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WACHIRA: It is possible to achieve “first oil” export by 2021/22

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Ideas & Debate

 

From questions I routinely receive, it is apparent that a public information gap exists on the current status of Turkana oil discoveries. I will attempt to answer a number of persistent questions, while also endeavoring to align various facts on Turkana oil.

I will begin by defining two often confused terms- “early oil” and “first oil”. Early oil is the crude oil that is currently being trucked to Mombasa for temporary storage waiting to make a full shipment to an overseas refinery. The oil was accumulated during the exploration and appraisal drilling in Turkana and is about 70,000 barrels (11,000 M3 or about 450 trucks) .expected to be shipped out before mid-2019.

“First oil” denotes the first commercial export of crude oil from Turkana through a new 850 Km Lokichar-Lamu pipeline. Meeting the first oil export target date of 2021/2022 should be the focus of all stakeholders- investors, national and Turkana county governments, and oil source local communities.

Another common question is why Kenya is exporting oil (early oil and first oil) while we continue to import petroleum products. Having permanently closed down the Mombasa refining operations in 2013, we cannot convert crude oil into products.

Further, there is currently no policy or plan to refine locally produced crude oil at Mombasa, Lamu or elsewhere. This is presumably advised by negative refining economics, influenced by weak economies of scale. This is however a dynamic and open situation that could change in the future.

The journey towards first oil by 2021/22 involves two distinct ongoing project activities. There is the upstream crude oil production development in Turkana, and a midstream crude oil pipeline construction project from Lokichar to Lamu port. The two projects are separate in ownership structure, but are mutually dependent and logistically conjoined because one cannot take place without the other. They have to be committed, executed and completed concurrently.

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The oil production development project is a joint venture (dubbed Kenya Joint Venture-KJV) of Tullow, Africa Oil, and Total with a 50/25/25 per cent ownership respectively, with Tullow as the project operator. This is the second stage of the oil value chain, termed “development and construction” after successfully completing the first “exploration and appraisal” stage which identified 10 oil discoveries in Turkana.

The production development model by KJV is “phased’ with Phase One initially targeting two out the ten discoveries (Ngamia and Amosing) with a projected output of between 60-80,000 barrels per day (bpd). Subsequent development phases will see incorporation of the other discoveries which will feed into the same export pipeline.

The KJV is currently undertaking FEED (Front End Engineering & Design) studies to determine production development costs for the Phase One project. This will inform the Final Investment Decision (FID) by the KJV investors to commit their capital, a commitment which is expected before end-2019. Assuming a two/three year project construction time, first oil can be ready to feed into the pipeline by 2021/22.

It is understood that the KJV has so far spent $2.0 billion, and expects to spend another $3.0 billion up to the first oil target, making a projected total spend of about $5.0 billion.

The midstream Lokichar-Lamu pipeline project investors are conducting a separate but parallel FEED study. The pipeline Joint Venture investors are expected to comprise the three KJV partners, together with the Government (probably represented by Kenya Pipeline Company).

For the two projects to meet the 2021/22 first oil commissioning date, we need an early alignment of all the stakeholders and permitting agencies. Specifically land will require to be acquired early enough. Supporting infrastructure (roads, electricity, and water) will need to be in place to facilitate construction and operations.

Further, we need to publish and operationalise the Upstream Petroleum Act to provide sound legal, regulatory, fiscal and commercial basis for the investments.

Finally if all goes as anticipated, project construction of the two projects will kick off in early 2020. This is the time to harvest local content benefits in the form of materials, services, and skills. The major question is whether Kenya has made adequate provisions for capacity to benefit from local content, a major economic opportunity.

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