Politics, potholes and price drops: the story of Kenya's crude

Kenya plans to export its first oil in June, but analysts say the test phase faces major challenges and appears motivated primarily by political considerations just months ahead of elections.

British company Tullow announced the discovery of oil in Kenya in March 2012, when prices were well over $100 (92 euros) a barrel, close to Lokichar in the country's arid Turkana region. Since then reserves totalling 750 million barrels have been found and there are hopes of more to come. But at the same time oil prices crashed and have been slow to recover.

Kenya's oil is good quality -- with low sulphur content and good density -- but with a wax-like consistency meaning it must be transported at a high temperature to keep it liquid, making the cost of exporting it higher.

- By road and pipe -

Turkana is deep inland so Kenya's oil will only be available for export after the construction of a 900 kilometre (560 mile) pipeline to a new port to be constructed at Lamu on the Indian Ocean coast. The pipe is planned to move around 100,000 barrels per day, but construction is not expected to start until next year.

In the meantime, Kenya has announced a two-year "pilot programme" moving a modest 2,000 barrels a day by road, more than 1,000 km to the existing port of Mombasa.

The journey along congested and badly maintained roads takes several days. Promised road repairs on the first 300 km are behind schedule but might be completed in August, local media reports.

- Discount... -

In the national press the government presents the road exports as a way to "test the market" and says buyers in China and India are interested.

Andrew Kamau, a senior official in Kenya's energy ministry, told AFP the pilot programme is about increasing understanding of how the oil reserves will respond to full-scale extraction.

"The idea is to get information, of course we're not going to make any profit during the pilot scheme," Kamau said.

"If you extract oil during these tests, you might as well export it," he added.

Kamau said the early exports will allow foreign refineries to get used to the specific characteristics of Kenyan crude, and to take the price hit early that often accompanies new oil entering the global market.

"I'd rather suffer the discount when I produce 2,000 barrels a day rather than when I produce 100,000," he said.

- ... and distraction -

But such explanations do not impress critics.

"This early oil pilot scheme is a distraction from what really matters, that is getting the pipeline done and starting production properly," said Charles Wanguhu, director of the Kenya Civil Society Platform on Oil and Gas (KCSPOG), adding that it is "not good value for money".

According to his organisation's calculations, production has to double and prices increase significantly if the government is to avoid losing tens of millions of dollars under the pilot programme.

WTI crude, the US benchmark, is trading at around $49 but Turkana crude is unlikely to achieve this price when it enters the market, suffering a discount due to its novelty and small volumes.

The government estimates that the pilot programme will be profitable at $43, according to energy minister Charles Keter, but KCSPOG says the real break-even is closer to $53, a figure backed by an oil industry source.

- PR stunt? -

"It is normal that there should be a test phase, but in these cases, one generally limits oneself to learning the properties and reactions of the reservoirs, one tests the extraction but one does not launch it on the market," said Benjamin Auge, a researcher at the French Institute of International Relations (known by its French acronym, IFRI).

And many observers see it as nothing more than a publicity stunt ahead of general elections on August 8 aimed at allowing the government to claim a success.

"The government is highlighting the progress made and the imminent production of crude, and it's fair enough," said Stanislas Drochon, director of Africa oil and gas at consulting firm IHS Markit.

"Usually, such tests are not the subject of such media and political coverage," he added.

Stunt or test, Tullow wins, said Wanguhu. The company is "not going to lose any money" on the pilot programme while keeping "on good terms" with the government.

source: AFP