OIL & GAS DOSSIER

Pres­i­dent Keny­atta’s prom­ises to turn Kenya into an oil-pro­duc­ing coun­try be­fore the re­cent elec­tions have proved empty, re­veal­ing huge in­fras­truc­ture gaps that will keep the project stalled for years to come

The Africa Report - - CONTENTS - By Mark An­der­son and So­phie Mbugua in Nairobi

Kenya’s pipe dream The gov­ern­ment’s pledge to be­gin oil pro­duc­tion by 2017 is in limbo, and huge in­fras­truc­ture gaps will cre­ate fur­ther de­lay

By now, rows of fuel tankers brim­ming with waxy crude oil should have been mak­ing their way to Mom­basa’s port, ready for sale on the in­ter­na­tional mar­ket. Kenya’s Pres­i­dent Uhuru Keny­atta promised last year that his coun­try would win East Africa’s oil race, beat­ing Uganda to be­come the first coun­try in the re­gion to join the oil-ex­port­ing club. “We have star ted [to­wards oil pro­duc­tion], and we are not mov­ing back,” he said in Au­gust 2016. “We want to be at the top of the pile.” And for a while, Kenya’s pri­vate-sec­tor ebul­lience and ad­min­is­tra­tive ’can-do’ at­ti­tude seemed to be do­ing the job, with a new oil ter­mi­nal des­ig­nated to be built in the east­ern coastal city of Lamu. But a po­lit­i­cal im­passe, low oil prices and a lack of in­fras­truc­ture have poured cold wa­ter on what many saw as an overly a mbiti ous pl a n, des i g ned t o win po­lit­i­cal favour ahead of a hotly con­tested gen­eral elec­tion on 8 Au­gust (see page 37). Lon­don-based Tul­low Oil, which holds five Kenyan li­cences and had planned to ex­port crude pro­duced dur­ing test­ing of its wells, has yet to reach a fi­nal in­vest­ment de­ci­sion about its fields. That de­ci­sion is not ex­pected be­fore the end of 2018.

Keny­atta’s prom­ise to turn Kenya into an oil-pro­duc­ing coun­try be­fore the orig­i­nal 8 Au­gust polls bore the hall­marks of a cal­cu­lated po­lit­i­cal move, an­a­lysts say. “[Keny­atta] gains some con­sid­er­able po­lit­i­cal cap­i­tal if he pre­sides over a coun­try as it be­comes an oil-ex­port­ing na­tion,” says Jac­ques Nel, an econ­o­mist at NKC African Eco­nomics. “I think this is what he was aim­ing for.”

ROADS TO NOWHERE

Al­most im­me­di­ately, red flags were raised. For ex­am­ple, the scheme to ship the oil by road raised eye­brows when it was an­nounced. Truck­ing oil is ex­pen­sive and un­sus­tain­able at a time when the price of oil is hov­er­ing at around $50 a bar­rel, a steep de­cline from just a few years ago. “There are not many coun­tries in the world that can do oil pro­duc­tion by road,” David Ohana, group man­ag­ing di­rec­tor of down­stream com­pany Kenolko­bil, tells The Africa Re­port. “It’s sim­ply too ex­pen­sive.” Ex­perts say that even if the price of oil were to dou­ble to $100, Kenyan pro­duc­ers would be un­likely to break even. Opt­ing for road trans­port was also a con­ve­nient way of by­pass­ing the big­gest ob­sta­cle to Kenya’s oil pro­duc­tion: a crit­i­cal lack of in­fras­truc­ture. To solve this, the Nairobi gov­ern­ment had planned to roll out an oil pipe­line serv­ing Uganda, Ethiopia and South Su­dan. The Ugan­dan sec­tion was to run from the oil­fields in the north of the coun­try all the way to the city of Lamu, where a new port is be­ing built. But that plan stalled af­ter Uganda de­cided last year to send its oil through Tan­za­nia, say­ing there were se­cu­rity con­cerns around the Kenyan route. Those in the oil sec­tor are still hope­ful that the pipe­line link­ing Kenya’s Turkana fields with Lamu will still be built in spite of Uganda’s with­drawal from the project and South Su­dan’s civil con­flict. “The con­struc­tion of the pipe­line is fea­si­ble, but fur­ther stud­ies need to be done,”

says Emma Gor­don, an an­a­lyst at Verisk Maple­croft. “Kenya needs to find some­one will­ing to in­vest in con­struct­ing the pipe­line.” Another op­tion is be­ing cham­pi­oned by French oil gi­ant To­tal, which ac­quired a 25% stake in Maersk Oil’s oil­fields at the end of Au­gust. To­tal is propos­ing to send Kenya’s oil through the Ugan­daTan­za­nia pipe­line. “We want to sanc­tion this project in the first half of next year, fol­low­ing an in­ter-gov­ern­men­tal agree­ment be­tween Tan­za­nia and Uganda ear­lier this month," To­tal’s CEO, Pa­trick Pouyanné, told re­porters in Au­gust. Tul­low Oil was the first to dis­cover oil in Kenya’s north­ern Turkana re­gion in March 2012. In the five years that fol­lowed, Tul­low has proven to be an ac­tive player in push­ing for oil pro­duc­tion to get off the ground. Tul l ow’s c ountr y man­ager for Kenya, Martin Mbogo, tells The Africa Re­port: “We re­main con­fi­dent that Kenya can be a suc­cess­ful oil ex­porter at cur­rent prices.” He adds: “So far all the peo­ple in­volved have made huge strides in un­der­stand­ing this new in­dus­try […]. We are pos­i­tive about the suc­cess of oil pro­duc­tion in Kenya.”

