Opportunities still exist in Kenya’s oil and gas sector

Ideas & Debate

Opportunities still exist in Kenya’s oil and gas sector


Equipment of the gas plant. FILE PHOTO | NMG

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Summary

  • The world is going through major changes in energy use, environmental and technological innovations, all of which Kenya must take into account as it renews its oil and gas ambitions.
  • Kenya discovered its first oil in Turkana County exactly ten years ago in March 2012, when world oil prices were consistently above $100 a barrel.
  • The post-pandemic economic recovery in 2021/22 and geopolitical crises around the world have stretched oil supplies, pushing prices back over $100.

Last week, Kenya announced the sale of 35 oil and gas exploration blocks, mostly in the natural gas-prone coastal Lamu Basin. This is an indication of Kenya’s renewed upstream focus after nearly seven years of inactivity in exploration.

The world is going through major changes in energy use, environmental and technological innovations, all of which Kenya must take into account as it renews its oil and gas ambitions.

Kenya discovered its first oil in Turkana County exactly ten years ago in March 2012, when world oil prices were consistently above $100 a barrel.

Oil was commercially valued at 80-120,000 barrels per day. The discovery has raised Kenya’s profile as an oil and gas exploration destination, with many foreign companies signing onshore and offshore exploration blocks.

Then, in 2014, excess global oil production capacity caused prices to plummet to as low as $25, forcing oil companies to rationalize upstream assets, including investment cuts, closure of marginal assets and mergers and acquisitions.

In Kenya, the Turkana oil project became unprofitable while exploration elsewhere in Kenya came to an end. The oil market crash caused by the Covid 2020 pandemic eventually led to the decision of Turkana oil investors to sell their assets, which is the current situation.

The post-pandemic economic recovery in 2021/22 and geopolitical crises around the world have stretched oil supplies, pushing prices back over $100. The same goes for natural gas, where supplies have been lower than demand and prices high.

The energy transition from fossil fuels (coal, oil, gas) to renewable energies is underway. Unlike petroleum applications that face increasing competition from the electrification of transportation, natural gas will retain a much longer lifespan.

Natural gas, a highly flexible low carbon fuel, is positioned to bridge the gap from higher carbon coal and oil to renewables.

Going forward, therefore, natural gas will continue to attract more capital from investors than oil, which has a shorter lifespan.

We can therefore expect a resurgence of investor interest in the Lamu Basin exploration block since this area is prone to natural gas deposits, being an extension of the Mozambican and Tanzanian offshore geology, which has significant natural gas resources.

However, past exploration experiences in the Kenyan coastal blocks have not been encouraging with almost all drilling yielding non-commercial quantities. This is a historic setback that Kenya will have to face.

I will therefore choose to focus more on the Turkana oil which is already in place, rather than the prospects for new oil and gas discoveries. With the dominance of transport electrification expected in the next 10 to 20 years, global and Kenyan oil demands have a finite shelf life.

Therefore, accelerating the Turkana oil project is a critical success factor in maximizing the value of the oil fields. It is therefore important that the government assumes the initiative with the investors to influence the deadlines of the Turkana oil project, to ensure a rapid implementation of the project, because indeed, it cannot remain a project “forever”.

As long as global demand for oil lasts and exports have a market at reasonably high prices, the Turkana oil project remains feasible and urgent. The first marketing option remains the export of crude oil by pipeline through Lamu.

However, to address demand-side risks, the project life should be condensed to less than 20 years by maximizing pumping rates to accelerate monetization. Additionally, infrastructure security along the Lapsset Corridor remains a major enabler for this project.

As long as Kenya continues to import petroleum products, local refining to specifically meet Kenya’s petroleum needs remains a sensible option.

This should be a very simple refinery located in or near Turkana producing basic petroleum products. Another option is to connect Turkana’s oil production to Uganda’s oil export and refining infrastructure, subject of course to the availability of spare capacity.

Finally, there is the option often pushed by climate lobbyists, which is to let Turkana’s oil rest forever underground in peace. This could easily become a default “do nothing” option if Kenya, for whatever reason, does not prioritize the marketing of Turkana oil.

Yes, with rapidly changing energy technologies and climate policies, Kenya needs to make quick decisions about its oil and gas future. There are socio-economic gains to be made when opportunities last.

Bonny J. Streater