Energy CS pushes Parliament for support on Turkana oil project

The Energy Cabinet Secretary Opiyo Wandayi has appealed to the Senate and the National Assembly to support the South Lokichar Oil project in Turkana County, terming its development and production phase as a significant milestone for the country.

Wandayi who appeared before the Joint Senate and National Assembly Energy Committees for deliberations on the South Lokichar Field Development Plan and production contracts, argued that support from the legislatures will enhance investor confidence in Kenya’s upstream petroleum sector.

He told the joint sitting chaired by Elgeyo Marakwet Senator William Kisang and Nakuru Town East MP David Gikaria that the Stock Tank Oil Initially in Place (STOIIP) has been estimated at 2.85 billion barrels with life of field resources estimated to be 429 million barrels and end of licence period resources of 326 million barrels.

“The South Lokichar development is of strategic importance with a broader objective of maximising the value of Kenya’s petroleum resources, prior attempts to secure a strategic partner for development of the project have not been successful due to the marginal resource size. The project requires fiscal support to attract the required capital for its realization,” said Wandayi.

He noted that an increase in the cost recovery limit from 55 per cent for Block T6 and 65 per cent for Block T7 to 85 per cent will enhance Kenya’s competitiveness, improve bankability and attract capital to advance the South Lokichar Project towards development and production, hence delivering the desired national economic benefits.

The CS told the committees that the project depends on debt financing. By capping cost recovery at 85 per cent and shortening the debt repayment period, the project could attract lower interest rates and gain easier access to financing for greenfield projects.

Wandayi noted that maintaining the cost recovery limit at 55 per cent and 65 per cent for blocks T6 and T7 respectively would mean an extended cost recovery period and presents difficulty in accessing debt finance.  This would mean a longer recovery period that will attract higher interest rates which will eventually be passed on to cost oil.

“Comparative analysis of other jurisdictions shows that cost recovery ceilings range from 70 per cent (Niger and Senegal) to 85 per cent (Angola and Cameroon) and 100 per cent (Ghana) with this showing that the recovery limit of 85 per cent is consistent with industry practice,” said Wandayi.

The CS said that Tullow Oil discovered crude oil in March 2012 and made several successful finds in the two blocks. The most developed fields hold an estimated 2.85 billion barrels of oil.

The current contractor, Gulf Energy, has now taken over development of the South Lokichar field. The committee members raised concerns on the new contractor with questions rising over the strategy they are to use.

Narok Senator Ledama ole Kina raised concerns about the strategy of the new developer, warning that drilling 990 wells without a clear plan could increase project costs. He noted the project was expected to earn $52 million (Sh6.7 billion) and questioned how much the local community would benefit, asking whether residents would get value for money or they’ll be told the costs were too high.

Ledama called for a clear debt structure and assurance that the developer would cover any cost overruns. He also said transparency in project operations was important.

Tana River Senator Danson Mungatana said Turkana leaders have faced political pressure over how the project has been managed. He noted that Turkana Senator James Lomenen had repeatedly requested reports on oil management without success.

Mungatana also asked who submitted the field development plan to avoid possible legal disputes and whether consultations with the National Treasury were held, including on any tax exemptions.

But Wandayi said: “The ministry does not have power to exempt any one from taxes but the firm met the requirements for that. I also sought approval of the Cabinet for the field development plan and it requires parliamentary approval for it to take effect,” said Wandayi.