Kenya’s Annual Receipts Could Reach $3 Billion Annually Once Oil Price Rebounds

A discussion paper dubbed “Potential Government Revenues from Turkana Oil” released in April 2016 estimate that annual receipts to the Government of Kenya could range from $800 million to as much as $3 billion. The high earnings are at an estimated barrel price of $85 while the low estimates  are at $45/bbl.

The amounts are estimates from the three sources of government revenue as per the production sharing system that include profit oil, a windfall tax imposed when oil is over USD50 per barrel, and the right to acquire an equity stake in the project.

Governmet Revenues vs Oil Price

“Assuming that the project does move ahead, as the analysis above has shown, the oil price will have a profound impact on the volume of revenue flowing to national and subnational governments,” reads conclusions from the discussion paper.

The discussion paper compiled by Cordaid, Timu, Kenya Civil Society Platform on Oil and Gas and Resources for Development Consulting says that the estimated 600 million barrels evacuation will be the greatest challenge with the remoteness of the discovery sites only favoring the pipeline as the only viable option.

This pours cold water on attempts by the government to export oil by road and rail in order to speed up first oil exports and more of a short term measure.

A feasibility study for routing Ugandan oil through Tanzania is currently underway while the engineering work required to generate firm estimates on overall costs, to devise specific plans for overcoming technical challenges, and to establish a per barrel tariff for both Ugandan and Turkana crude, has not yet begun.

Block 10BB 13T pipeline

The report backs up views by various pundits that first oil through pipeline transport could be around 2021 on the earliest with a final investment decision or project sanction sometime in 2017/18 at the earliest and the minimum time to build the pipeline is three and a half years according to the Toyota Tsusho Pipeline Report.

“The most important upcoming milestone for Turkana oil therefore is the final investment decision for both the upstream operations and the pipeline. Assuming a decision in 2017, the earliest possible date for first exports through the pipeline would be late 2021.”

The paper further estimates that exploration costs through to the beginning of the development phase in 2017 will be $ 1.8 billion. Cost estimates for the development phase are at an average of $6/barrel in Uganda as provided by Tullow Oil to investors in October 2015.

The estimates in the Petroleum Master Plan (10% of development costs) are very high the paper laments. The originators of the paper also assumed 6% of development costs that results in an average operating cost of $7 per barrel in comparison with International Energy Agency data on large, onshore oil fields.

Going by the Toyota Tsusho design the estimated transit fee for oil per barrel would be $15.20 and the corresponding tariff for crude originating in Turkana, according to the Toyota Tsusho Pipeline Report would be $10.70.

The paper estimates on the overall cost correlate with Tullow’s recent cost estimate of around $25 dollars per barrel for Turkana oil.

“A true breakeven price, however, would need to take into account the discount to Brent identified above as well as the profit oil allocation to the government,” the paper cites.

Back to production the paper estimates that during the first phase the peak will stand at 75,000 bopd which will surge to 150,000 bopd  during the second phase.

The paper assumes that State participation from the production sharing terms for Block 10BB and 13T at 20% and 22.5% respectively.

“Capacity building should be a priority, both at both national and regional levels and within and outside of government (including for civil society and local communities), as the Turkana oil projects move from discovery towards development and eventual production,”  the paper recommends.

“A key aim of the report is to deal with expectations around future revenues, present a profile of likely revenues, track costs and more critically the timelines. While there are limits to analysis based exclusively on public domain information, it also points to the need for increased transparency and accountability in the oil and gas sector in Kenya,” concludes Kenya Civil Society Platform on Oil and Gas Coordinator Charles Wanguhu.


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