14 March 2017

Kenya: Tullow Oil, Government Sign Production Agreement

British explorer and producer Tullow Oil on Tuesday signed a production agreement with the national government, paving the way for the exportation of crude oil from Turkana fields.

The pact draws the roadmap for Kenya's early oil export plan that is expected to pump out 2,000 barrels per day for transportation by trucks and storage at the defunct Kenya Petroleum Refinery's storage tanks in Mombasa.

Movement of the oil, to buyers and markets that the government is yet to make public, is set for June.

"With this agreement, which covers legal and technical issues, we will next month start moving oil from Lokichar to Mombasa for export," Energy Cabinet Secretary Charles Keter said.

Nairobi has enlisted the legal services of London-based white shoe law firm Simmons & Simmons to shepherd the export plan.

Kenya's oil is classified as light and sweet, meaning it has less sulphur.

This type of oil is known to fetch higher prices in the global market because dealers find it easier to refine and it produces high value products - petrol, diesel and kerosene.

It is, however, waxy and sticky, making it necessary to heat it during transportation.

Kenya plans to move between 2,000 and 4,000 barrels of oil per day using flatbed trucks mounted with oil tanktainers (130 barrels) and trains in the absence of a pipeline.


The plan opens a goldmine for truck owners who will be contracted to transport the oil to Mombasa.

The early export scheme seeks to test the receptivity of Kenyan oil in the global market, pending full field development that includes pipeline construction connecting the Turkana oil fields to the port of Lamu.

Nigeria's oil - bonny light - is among the best in the world while Gulf oil is of low quality and is classified as heavy and sour as it comes with lots of sulphur that has to be removed before refining, raising processing costs.

South Sudan's dar blend is also classified as being of poor quality, reaping lower returns while the country's Nile blend is top quality.

Mr Keter said that refurbishment of Kenya Petroleum Refineries Limited (KPRL) facilities is ongoing and will soon be completed.

KPRL has 45 tanks, nearly half of which will store the crude from Turkana for shipment while the rest is for refined products.

Kenya expects to embark on large-scale production in 2020 and will export the oil through the 865-kilometre pipeline linking the Turkana oilfields to Lamu port to be built at a cost of Sh210 billion.


The pipeline will enable East Africa's largest economy to pump out about 100,000 barrels a day.

The Turkana oilfields have a lifespan of 25 years.

The government has more recently come under heavy criticism for its rush to enter the saturated oil market, even before crafting a strong business case for the trial.

Global crude prices are now at $55 a barrel from $115 mid-2014.

The government hopes that oil exports will earn the country the much-needed petrodollars and help stem the rising tide of public debt that now stands at half the gross domestic product (GDP).

The Kenya Civil Society Platform on Oil and Gas last year warned that government's rush to start exporting crude could cost the economy more than Sh4 billion given the vast distance to be covered by special trucks.

The lobby insists that the State should construct a pipeline before exporting.

But Energy ministry officials argue that Kenya will make a profit from oil sales at $34 - $50 per barrel.

At $34, Kenya's breakeven level is higher compared with top producers like Saudi Arabia ($9), which pumps out 10 million barrels a day and Venezuela ($23.50).

Nigeria's profit level is $31.60, Angola ($35.40) and the US ($36.20), according to Norwaybased consultancy firm Rystad Energy.

Kenya's total oil reserves are estimated at 750 million barrels.


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