Oiling the Wheels

By Aggrey Mutambo

KENYAS arid region of Turkana County was once known primarily for near-starving people begging for food， violent cattle rustling and tracks for roads.

Then oil was discovered in 2012. Signs that the livelihoods of the more than 855，000 people in this northwestern part of Kenya could change for the better became more tangible when Tullow Oil， the Londonheadquartered oil and gas multinational， announced an estimated 300-million-barrel oil discovery.

“The discovery of oil in the region will have many[trickle-down] effects on the economy，” Josphat Nanok， Governor of Turkana， told a group of journalists in December.

Kenya had been prospecting for oil since 1937 without success. In 2015， the Kenyan Government announced oil production may start in late 2016. But Tullow has said that it can produce the first oil only by 2020.

“We are likely to see the towns here expanding very fast because of the economic activities that would result from oil production，” Nanok said.

East Africas oil boom

With the subsequent discovery of another deposit in Turkana by Canadian firm Africa Oil and by Australian firm Pancontinental on the Kenyan southern coast， Kenyas Ministry of Energy and Petroleum said the country has reserves of up to 1 billion barrels， 600 million of which is in Turkana.

It means Kenya has joined the list of African countries recently discovering oil or gas such as Ghana， Tanzania， Mozambique and Uganda， with an estimated combined 237 billion barrels of oil and gas reserves， according to a 2014 study by Ernst and Young.

In Uganda， there had been similar excitement when oil was discovered in the Albertine rift basin in 2006. The Ugandan Ministry of Energy and Mineral Development said the find was about 6.5 billion barrels， making the country the fourth largest oil reserve host in Sub-Saharan Africa.

In 2011， Tullow， French multinational Total， and Chinese oil giant China National Offshore Oil Corp. （CNOOC） signed agreements with the Ugandan Government to establish a refinery and pipeline for the start of crude output from 2018.

Then oil prices started to slump， dropping from over$100 per barrel to $25 in February 2016. The oil companies immediately responded to that.

“Some firms suspended operations and investment in the sector went down over concerns that when prices are too low they may not be able to cover costs，” said Kwame Owino， Chief Executive of the Institute of Economic Affairs， a public policy think tank in Nairobi， when prices hit $30 in January.

What was causing this price slump？ The Organization of the Petroleum Exporting Countries （OPEC）， a 13-member Vienna-headquartered bloc that exports 40 percent of global oil， said there was a glut in the market， caused by non-members.

“Until 2015， all of the supply growth since 2008 came from non-OPEC countries. Between 2008 and 2014， overall non-OPEC growth was more than 6 million barrels a day， while OPEC actually saw a contraction，”OPEC Secretary General Abdalla el-Badri said at a conference on oil in London in February.

“It is crucial that all major producers sit down to come up with a solution to this. The market needs to see inventories come down to levels that allow prices to recover and investments to return，” he said.

Not all doom and gloom

Economists， however， argue a slump in price should not affect exploration.

“The fall in prices is not a reason for firms to freeze exploration. In the new oil frontiers like East Africa， where countries like Kenya and Uganda have discovered massive oil deposits， the discovery means that regardless of falling prices， exploration companies must invest in the initial associated infrastructure，” Bernard Ayieko，an economist and African investments commentator， told ChinAfrica.

While the oil price drop is good news for consumers， what about those dreaming of joining the league of big oil producers， such as Kenya， Uganda and Ghana？ What would it mean to the survival of those in the big league who depend on oil revenues to run their economies such as Equatorial Guinea and Angola？ In Africa， 19 countries are significant producers of oil and their economies rely on oil exports.

In both Kenya and Uganda， if the new exploration ventures are to succeed， oil must be $50 a barrel. In South Sudan， where the World Bank reports a daily production of 165，000 barrels， Juba would benefit only if it exported oil much above the mandatory transportation fee of $25 per barrel for using the pipeline running through Sudan.

“Marketing oil and gas globally will remain challenging until overproduction is contained and prices strengthened，” said George Wachira， a director at Petroleum Focus Consultants， a Nairobi-based consultancy. Wachira believes current prices make it difficult for many oil and gas projects worldwide to be viable.

Making production adjustments

Economists advise that both governments and oil companies adjust in certain ways. One way is halting extraction activities.

CNOOCs 2016 Strategic Review， published in January， says the company will “continue to lower costs and increase efficiency and focus on returns by balancing short-term benefit and long-term development.” CNOOC bases its analysis on a projected oil price index by Brent and WTI which assesses oil may reach $70 per barrel by 2019. The Chinese company， which runs 51 percent of its budget overseas， says it has reduced its exploration， development and production budget from 107 billion yuan （$16.47 billion） in 2014 to less than 57.4 billion yuan（$8.8 billion） in 2016.

A similar tactic has been employed by Tullow， CNOOCs partner in Uganda. In Kenya， however， Tullow has exploration contracts with the government which it must complete within the given time. It says this year it will focus on saving drilling costs as it waits for oil prices to improve.

“In 2016， our main focus will be to continue to selectively replenish and high grade the exploration opportunities for future growth，” Tullow said in its operational update in January.

However， according to Ayieko， oil pricing should not affect set oil production schedules since price fluctuations dont last long. “The short-term forecast looks bleak but a closer look at the timelines points to an increase in activities in the next 10 years - a period that is good enough to change oil sector fortunes，” Ayieko told ChinAfrica. “Thats the time when these countries will start to reap the full benefits of investing in oil production.”

Another option is to renegotiate deals. For instance， South Sudan has the oil while Sudan has the pipeline. In 2012， an agreement was struck to peg the transportation fee at $25 per barrel of oil moved from South Sudan to Port Sudan in the eastern part of Sudan. The oil slump meant South Sudan operated at a loss every time it sent oil through Port Sudan. In February， however， an agreement was reached for transit fees to be a percentage of prevailing market prices rather than be fixed.

With a pipeline proposed from Hoima in the west of Uganda through Kenyas Turkana County， Uganda and Kenya too are discussing a similar flexible arrangement for oil transportation.