Kenyans to Wait Longer for Oil Money as Sh1.2 Billion From Sale Covers Expenses

18 August 2019

Kenyans should expect no revenues yet following Thursday's announcement that the country was selling its first crude oil to China.

Petroleum principal secretary Andrew Kamau said the $12 million to be received from the sale will largely be used to cover for the expenses that the explorer and the government incurred in market testing for the crude, which is set to be exported later this month.

The PS, who had earlier revealed that Kenya had sold the crude oil to ChemChina UK Ltd, said a delegation of ministry officials will be heading to Turkana next week to explain to residents, through their leaders, what to expect from the maiden sale of Kenya's crude.

"We will be meeting all the leaders next week to explain to them what the sale means because, as we have always said, the Early Oil Pilot Scheme is a market test and not necessarily a commercial venture," Mr Kamau told the Sunday Nation.

The expenses to be recovered, according to him, include the cost of setting up the oil drilling machines, rehabilitation of storage tanks and expensive trucking of the crude that saw the pilling of 200,000 barrels headed for Beijing in two weeks.

The upfront cost recovery from the sale of oil means the EOPS may not yield any petrodollars until the project reaches full development in 2022.

The news may not be sweet music to Turkana residents, who on August 1 received with great joy an announcement by President Uhuru Kenyatta that Kenya had struck its first oil deal.

"I think we have begun our journey and it is up to us to ensure that those resources are put to the best use to develop our country to make it prosperous and to ensure we eliminate poverty in Kenya," the President said, signalling possible revenue flows.

Turkana is ranked among the poorest counties in Kenya, according to the Kenya National Bureau of Statistics.

An integrated household budget survey released last year showed that the county alone accounts for close to 15 per cent of the hard-core poor in Kenya. The country is also food-deficient, with 66.1 per cent of its population considered food poor.

The mention of cost recovery from EOPS now opens a glimpse into the possible revenue handling formula, which may mean upfront recovery of costs given that the government has declined to disclose its production sharing contracts with British oil explorer Tullow.

The Petroleum Act 2019 provides for profit-sharing between the national government (75 per cent), county government (20 per cent) and the local community (5 per cent), but that will only be known after the cumulative cost of the Early Oil Pilot Scheme is done, including how the cost will be recovered.

The two partners have kept their deals secret, with even the announcement of the crude oil buyer coming two weeks after the deal was made.

It is not clear why Tullow Oil had insisted that the buyer would remain secret, citing a 'non-disclosure agreement,' moments before PS Kamau revealed that they had settled on the Chinese oil multinational.

"Non-Disclosure Agreement does not allow us to reveal the name of the winning bidder unilaterally. However, the process was competitive; a group of target buyers was invited to bid for the crude with the winning bidder selected based on the price offered," Tullow country manager Martin Mbogo said.

A coalition of 16 civil society organisations under the Kenya Civil Society Platform on Oil and Gas has been pushing for full disclosure of the contracts which specify how the costs incurred by Tullow Oil will be recovered when oil is sold.

KCSPOG Coordinator Charles Wanguhu said the revelations that all the $12 million will go into costs now means the EOPS has no limit on the cost recovery, unlike typical production sharing contracts.

"A normal production sharing contract has a cap on how much is allocated to cost recovery to ensure every year you still get some money. It may take long to make full cost recovery, which is usually a recipe for suspicion, especially from local communities," Mr Wanguhu said.

It also remains unclear just how much Tullow Oil has spent in the Turkana Oil fields, with results of an audit commissioned by the government yet to be made public.

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