Kenya's Red Tape Blamed for Delay in Oil Production Plan

A team led by Petroleum and Mining CS John Munyes during a visit to the Kiboko oil spill site in Makueni County on June 3.

Kenya's plan to start producing oil could be thrown into a spin, if one of the joint partners makes good their threat to pull out over incessant delays caused by government 'bureaucracy'.

The partner -- under the Kenya Joint Venture (KJV), which comprises the government, Tullow Oil Plc, Total SA and Africa Oil Corporation -- has cited Kenya's prolonged process of making final investment decision (FID) delay in negotiating legally binding heads of terms (HoT) and slow grant of approvals, which it says is making the project less feasible.

OBLIGATIONS

"It has been an open talk within this industry over the firm's intentions to pull out of this venture. So far they are scouting for a buyer of its interests given that the multi-agency team within government is yet to even start negotiations of legally binding HoT with the joint venture partners. This means more delays in progressions from exploration to production," the Nation was told at the sideline of last week's East African Petroleum Conference and Exhibition in Mombasa.

At the centre of this delay is said to be the office of the Attorney-General and Treasury, which, together with the Ministry of Petroleum, are part of the multi-agency government team.

These two offices, sources say, are accused of being 'too slow and difficult' in progressing to the negotiations for the HoT terms that would set the pace for the establishment of the commercial structure associated with field development.

Some of the issues the government has been grappling with are prolonged negotiations of the legally binding heads of terms.

Nation understands that Kenya has concluded negotiations for the non-binding HoT covering the details of proposed agreement and target completion dates among others. But it is the binding HoT, which has confidentiality clause with enforceable obligations and termination procedure that the AG's office has been dragging its feet on, to the frustration of the joint venture partners.

If the party makes good their move to pull out, then Kenya risks missing target to start commercial crude output by 2022 as this will further delay building of field production facilities in Lokichar and oil export pipeline to Lamu port on the coastline.

The withdrawal has potential to impact timeline of mobilising funds of capital intensive building of field production equipment and crude export pipeline pushing starting of commercial oil exports to either 2025 or 2026.

AGREEMENTS

At the Mombasa conference, Tullow Oil warned that the delays by governments in granting approval to oil projects risked eroding the value of countries 'commercial crude oil discoveries.

Tullow executive vice-president for East Africa, Mr Mark MacFarlane, said further delays will affect the country and communities.

"Without permits, licenses, agreements, understanding, we can't move. These projects are good but further delays will do nothing except erode value," Mr MacFarlane said.

"In Kenya, we need all levels of government to move faster and make decisions. We can only move as fast as the slowest government department. Some of the tasks that must be completed tasks that must be completed for the South Lokichar basin to reach FID by the end of 2019 include commercial framework agreements with Kenya's government, as well as agreements over land title and water supply," he added.

In an exclusive interview with Nation, Petroleum Cabinet Secretary John Munyes admitted to the delays, and said they are doing 'all they can' to ensure no partner pulls out and the agreements are signed in a timely manner.

"Yes it is true that there could be reservations by some of our partners on the pace of how things are moving. In deed it is true that we need to be strict in the schedule timelines but we also have to be alive to the complexity of the matter at hand. So even if we overlap by a year but deliver the best deal, then so be it," Mr Munyes said,

The World Bank through its Kenya Petroleum Technical Assistance Project and the Norwegian government have offered technical assistance to the Kenyan team as it seeks to have a team that will deliver the best deal for the country.

NEGOTIATIONS

"It has been a very tough process, but we are indeed happy with the support we have received in having our teams get the best technical consultancy assistance as we seek to negotiate favourably," Mr Munyes said.

"It is my hope that once we conclude these discussions, then we can now approach lenders to give us the funds as we head into full production. It has not been easy given the complexity of the issues at hand. The negotiations and discussions have touched on cost recovery and also the deliverable aspects. We are also talking within the partnership over the pipeline, land compensation and water access, which we plan to tap from the Turkwel, and with approvals from the West Pokot County government," he said.

The government has also seen its team sent to the UK for 'extensive discussion', but also retain several oil and gas foreign technical consultants domiciled within the ministry and also Treasury.

In the current plan, Tullow and the joint venture partners expect to achieve FID by end of this year, subject to reaching timely agreements on various project requirements with the government, but multiple sources cast doubts on it being achievable this year. The three exploration firms have been hoping to secure these approvals so as to build oil production facilities.

"The project is facing extended negotiations. We look forward to expediting conclusion of commercial principles, availability of reliable water for oil production, access to land for upstream and midstream development," Tullow Oil Kenya MD Martin Mbogo said.

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