Kenyan oil industry faces infrastructure, capacity challenges

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Recent petroleum finds in Kenya’s arid and underdeveloped north have caused excitement, but even if commercial production goes ahead, major challenges remain.

Kenya will need to invest in human resources, manage often unrealistic expectations and beef up infrastructure, preferably in conjunction with its neighbours, experts say.

East Africa has long lagged behind the west of the continent where oil was found back in the 1950s.

But in recent years Tullow Oil of Ireland has struck oil in the east, first in Uganda, where confirmed reserves of 1.7-billion barrels are located, and now, they hope, in Kenya.

“Companies have passed commercial thresholds” in Kenya, independent consultant Mwendia Nyaga said.

But given that they still need to work out the costs of extracting what they have found, Kenya has not yet officially “declared commercially viable resources”, he said, even if companies see a “high possibility of production”.

“In 2006, there was very little exploration onshore. The main operation was offshore,” Mr Nyaga said.

“Today, every single licensing opportunity onshore has been taken.”

Kenya has four basins. Anza, Mandera and the Tertiary Rift, where the Turkana finds lie, are all completely onshore, while the Lamu Basin extends offshore.

“The geology tells us that there is oil in the Great Rift Valley, running up and down,” Citigroup Africa economist David Cowan said.

Kenya no longer attracts only independents such as Tullow. Majors such as Total of France and Italy’s Eni have started moving in.

“In East Africa the problem is not geology. Rather the question is what to do with the oil and gas produced,” IHS analyst Stanislas Drochon said.

“For oil the difficulty is that the region is landlocked,” he went on, referring to Uganda, Kenya’s Turkana region and neighbouring South Sudan, which sends out its oil via Sudan.

For Kenya’s Turkana region, populated largely by pastoralist communities who fight over land and water resources, all the infrastructure for getting oil out still has to be put in place.

Uganda, Kenya and Rwanda are in discussions over a pipeline network that will connect with a planned new deep-water port on the Kenyan coast.

The legal and regulatory framework in Kenya also needs beefing up, experts said.

A new version of Kenya’s petroleum law, last revised in 1986, is being drawn up, notably in the light of new environmental requirements.

It will create a new upstream regulator and strengthen a number of other bodies, with the aim of leaving the ministry in charge of policy and creating a petroleum directorate responsible for ensuring that companies stick to the terms of their contracts.

The existing National Oil Corporation of Kenya will be the joint venture partner with oil companies.

Kenya also has human resources issues to address, including the inclusion of local communities who expect to see a share of the oil wealth.

“Kenya has comparatively well-trained human resources, you have engineers, but they haven’t worked in the oil industry. You’ll find plant operators, but you’ll have to teach them the oil industry,” Mr Nyaga said.

“One of the big challenges in the region is managing the huge expectations,” said Mr Drochon.

“People expect to see prices at the pump drop immediately whereas anything to do with oil takes a long time,” he said.

The Kenyan government says it is aware of the dangers and is putting in place measures to guard against them.

“There has to be engagement between contractors and the local community and government — at national and county level — in such a way that the local people see tangible benefits,” said Energy Ministry petroleum commissioner Martin Heya.

He said oil-producing communities must feel “tangible benefits both through employment and through local tenders for goods and services”.

While Kenyan companies will be quick to supply nontechnical services such as catering and transport, providing even semi-technical services will remain a challenge for years to come.

The revenue that Kenya derives from oil must be shared out between the national government, the county government and regional committees where the oil is found.

Mr Heya wants to see the setting up of a sovereign fund to ensure future generations benefit from oil wealth and an equalisation fund. The latter is to cushion the effect of fluctuations in oil prices — when prices are up more is saved and when they go down money can be withdrawn.

Tullow has already had a foretaste of what can happen if communities feel disgruntled.

It recently had to suspend operations on two blocks for the best part of two weeks after local people, backed by local politicians, marched on a drilling camp.

“If we neglect involving local people, local industries, then you have problems later, like in Nigeria,” Mr Nyaga said. “People … for example burst pipelines because they see it as a foreign industry that they don’t benefit from.”

Community expectations evolve, he said, and companies need to take that on board. A company that builds a school for a community needs to recognise that the children who attend it will see themselves as its next generation of petroleum engineers.