In Lokichar, 550 kilometers north-east of Nairobi, a dusty village is basking in glory brought about by a recent oil boom. British oil prospecting firm Tullow Oil announced in 2012 that it had discovered oil in the larger Turkana region. This was just the beginning.
In 2014, Tullow announced its seventh oil find in the region, estimating that the basin could have as much as one billion barrels of oil. Since then, the village as well as its residents have been living in the hope of a better and brighter future. Fortunes of the arid land, populated by nomadic pastoralists, have continued to rise over the years.
Undoubtedly, the discovery unlocked vast business opportunities in the region as investors continue trooping into the country. For instance, Kenya recorded growth in Foreign Direct Investments (FDI) according to a 2016 report by the United Nations Conference on Trade and Development (UNCTAD).
In Lokichar, the opening of the South Sudan border, which opened up the region to business opportunities, as well as a small non-commercial airport are evidence of the region’s transformation. Besides these, an oil pipeline connecting South Sudan and the port of Lamu on the Kenyan coast will pass through Lokichar.
Dream in limbo
In Kenya, oil is associated with riches and no one is more optimistic than the common man. It is easy to see why. Oil prices in the global market dictate the local cost of food and commodities and by extension, inflation.
When the country announced plans to start commercial production of oil by the end of 2016, the whole nation waited with baited breath. But that might be just a pipe dream. Plummeting crude oil prices in the global markets over the past few years have dealt a major blow to Kenya’s oil prospects.
Here is how. In July 2016, a barrel of crude oil was trading at $29. This is the first time it dropped below $30 since 2003 and 72 per cent lower than it was in March 2012 when Kenya announced it had struck oil. At the current crude prices, Kenya will be unable to extract oil, according to a Chicago based research and investment management firm, Morningstar Inc, which puts the breakeven price for oil from Lokichar at about $50 per barrel. When the good news about the discovery of the precious commodity was made, crude oil was going for $111 a barrel.
Oil analyst George Wachira says that the effects of falling oil prices are being felt in the local oil exploration scene, where many upstream investments, mainly in exploration and drilling, have either been reduced or postponed. “Nearly all the oil companies have restructured their assets and operations to reduce costs and preserve balance sheets’ integrity,” he says.
Major investments that had started gaining traction are now losing steam, exposing the twists and turns that have since rocked the Kenyan oil sector. Industry analysts predict that the situation could get worse, at least in the next two years, before the affected firms return to some measure of profitability.
No appetite for investment
Some explorers are leaving. UK’s Tower Resources, Afren Oil, Australia’s Pan continental Oil and Marathon Oil of the US have all exited Kenya due to a poor environment that makes it difficult to raise funds for exploration.
Patrick Obath, a consultant in the energy sector, explains the recent developments, “The level of activity in the upstream sector at the moment is between 40 and 50 per cent. We expect to see a lot of negotiations between the government and exploration companies to extend commitments that had been made earlier due to lack of finances for their implementation.”
Firms offering support services to the sector have also been hard hit. “With the prevailing oil prices, there is not much appetite for investment in projects such as pipelines by oil companies and other investors because of uncertain returns,” says James Mbote, chairman of Oil and Gas Contractors Association of Kenya.
While the slump in oil prices is good news for Kenyans, who have enjoyed reduced fuel prices ever since the slump kicked in, it is bad news for a country dreaming to become a top oil producer.
This turn of events is jeopardising Kenya’s plans for early production of oil. A case in point is the collapse of talks between Kenya and Uganda — also producing oil — regarding a joint $4 billion pipeline to transport oil to the port. As it stands, Kenya will now have to build its own pipeline to transport some 600 million barrels of oil from the Turkana oilfields to Lamu for export. This comes after Uganda struck a deal with French firm Total, which will see the pipeline run through Tanzania.
In the short term, however, the government has said that it will transport crude exports through rail and road to Mombasa, but the full scale and long-term exports will be transported to Mombasa via the Turkana-Lamu pipeline.
Regarding the competition between the two oil producing east African countries, Kenya and Uganda, oil expert George Wachira says, “The next psychological contest is which pipeline (Lamu in Kenya or Tanga in Tanzania) shall dispatch the first barrel of crude oil into the international markets.”
He says that the critical challenge for Kenya is to implement a timely pipeline project that results in competitive tariffs. This, coupled with the resurgence of crude oil prices, expected to stabilise by 2019, could revive the Kenyan oil dream.
“As the global oil prices show signs of strengthening, the Kenya economic and fiscal planners should be alert to a more stringent era characterised by higher cost of energy imports with negative impacts on foreign currency availability and inflation,” says Wachira.
The industry is expected to rebound, probably post 2016. Wachira believes another boom can happen if investors in the Turkana oilfield and the Kenyan government are focused on having the crude production facilities and the crude export pipeline ready by 2019/20.