What is in store for Turkana oil as investors depart?

Tullow Oil and Total, the two investors in Turkana oil development with 50 percent and 25 percent equity respectively, have announced plans to sell their entire interests in Kenya.

Tullow, the joint venture operator, has also announced that it will lay off 650 employees in Kenya. This essentially means that the Turkana oil development plans have been frozen, at least until a new principal investor and operator is found…

The latest investment plans for Turkana oil involved producing and exporting 60,000 barrel per day (bpd) of crude oil by pipeline via Lamu. Final investments decisions were expected this year with a target for first oil exports in 2023/24.

Although Africa Oil (with 25percent interest) has not announced its immediate plans, it is a fact that it does not have sufficient technical and financial capacity to develop and operate the oilfields on its own. Its fortunes are dependent on finding new sufficiently capitalised partners. Alternatively, Africa Oil may also opt to sell its stake and quit the scene.

When oil was discovered in 2012, the Turkana oil project economics were quite rosy with an estimated commercial production of between 80,000-100,000 bpd, at a time when global oil prices were above $100 per barrel. It was also expected that Uganda and Kenya would jointly invest in a crude oil pipeline from Lake Albert through Turkana to Lamu.

Three happenings have since made the Turkana oil project less attractive. Firstly, Uganda decided to abandon the Kenya route and export their oil via Tanzania leaving Kenya to finance its own pipeline. Secondly, realizable oil prices dropped from above $100 to between $50-65. Thirdly, Turkana oilfield appraisals confirmed smaller volumes of available oil at 60,000 barrels per day. All these changes essentially diluted project economics – reduced revenues and increased unit capital and operating costs.

Then came the recent Tullow Oil Plc financial woes which for the key equity holder and operator of the Turkana oil project are not good news for Kenya. Reports indicate a weak balance sheet and unsustainable cash flows as operating costs far exceed revenues.

Tullow’s upstream assets are said to be either under-producing (Ghana) or stranded and not producing (Kenya, Uganda, and Guyana). Immediate cost-cutting and divestment from marginal assets appear to be Tullow’s immediate priority

For Kenya, withdrawal of the principal project operator is a major setback because any new operator will have to set up from scratch. However we should see Tullow’s withdrawal as an opportunity for Kenya to get a global oil firm with stronger financial and technical capacity. .

But getting a major oil firm to invest in Turkana Oil will not be easy considering the low appetite for new oil and gas investments in a global environment characterised by supply, demand, and price uncertainties. Oil prices are generally down, oil is over-supplied, and oil demands have been weak.

Further, climate change policies and activism have made oil investors to be very selective of their oil investment portfolios. All these factors have changed investment dynamics and will likely make it harder for a credible major oil firm to get interested in Turkana oilfields.

The government should however be careful not to authorise sale of Turkana oilfields to small oil players (who I call “cowboy” companies) without sufficient financial and technical capacity. Such companies have been here before and were mainly interested in speculative deals – buy low now and sell high later

In the meantime, and until we get new investors, we need to accept that we can move on without Turkana oil. Those who have acquired new direct and indirect skills from engagements with Tullow will need to migrate these skills to other economic sectors.

The new crop of Turkana county entrepreneurs will need to move into alternative trades and opportunities while awaiting new oil investors. Further, the county governments should ensure continuity of any community projects initiated by Tullow.

Yes, it was an oil dream which was never realized, and this is why we need for now to scale down expectations from Turkana oil.