Kenya: Hope for Turkana Oil Project As Kenya Signs $3 Billion Financing Deal

Kenya has signed an agreement with oil multinationals that is intended to attract up to Ksh308.4 billion ($3 billion) financing for development of its Turkana petroleum deposits, potentially placing the country ahead of Uganda in the race to the market.

Kenyan petroleum ministry officials were this past week in London to finalise an information memorandum that will be marketed to global financiers who are keen on putting money in the Turkana oil project.

The deal, which was confirmed by Petroleum Principal Secretary Andrew Kamau, comes at a time when Uganda, which discovered crude deposits six years earlier than Kenya, is locked in an impasse with oil multinationals that has resulted in the suspension of production and export infrastructure projects.

"We have agreed on the project information memorandum that allows us to do market sounding, which is going to the market to source for funds," Mr Kamau told The EastAfrican in an interview. "The memorandum is being shared with banks that we know have the size and the appetite to finance this kind of project. We are looking at 10 banks, both local and international."

In June, Kenya also signed the heads of terms agreement with Tullow, Total and Africa Oil, the joint venture partners involved in development of the Turkana oilfields, laying out the obligations of each party and investments required for commercial production.

The first shipment of 250,000 barrels of early oil exports also happened in August, as Nairobi sought to test the appetite for its crude deposits on the international markets.

The information memorandum now takes Kenya closer to signing the Final Investment Decision (FID), which is the ultimate step in the long road to drilling and commercial production expected in late 2023 or 2024.

Uganda had set a commercial production target of 2022, which is now in doubt following the row with the oil multinationals.

The Total general manager, Pierre Jessua, in an interview this past week said the multinationals have re-started negotiations with the Ugandan government to resolve the standoff.

"It does not mean that we are leaving the country or that we want to stop the project. No. We just have to be very careful managing funds of our shareholders," said Mr Jessua.

Kampala has partnered with Tanzania to build an oil export pipeline to the port city of Tanga, a project that Total suspended following the tax disagreement with Uganda Revenue Authority.

The $3 billion that Kenya is seeking will be spent on construction of an oil pipeline from Turkana to Lamu as well as development of drilling and storage facilities.

Uganda's East African crude oil pipeline (EACOP) stalled following URA's disagreements with Tullow on the amount of capital gains tax that the company should pay in sale of its stake to Total E&P and China National Offshore Oil Company (CNOOC), technically called a farm-down transaction.

Tullow Oil wants to pay $85 million on the basis that most of the proceeds of the $900 million farm down will go towards investments in the oil pipeline, but Kampala is demanding $300 million.

The tax demand prompted Tullow to terminate the farm down agreement signed with joint venture partners Total and CNOOC, forcing Total to suspended technical operations on the pipeline.

Kenya discovered crude deposits in 2012, while Uganda hit the black gold in 2006.

The memorandum that Nairobi signed with oil multinationals will see Kenyan taxpayers fork out Ksh48 billion ($467 million) to finance upstream and midstream projects to facilitate commercial production. The financing structure was agreed following extensive as a precursor for signing the FID by a target deadline of mid next year.

An Environmental and Social Impact Assessment approved by the National Environmental Management Authority (Nema) is also a critical requirement before signing of the FID.

In the Turkana oil fields, the Kenyan government, Tullow, Total and Africa Oil must raise Ksh195.3 billion ($1.9 billion) in equity to finance the drilling of 320 wells and flow lines connecting the crude deposits to a central processing facility that will connect to the pipeline.

The Kenyan government, which will acquire a 20 per cent shareholding on the upstream infrastructure by diluting the current shareholders based on its backing rights, must raise KSh41.1 billion for development of the drilling and storage infrastructure.

Currently, Tullow is the majority shareholder for upstream with a 50 per cent stake while Africa Oil and Total each hold 25 per cent stakes.

In midstream, which involves the construction of the Lokichar Lamu crude oil pipeline (LLCOP) at a cost of KSh113 billion ($1.1 billion) through a syndicated loan, Kenyan taxpayers will foot a bill of Ksh6.8 billion ($67 million).

This is based on the fact that the partners have settled on financing the pipeline through 70 per cent debt from both international and local commercial banks, with the remaining 30 per cent raised by equity holders.

The partners are in the process of forming a holding company that will oversee the management and running of the pipeline, ultimately shutting out the Kenya Pipeline Company which currently manages the country's pipelines.

According to Mr Kamau, the market sounding, which should take about one month, will involve sharing the memorandum with banks specialising in project finance.

The process should culminate in the identification of a lead arranger of the syndicated loan after the partners scrutinise the term sheets that competing banks will offer.

Kenyan banks could miss out from the mega financing deal, as they have become un-enthusiastic on long-term financing since introduction of statutory controls on the cost of loans.

"Since the rate cap, the average maturity of a loan has reduced considerably. Some of the large banks have categorically stated no project financing due to the risks," said Gerald Muriuki, an analyst at Kenya's Genghis Capital.

The financing banks will also have access to the Front End Engineering Design study that shows Kenya has settled on an 18-inch pipeline buried underground to reduce its impact on communities and wildlife.

It will also have 16 above-ground installations like pumping stations, pressure reductions points and generators owing to the waxy and heavy nature of the crude.

The Kenyan government will be hoping that concerns raised by non-governmental organizations like the World Wide Fund for Nature will not work against efforts to raise funds for the project.

WWF has warned that although LLCOP may generate national economic gains, it poses "significant or high threat" to important biodiversity, natural habitats and wildlife habitats along its corridor that traverses six counties.

"Although its direct impacts might be moderate, it is the indirect impacts of the pipeline and associated developments that may pose the most significant threats to these ecosystems and associated economy," said WWF.

Kenya is targeting to commence commercial exports of between 60,000 to 80,000 barrels of crude per day in 2023 when the 892-km pipeline is projected to be completed. The country's crude reserves are estimated at 500 million barrels, with about 400 million considered recoverable.

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DAR-KAMPALA DEAL NOT FULLY SEALED

As discussions between Uganda and oil multinationals over the East African crude oil pipeline (EACOP) project are going on, Tanzania is yet to finalise evaluating modalities for compensation for affected communities.

Minister for Energy Dr Medard Kalemani told The EastAfrican this past week on the sidelines of the oil and gas congress in Dar es Salaam that the government is waiting for the outcomes of the negotiations between Uganda and its EACOP partners to finalise its own plans.

The two-day congress attracted over 600 oil and gas experts from Uganda, Tanzania, Norway, Morocco, Comoro, UK, France and Canada.

The chairman of the Uganda Refinery Holding Company Irene Bateebe, who led the Ugandan delegation said that the country is working round the clock with oil investment companies to come to an agreement on the EACOP and the resumption of work on the project as early as possible.

Ms Bateebe also serves as the principal refining engineer in the ministry of Energy and Mineral Development.

By Emmanuel Onyango

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