OpEd: Early Oil Pilot scheme (EOPS)an enabler, not a replacement for the Full Field Development

by Andrew Kamau, PS Department of Petroleum; Ministry of Energy & Petroleum

The last four years have been the most remarkable period in Kenya’s Oil and Gas industry since exploration began in the country in the early forties.  During this period, over 45 Oil and Gas exploration wells have been drilled in Kenya, more than the total number of wells drilled since the 1940s. At the same time, Kenya has also undertaken extensive policy, legal and institutional reforms in line with the Constitution of Kenya 2010. This review has seen the approval of several bills by parliament including: the Petroleum Bill 2015; the Community Land Bill 2015; and the Energy Bill 2015.

These important bills not only align the Oil and Gas sector to the provisions of the Constitution of Kenya 2010, but also set out the industry’s regulatory structure and ensure that the industry is managed in a transparent and equitable manner, with all production sharing agreements (PSC) ratified by Parliament. The bills additionally ensure protection of the environment,  local community participation; and provide a framework for managing the fiscal opportunities and risks of oil revenues expected once commercial production begins.

The industry provides an important building block for the continued growth of the country. Indeed, Oil and Gas is one of eight key sectors supporting the Economic Pillar of our Government’s Vision 2030 National Development Plan.

To ensure continued progress in Kenya’s Oil and Gas industry, the Government – in collaboration with the Turkana County Government and the Kenya Joint venture partners (KJV – Tullow Oil, Africa Oil and Maersk Oil) – is now working on the Early Oil Pilot Scheme (EOPS).

EOPS will specifically utilise five existing wells to produce oil, with phase one targeting oil production of 2,000 barrels per day. The oil will be transported from Turkana to Mombasa by road in insulated tanktainers. Elsewhere, trucking of oil by road is widely practiced in the United States, Canada, India, Russia, and Kazakhstan, among other countries. At current oil prices, EOPS is not expected to generate significant revenue.

The project that most resembles Kenya is the Cairn India oil project. The crude oil produced at their Rajasthan fields is waxy and is currently transported in the world’s longest continuously heated pipeline. Before this pipeline was built, Cairn India transported between 20,000 and 30,000 barrels of crude oil per day by road, a distance of 750 KM to the port at Kandla. On October 8, 2009, Cairn India exported their first 208,000 barrels on board a Singapore registered ship. This is a parcel size similar to the one envisioned in the EOPS.

Critically, EOPS is an enabler and not a replacement for the Full Field Development (FFD), which will include amongst other LAPSSET (Lamu Port South Sudan Ethiopian Transport) developments, a crude oil pipeline from Turkana to Lamu carrying between 80,000 – 150,000 barrels of oil per day.

Although it will be a small scale project, EOPS will mark the first major milestone in Kenya’s Oil and Gas industry: producing and exporting crude oil for the first time in the country’s history.

So why are we undertaking this pilot scheme?

First, EOPS will be key in establishing logistical and technical infrastructure (e.g. roads, bridges) and other key arrangements crucial for supporting FFD.  Establishing these aspects beforehand will allow the operators to identify and manage risks associated with large capital-intensive projects like FFD and so reduce potential delays. The EOPS will also provide an opportunity for both the National and County Governments to gain enabling experience and capabilities necessary to facilitate FFD.

Second, EOPS will provide important technical well data that will greatly assist in planning for FFD. This data will help the operators of the project understand the behaviour of oil reservoirs and how they transform as they produce oil.

This is also known as the appraisal phase. During the last appraisal phase, over 60,000 barrels of crude was produced and is currently stored at Lokichar. With the drilling of 5 new wells, it is necessary to produce more crude oil in order to understand the reservoirs better and increase Kenya’s recoverable reserves from the current 750 million barrels to over 1 billion barrels. This can only help improve the viability of Kenya’s crude export pipeline.

This crude oil will have to be stored somewhere. The only two alternatives are to build more tanks at Lokichar or use the existing tanks at Kenya Petroleum Refineries in Mombasa. We have chosen to use the already existing asset and provide revenue to the refinery.

Third, EOPS will help establish Kenya as a crude oil exporter and provide valuable information on the international market for Kenyan crude. Since our oil will be a new product in the global crude oil market, EOPS will help introduce it to the international crude oil market in a low key way and provide an understanding of what potential buyers are prepared to pay for the oil product.

Finally, EOPS will create employment and business opportunities that will assist in building the capability for Kenyans and local business, thereby positioning them so that they can maximise on the opportunities created by FFD. These will be limited opportunities initially, but ones which can be scaled up as and when FFD begins.

For these reasons, the EOPS is an important technical project which will be a key enabler for FFD which still remains some years away.

It should be clear that EOPS will not immediately solve the challenges faced by the communities in Turkana. However, I believe that EOPS will act as a stimulus for tackling some of these challenges and unlock immediate benefits. For example, the government has allocated KES 3.2billion towards tarmacking the A1 road from Eldoret to Lokichar, alongside funding for a modern 600km highway from Eldoret to Nadapal. The section between Lochuma to Nadapal (including Kainuk Bridge) has already secured financing from the World Bank. This important upgrade will open up Turkana County, improve transport options for its inhabitants, and ease access both of Turkana goods (e.g. agricultural, herding and fishing products) to wider Kenyan markets and for consumer goods to Turkana. These infrastructure projects will also put Turkana on Kenya’s tourist maps by easing travel to Turkana.

Our Government recognises that the development of a successful Oil and Gas industry in Kenya needs a broad, concerted effort by all relevant stakeholders. Together we can ensure the associated benefits and opportunities can be shared by both current and future Kenyan generations.