Why Tullow is holding all the cards in oil exploration deal with State

As Tullow Oil prepares the costly venture of producing and exporting 2.4 million barrels of oil over the next three years, the UK firm may end up slapping the Government with a colossal bill of its costs.

As it is, Kenya is still in the dark about how much Tullow Oil has spent in exploration works in the Lokichar Basin since it started prospecting for oil back in 2010.

The costs the company has incurred might be recovered before Kenya can start enjoying the benefits of the black gold under the Early Oil Programme.

At the moment, the revenue share agreement between the Government and Tullow is still unknown, as the contract between the the two entities remain confidential.

Revenue share is a thorny issue for Government, explorers and host communities and might explain why President Uhuru Kenya was incensed when the Turkana County Government demanded 10 per cent of the revenues.

It is because of this that Kenya might be in for a rude shock when Tullow presents its bill, which is already running into hundreds of billions of shillings.

Tullow Oil last year said it had invested over $1.5 billion (Sh150 billion) since it started exploring for oil in Northern Kenya in 2010, a figure that could not be contested since the Government has not been auditing its books to verify the claims.

This amount is expected to further go up as the company and its joint venture partners start earnest preparations to start commercial production in 2020. The early oil pilot scheme, where the companies together with Government are expected to start production and export on a pilot basis, is also expected to escalate the costs.

An independent study by a local non-governmental lobby estimated that the pilot scheme might cost as much as Sh4 billion, but this could be higher, depending on the volumes produced.

According to documents prepared by the National Treasury, the country plans to produce 480,000 barrels of oil over the 2017/18 financial year and double this to 960,000 barrels of oil over the next financial year and produce another 960,000 barrels in the third year (2019/20) of the pilot programme.

State Department for Petroleum Principal Secretary Andrew Kamau said the early oil pilot scheme will not be charged separately, but costed as part of Tullow’s exploration and appraisal budget while the Government is expected to handle infrastructure, including road repairs and upgrade of the refinery.

The costs will then be recovered as part of money Tullow Oil will have spent during the exploration phase when commercial production begins.

“All the costs will be borne by Tullow and joint venture partners in Kenya. It will be included in their exploration and appraisal budget. As Government, the only area we are spending on is the refinery upgrade and heated storage,” said Mr Kamau.

He said the ministry has already notified Tullow Oil of its intent to look into its books and other reports so as to establish how much the firm has spent in its exploration in Lokichar Basin. “We have given Tullow notice that we will start auditing them,” said the PS.

The Government has taken four years trying to get someone with the special skill to audit Tullow, but has come up empty handed.

In 2013, when Kenya started getting good reviews as an emerging oil province, the National Oil Corporation of Kenya (NOCK) had been given the mandate to audit the upstream players.

This was, however, withdrawn, with the Energy Ministry expressing concerns on the possibility of conflict of interest, considering NOCK is a player in the upstream oil sector, where it is exploring Block 14 T in Kajiado County.

The ministry then advertised for a private consultant in the same year, with nine of the applicants having the expertise in the field.

Last year, the ministry made another attempt, but close to one year later, it is still yet to find a suitable auditor.

PS Kamau said the Government had already shortlisted several firms and will be selecting one that is expected to audit reports by Tullow Oil to determine how much the firm has spent over the seven years it has been exploring in the country.

He added that the Government will spend money advanced by the World Bank through the Kenya Petroleum Technical Assistance Programme (KEPTAP), which is aimed at enhancing Kenyan capacity in the petroleum industry.

“We have done the tender, shortlisted and are now waiting to get a go ahead from the World Bank,” said Mr Kamau.

auditing Tullow

While past attempts have tried auditing all players, the PS said a consultant would concentrate on auditing Tullow, which is nearing production, as many of the other players are yet to make substantial oil or gas finds.

Other upstream players are, however, required to submit quarterly and annual progress reports on their respective blocks.

“The focus for the audit for now is Tullow Oil because they are the only ones that have found substantive oil and preparing for production, which is when you can have cost recovery,” he said.

The fact that Tullow says it spent Sh150 billion in six years, an average of Sh25 billion annually, means it may end up spending Sh300 billion before Kenya can make viable exports in 2022.

This may be compounded by Sh18.9 billion from the total cost of the early oil programme.

According to estimates by Kenya Civil Society Platform on Oil and Gas (KCSPOG), to transport the oil, the Government would need at least Sh220 per barrel on leasing the isotainers, a special containers used in transporting oil. Road transport will also attract Sh1,050 per barrel compared to rail transport, which will cost Sh650 for every barrel moved to the Mombasa Port.

There will also be another Sh225 cost on storage for every barrel. At the end of the scheme, the Government, according to KCSPOG is looking at transporting about 900,000 barrels of oil. This will see the overall costs stand at Sh6.3 billion.

This may, however, be offset by the Sh3 billion in revenues expected from selling the oil if the country can get a buyer.

The early oil programme, which the Government says will help gauge the market’s reaction to Kenyan oil, has been criticised as an unnecessary expense that will inflate costs and eat into the country’s revenue when it gets into commercial production phase.

KCSPOG Coordinator Charles Wanguhu said the exercise is an unnecessary expense that the country can ill-afford.

“We estimated that the early oil project will cost Sh4 billion on the project. Our estimates were based on terms of a standard contract, but our impression is that they have signed a contract to give preferential terms to Tullow and Africa oil so that they can go ahead with the project. This is despite the project not being a necessary precursor to full field development,” he said.

“The Government will also have to refurbish KPRL, install heating systems and a new jetty for the scheme. Who is going to pay for the scheme and where will the revenues go?” posed Mr Wanguhu.

He said at the moment, it is difficult to tell what Tullow’s tab to the State may be, because the revenue sharing terms, contained in Public Sharing Contracts signed between the Ministry and oil companies, are confidential.

“It is important that the Government looks at those costs to make sure that they are allowable costs. If the contract says that all sundry costs are acceptable, then the company will pile on all these costs. They will keep bringing consultants from the UK and the US and charge the Government because they know we will pay for it eventually,” he said.

“It is also a concern for the early oil scheme. The exploration companies are likely to agree to undertake it, but pass on all costs to the Government. We need to understand the agreements made between the Government and these companies so we do not end up with ridiculously high costs.”