Oil Slump Bypasses Kenya As It Waits To Turn On The Taps

Emerging East African oil giant Kenya is sitting on about one billion barrels of reserves that its discoverers say is commercially viable even with oil at a dismal $30 per barrel, though it will be years until they can get it out of the ground.

Irish explorer Tullow Oil—the company credited with putting Kenya on the world’s oil map with a game-changing discovery of 600 million barrels in the South Lokichar basin in 2012—says oil can be produced in Kenya for around $25 per barrel, which would make it one of the cheapest places in the world for producers.

It’s not as earth-shattering a production cost as Iraqi Kurdistan’s $1-$2 per barrel, or even Kuwait’s ($8.50) or Saudi Arabia’s (under $10) for that matter, but it’s far better than the over $52 per barrel in the UK, or $48 in Brazil.

And it’s a big playing field, with Kenya poised to become the central East African oil hub and king of its infrastructure if any progress is made on some very big plans. Related: The Billion Dollar Biofuel That Fell 2.7 Billion Gallons Short

In its annual report, Tullow noted that “studies indicate low full cycle cost circa $25/bbl,” which includes capital expenses, operating expenses and tariffs.

A $25 breakeven price would make Kenya cheaper than Nigeria (about $31) and Angola (about $36), even if the profit margin is only “razor thin”.

But Kenya isn’t producing—yet. Tullow still doesn’t have the green light for extraction, but hopes to have a final field development plan by year’s end. Even then, it would be another three to four years before Kenya’s first oil came out of the ground.

While the Kenyan government had previously targeted 2017 for first production, there is now talk of 2022.

And the five-year delay is all about getting the right infrastructure in place, which is very much a regional game. Related: The Decline Of The Coal Industry Is “Long-Term” And “Irreversible”

This is where all the PR about the $25/barrel production costs becomes important. The theory is that the promised low production costs will lure investors into massive infrastructure projects that include everything from ports to railroads and pipelines that can get East Africa’s product to market. The end destination in Kenya is the port of Lamu—East Africa’s new pathway to global markets.

At least, that’s what Kenya is hoping. The country is vying to be the throughway for exports from Uganda and South Sudan, which is dying to get out from under Sudan’s heavy transport tariffs.

This is what the LAPSSET (Lamu Port South Sudan and Ethiopia Transport) corridor is all about, and Kenya insists it will be cheaper to bring it through Lamu than through Ethiopia or Tanzania. Ethiopia has since been dropped, though the acronym persists, and has instead struck a deal with Djibouti. And Uganda has been problematic with intermittent second thoughts about exporting crude oil as opposed to building its own refinery and exporting refined products—or both.

Right now, Tullow and its partner, Africa Oil, aren’t as worried about low oil prices as they are about getting a pipeline from Uganda to Kenya’s Lamu Port. Related: Why OPEC Production Freeze Could Pave The Way For Actual Cuts

With half of the LAPSSET acronym unclear, the most urgent project is to finalize construction plans for a crude oil pipeline running from landlocked Uganda—which has some 6.5 billion barrels of reserves—to Lamu, the details and financing for which still have to be worked out. A deal was finally reached in August on a route.

The partners are hoping to make a final investment decision on production early next year, for which infrastructure has to have a clear path forward.

Despite the infrastructure uncertainty, and the fact that Kenya isn’t producing yet—there is another factor that might lure in investors. As many of its neighbors are buckling under the pressure of low oil prices, Kenya is enjoying a budget surplus—its first in half a decade, according to the Financial Times.

Indeed, the country is being touted as a beneficiary of the oil price slump, and this year will be a good one—precisely because it’s not yet pumping its own oil and is enjoying the cut-rate imports.

By Charles Kennedy of Oilprice.com

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