should rush to export crude when we do not have the structures, like a pipeline, in place,” he added.

Election year

The Kenya Civil Society Platform on Oil and Gas (KCSPOG) also termed the project a “waste of public resources” in a report last week.

“It would appear that matters external to economics are a significant driver behind the push for early oil. In an election year, the official launch of oil could be heralded as a key milestone for the Government,” said Charles Wanguhu, KCSPOG’s co-ordinator.

In its report, Early Oil from Turkana: Marginal Benefits and Unacknowledged Costs, the civil society group said Kenya stands to lose about Sh3 billion from the early oil project.

According to KCSPOG, the Government is looking at transporting about 900,000 barrels of oil by the end of EOPS – though Kenya has an estimated 750 million barrels of recoverable reserves in onshore fields.

However, under this early oil plan, overall costs will hit Sh6.3 billion, the civil society group says.

And with oil prices at Sh4,600 per barrel, total revenue will be about Sh3.4 billion, which translates to a loss of Sh2.9 billion.

However, even assuming that the country fetches the Sh5,600 per barrel it is hoping for as a minimum, and which is unlikely given that the Turkana oil is waxy and will be sold at a discount, revenues will increase to just Sh4.3 billion.

Kamau last week admitted that for Kenya’s oil production to be profitable, crude prices need to be at about Sh5,600 ($55) per barrel. The PS, however, acknowledged that under the pilot oil scheme, the State does not expect to generate profits.

Tullow added that the plan is a marketing one expected to test how Kenyan crude oil will be received by international buyers.

Pipeline infrastructure

But KCSPOG has questioned why the Government would push on with a loss-making project instead of spending these resources to put up the pipeline infrastructure necessary to support commercially viable production.

The EOPS is an initiative of the Ministry of Energy and Petroleum, and one of the main reasons given for the scheme is that it will be a valuable precursor to full field development.

Despite a similar plan aborting in Uganda, Tullow has fronted the project as an enabler in establishing commercial, infrastructure and logistical arrangements.

But the firm will not bear any losses associated with the production of oil given that it will compensate itself for all costs upfront before money from the resource trickles down to the country.

Tullow is also expected to provide important oil reservoir information, establish an international market for Kenya’s crude oil, test management of community concerns and issues, as well as stimulate critical infrastructure development in Turkana County.

However, the drop in international oil prices and the losses involved have taken away the shine from the pilot project, save for the political mileage it will create and the millionaires it will make as entrepreneurs win contracts along the value chain.

The analysis by KCSPOG shows the Government will spend Sh1.5 billion to upgrade the storage depot in Mombasa, on top of the Sh500 million it used to buy off Indian firm Essar’s stake in KPRL.

Another Sh5 billion will be used on road repairs, and the building of the Kainuk bridge between Turkana and Kitale.

The civil society group concluded that the cost of producing oil under the proposed scheme far outweighs the revenues.

“In the absence of a significant increase in either oil prices or export volumes, the Early Oil from Turkana is a money-losing venture,” Mr Wanguhu said.

The Government estimates to spend Sh200 per barrel more on road transport costs than it would on a pipeline.

“Our estimates show that the costs will be much higher,” Wanguhu countered.

Some of these costs include leasing the isotainers, at a projected Sh220 per barrel, as well as storage and transport costs. The oil would need to be stored in heated tanks for about 100 days to get to the 200,000 barrels required to ship it out of Mombasa.

The civil society group added that road transport would attract Sh1,050 per barrel – against Sh650 per barrel it would cost to move crude oil to the port by rail. Storage will take up Sh225 per barrel.

Another of the major risks facing EOPS is managing expectations in Turkana, where residents expect to earn a share of oil proceeds, despite the project being a loss-making venture in the beginning.

There will also be logistical risks, given the Turkana-Mombasa operation is a complex and untested one, as well as health and safety-related risks given the frequency of accidents linked to trucking petroleum products.

“The National Cohesion and Integration Commission identified 19 counties at risk of violence in 2017, and six of these lie on the proposed route of the early oil scheme,” the KCSPOG report added.

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