Tullow oil, one of the main exploration companies in Kenya which discovered 600 million barrels in the South Lokichar basin in 2012 says that 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.
Although the cost is 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. This puts Kenya in an enviable position as low production costs are bound to entice investors. Furthermore Kenya is poised to become the central East African oil hub and king of its infrastructure if any progress is made on some very big plans .
Tullow reported that “studies indicate low full cycle cost circa $25/bbl,” in its annual report. This includes capital expenses, operating expenses and tariffs. These costs are even cheaper than African oil giants, Nigeria (about $31) and Angola (about $36), even if the profit margin is only marginal.
Even so, Kenya is yet to start producing. Tullow still does not have the green light for extraction, but hopes to have the field development plan (FDP) by the end of the year. 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.
The current market turmoil has created a once in a generation opportunity for savvy energy investors.
Whilst the mainstream media prints scare stories of oil prices falling through the floor smart investors are setting up their next winning oil plays.
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 contending to be the expressway 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 remains, and has instead struck a deal with Djibouti.Uganda on the other hand has been problematic with intermittent second thoughts about exporting crude oil as opposed to building its own refinery and exporting refined products, or alternatively pursuing the Tanzania route.
Right now, Tullow and its partner, Africa Oil, are not as worried about low oil prices as they are about getting a pipeline from Uganda to Kenya’s Lamu Port.
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. An agreement was reached in August on a route, although in December, Uganda was once again reconsidering its options.
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 is not producing yet, there is another factor that might lure in investors. As many of its neighbours 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.