Who Owns Whom

For those with more than a passing interest in Oil, the latest WoW report on the Petroleum industry in Kenya offers an erudite overview and value chain of petroleum, natural gas as well as, in the context of Kenya, the economic use of various petroleum products.

This blog touches on the curse of mineral riches and how the climate impact changed the outlook for hydrocarbons. Most importantly look at the oil find in Kenya and what it will mean for that country.

The early seeds of the recognition of the need for alternative (renewable) energy started in the 70s with the doomsday Club of Rome report and the petrol boycott that saw the price of quadruple. At that time technology was insufficiently advanced to produce economically viable alternatives. It took some time before technology caught up with economic realities, but it was in the making.

Going back to Kenya and its recent oil finds.
Kenya like all countries sees oil exploration as offering economic potential in terms of growth and energy independence. Its viable oil finds were rather recent.
Only in 2012 did Tullow (a UK oil explorer), discovered commercially viable oil reserves, with the Lokichar sub-basin reserves in Kenya estimated at 4 billion barrels and recoverable crude oil at 750 million barrels. Several international big oil companies (Total, Africa Oil Canada, Qatar Petroleum, ENI) are also operating in the area, which confirms the commercial viability assessment of the basin.

What do we know about these oil fields?

1. The reserves are commercially viable even if they are not in the league of those held by the major oil producing countries. For example, Kenya’s find represents 1.3% of Venezuela’s reserves. They also have to compete with the likes of Libya and Nigeria on the African continent.

2. The reserves appear to be of good quality unlike Venezuela’s “heavy oil” or Canada’s “oil sands”, reducing the estimated cost of oil production.

Kenya’s cost of production is placed in the range of USD 20 to 30 per barrel. This certainly offers a competitive edge for the country. While Saudi Arabia’s cost is below USD 10, its long history as the biggest supplier has made the country more settled at revenues of about USDF 60-80 per barrel. The Saudi oil revenue has become the main revenue driver in the government’s budget and economic growth plans. Thus a low oil price of say USD 40 as we witnessed recently is painful enough for Saudi Arabia’s economy for it to agree on output restrictions to support the oil price.

3. Kenya will be able to generate significant revenue from its oil fields, but according to reports, they will only start producing oil by 2024, due to some uncertainties which may affect its final production cost.
The route of 892 kilometre oil pipeline from the Tukana oilfields to the Luma port is yet to be finalised with various land claims pending. Road transport in the interim period would be utilised which happens to be very expensive.
There is wrangling between private sector participants and Government over extension of licenses due to delays caused by the COVID and disagreements over performance expectations, having cost implications.
The Government is seeking funds to invest in a lot of downstream infrastructure, storage, upgrading of refineries, distribution, etc all of which still has to be completed.

What are the key consideration to reflect on?

Kenya is in a better place than Venezuela, a classic example that mineral riches by themselves do not produce wealth and prosperity for a country. The WoW reports on improvements in the political structures and governance, although with some caution, mentioning that Kenya still has a way to go towards benchmark standards of good governance.

Kenya does not have an established oil related infrastructure and will never have the volumes of a Saudi Arabia, both elements that affect the cost of production. While it is deemed as a potential low cost oil producer, Kenya should manage its investments in the oil fields carefully for two reasons:

1. The cost of oil production keeps coming down due to technological improvements. The US shale oil cost of production over time came down from about USD 60 to USD 39. There are a number of countries that match or beat Kenya’s estimated cost of production, and are financially stronger. Russia a short while ago showed its muscle in the OPEC+ negotiations sending oil prices plunging. It was for a short period but highlighted such possibilities recurring.
2. The early 1973 seeds of alternative renewable energy mentioned above are now accentuated by a much greater awareness of climatic impact of hydrocarbons. The movement to carbon-neutrality has gained tremendous momentum and is accelerating fast, so much so that worldwide demand for oil may be declining in the future. This in the long run will keep pressure on pricing of oil, and will make financing more difficult and in consequence more expensive for oil exploration and extraction.

Kenya if it governs its energy and oil extraction correctly will still do well … just making it in time.
It may constitute a sound basis for a number of beneficiation and peripheral project opportunities to be implemented with the new oil revenues, which are not yet entrenched in the government’s general revenue budget.

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