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Pitfalls to avoid in Kenya's oil sector

URKANA -- British oil and gas firm Tullow has discovered oil and gas in northwest Kenya with partners Africa Oil in Block 9. PHOTO - COURTESY: TULLOW OIL

by Mohamed Guleid
Monday, June 20, 2016

It is nearly five years since oil was discovered in Turkana County. That discovery was expected to make Kenya an oil-producing state. We are still waiting for this Black gold to have a real impact on the Kenyan economy.

Notably, the statistics of local companies’ participation in the exploration and production in the energy and power sector is very dismal and practically no local entrepreneurs or even local banks have dared venture into this lucrative sector. The sector is dominated mostly by western companies. How can we reverse that imbalance?

Let me give you a good example of how the Petroleum Industry Bill legislation has empowered Nigerian local companies to become multinational oil corporations. The PIB turnaround in the industry began with the signing into law of the Nigeria Content Act in 2010, much to the chagrin of those that never gave it a chance.

The Act sought to empower more Nigerians to make bold contributions to the sector that has long been dominated by multinationals and foreign operators. With the advent of the Content Act, there was a re-definition of Nigeria’s petroleum resources, whose contribution to the nation’s Gross Domestic Product, GDP, has been abysmally low.

This is notwithstanding the fact that the industry is the country’s biggest revenue earner, accounting for more than 80 per cent of its foreign exchange earnings. A good example is Nigeria’s Oando Energy Resources Inc, which sealed a deal worth $1.79 billion for the acquisition of the Nigerian Operations of ConocoPhillips.

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Fulfilling such a lofty national objective is certainly no simple task.
As already noted, the greatest strength of the reform agenda is the dramatic increase in the participation of Nigerians in the sector. While in the past only a handful of wealthy and politically connected Nigerians were permitted to participate, the story has long changed to: “If you have the capacity, come prove yourself.”

The outcome is astronomical, many Nigerians, including those in the Diaspora, took up the challenge with most of them resigning from their plum oil jobs to prove themselves. Their activities are more evident in the services for the benefit of technology transfer; the upstream, which is the core of the industry, and the downstream, which is the interface with the Nigerian people, and more recently in domestic gas.

Just to emphasise these exploits, all of the upstream assets being divested by the oil majors, including the SPDC/Total/Agip divestiture of eight oil blocks were acquired by Nigerian companies in alliance with some foreign technical partners.

Sadly, we in Kenya are not prepared for the future of the oil industry and its massive petrochemical and value-addition services that create real jobs that are needed to reduce unemployment, which the World Bank estimates to be at 40 per cent. Should we take the decision by Uganda and Tanzania to team up as good riddance? Yes, and for good reasons.

First, the decision by Uganda to take its pipeline route through Tanzania was not only a case of economic suicide, but would also surely be difficult to implement due to the ruggedness of the Tanzanian hinterland.

Secondly, Ugandan oil is heavy and would require massive investment in special pipelines to heat the pipes. If it passed through Northern Kenya, the temperatures are high enough for natural heating of the pipeline network.

Finally, almost 19 billion barrels of South Sudan oil that is medium light and close to two billion barrels from the Kenya that could have brought down CAPEX (capital expenditure), initial project costs and sharing of Project Risks (had we chosen the Uganda route) will flow Eastwards. It is also feared that Ugandan oil fields are, by their very nature, marginal and thus cannot generate viable levels of oil for long. Could be that even before the money for the pipeline is paid, the oil might have run out, the only beneficiaries being the multinationals and pipeline contractors .

I know I am touching raw nerves there. But in any case, a similar expensive pipeline project miscalculation is rife in the industry and a good example is the Chad-Cameroon Oil Pipeline that was constructed in the early 1990s and Chad is still paying for that pipeline with minimal benefit to its economy.

Having decided to go it alone, Kenya has a lot of homework to do. To mitigate against attendant risks, Kenya should ensure that the oil infrastructure and the Lamu Port Southern Sudan-Ethiopia Transport Corridor project (LAPSSET) are viable. Its efforts to stabilise Somalia are commendable and should be enhanced and reinforced.

Indeed, opportunities abound in the reconstruction of Somalia with the possible election of a new president in October. Take for example, next month, Amsas Management Consulting, an Australian company will host the second Somalia Investment, Trade, Oil and Security conference in Nairobi and many companies from Somalia will showcase their products and services.

It is a good forum and place for Kenyan and Somali companies to network and find ways to end the nearly 30-years strife that has crippled the country economically. Needless to say, the LAPSSET project and Northern Kenya’s county economies need a viable energy and infrastructural agenda that will help create jobs.

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