A NEED TO FO­CUS

To­day, the coun­try’s re­serves are es­ti­mated at about 750m bar­rels. Mbogo ac­knowl­edges that there is still a long way to go be­fore pro­duc­tion can be­gin. “The main chal­lenge for oil pro­duc­tion in Kenya is that the up­stream oil and gas in­dus­try is new in the coun­try,” he says. Ohana of Kenolko­bil says “it will take 10-15 years to get oil pro­duc­tion started if we do well”, not­ing that ground has not yet been bro­ken on mas­sive in­fras­truc­ture projects. “Kenya can do it – I have no doubt,” he says. “If the gov­ern­ment will fo­cus on this, they will [start pro­duc­ing oil]. But I don’t see the fo­cus.” Kenya’s pol­i­tics are keep­ing oil in the ground. The sur­prise an­nul­ment of Kenya’s Au­gust pres­i­den­tial elec­tion means that a re-run is now sched­uled for 17 Oc­to­ber, ex­tend­ing the pe­riod of po­lit­i­cal un­cer­tainty hang­ing over the coun­try. There are also un­re­solved de­bates about rev­enue shar­ing from oil pro­duc­tion. Pres­i­dent Keny­atta has re­fused to give 10% of oil rev­enue to Turkana County, the sparsely pop­u­lated and im­pov­er­ished area where the oil is lo­cated, of­fer­ing 5% in­stead. In con­trast, op­po­si­tion pres­i­den­tial can­di­date Raila Odinga said he would agree to give Turkana 10%. Kenya’s Se­nate must ap­prove the pe­tro­leum bill that is cur­rently pend­ing, be­fore pro­duc­tion can move for­ward. This bill will set out oil rev­enue shar­ing be­tween the na­tional and county gov­ern­ments, and lo­cal com­mu­ni­ties. But with op­po­si­tion lead­ers cur rently boy­cotting par­lia­ment, Se­nate ap­proval could take some time.

SE­CU­RITY CON­CERNS

Dis­agree­ments over lo­cal con­tent are com­mon at the on­set of pro­duc­tion. “Kenya is ex­pe­ri­enc­ing the same com­mu­nity re­la­tions en­coun­tered in ev­ery new oil and gas coun­try,” says Verisk Maple­croft’s Gor­don. “The ma­jor­ity of the com­mu­ni­ties are un­e­d­u­cated and wouldn’t un­der­stand why the rev­enues aren’t flow­ing, which would ex­pose the oil ex­plor­ers to se­cu­rity risks.” Se­cu­rity has de­te­ri­o­rated in some of the ar­eas around Tul­low’s projects in Turkana. Me­dia re­ports sug­gest that Tul­low is un­able to send its staff to some ar­eas be­cause they have been at­tacked by an­gry lo­cals who want a greater share of the oil rev­enue. An­drew Ka­mau, prin­ci­pal sec­re­tary for pe­tro­leum, told re­porters that se­cu­rity prob­lems had stalled early oil ship­ments. “Ev­ery­thing is ready, but we have a few is­sues with se­cu­rity,” he said. “It will be dif­fi­cult for us to give a go-ahead to the truck­ing com­pa­nies be­cause we would be risk­ing the lives of the driv­ers.” Both Kenya and Uganda have an­nounced plans to build oil re­finer­ies. That would elim­i­nate ex­pen­sive ship­ping costs and lower the price of pe­tro­leum across the re­gion. Kenya is spend­ing about $50m a year on ship­ping to im­port re­fined pe­tro­leum from the United Arab Emi­rates. “If we have crude I think we should have a re­fin­ery,” Ke­nilko­bil’s Ohana says, adding that only one re­fin­ery would be needed to serve the re­gion. “The whole re­gion will ben­e­fit from oil pro­duc­tion be­cause right now they have to freight it in,” Ohana says. “It could be a big boost to the economies – get­ting the oil cheaper. Then th­ese coun­tries will be flour­ish­ing.”

We did our due dili­gence when the com­mit­tee and the Na­tional Assem­bly passed this bill. It would be wrong if a com­mu­nity en­riches the world and re­mains poor ” The mem­ber of par­lia­ment for Turkana South, James Lome­nen

Turkana, in Kenya’s arid north, has the most to gain from an oil econ­omy

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