Exit of Lokichar-Lamu line ties KPC's growth to complex oil export plan

The Kenya Pipeline Company (KPC) could be compelled to pump billions of shillings to convert some of its facilities in Mombasa to handle crude oil from Lokichar in Turkana County for export, once the project starts commercial production later this year.

In what could be the first major investment for the pipeline company post-Initial Public Offer (IPO) and possibly supported by cash injected by the new shareholders, KPC is expected to invest billions of shillings in repurposing tanks and other facilities at the Kenya Petroleum Refineries Ltd (KPRL) to store crude oil from Lokichar.

KPRL was acquired by KPC in 2023, in what was seen as a masterstroke for national energy security.

KPC will also be required to modify other infrastructure, including truck discharge bays to receive oil that will be brought in by lorries by road from Turkana and pipelines to support the evacuation of the oil from the tanks at KPRL to vessels that will ship out the oil. 

The need to upgrade the oil storage and other facilities in Mombasa follows the abandonment of the plans to build the 892-kilometre crude oil pipeline between Turkana and Lamu as had been proposed by Tullow Oil in favour of Gulf Energy’s proposal to transport crude oil to Mombasa by road. 

In the new plan that bears semblance to the Early Oil Pilot Scheme (EOPS) implemented in 2020, oil will be moved by road from Lokichar to Mombasa, stockpiled at KPRL at a rate of about 20,000 barrels per day and exported in batches of about 600,000 barrels every month.

Gulf Energy, which acquired Tullow’s stake in the project oil Kenya, presented the proposals in its Field Development Plan (FDP) in August last year and received Cabinet approval in November and is currently under consideration by Parliament. 

The works that KPC will undertake at KPRL will also mean the reversal of what the company has been undertaking over the recent years.

The company has been refurbishing the tanks at KPRL so that they can store refined petroleum products.

The storage facilities were initially designed to store crude oil during KPRL’s refining days and had to undergo modification to enable them to store refined fuel. This was seen as key in expanding Kenya’s capacity to handle imported fuel and enhance energy security.

In its FDP, Gulf Energy said it requires 143,000 cubic metres (enough to store 900,000 barrels) of storage capacity at KPRL. The facility has tanks that can hold 484 million litres (4844,000 cubic metres) of fuel.

It further requests KPC to provide storage infrastructure at a fee.  “The project requires truck offloading facilities with a capacity to offload 100 trucks per day, as well as at least 900,000 barrels (143,000 cubic metres) of heat-traced and insulated storage capacity at KPRL,” said Gulf Energy in the FDP. 

“Additionally, a heat-traced and insulated pipeline is required for evacuating crude oil from KPRL to Kipevu Oil Terminal Two (KOT2). The Contractor (Gulf Energy) requests that KPRL provide the necessary infrastructure to offload, store, and export the crude oil.

This should be provided at a commercial tariff to the project, similar to the commercial arrangements with the downstream petroleum business.”

Not all tanks at KPRL had been converted to hold refined products. Sources said even those that had been designed to store crude oil would still need to undergo major modification, considering the high wax content of the Kenyan crude.

The waxy oil requires pipelines and tanks to stay heated to make it easy to pump. Without heating, the oil solidifies, and other than making it difficult to pump, it could also damage the tanks and pipelines. 

Gulf Energy in the FDP notes that “due to the nature of the oil properties, a robust wax management strategy will be required from the reservoir up to and through the processing and export facilities.” 

In the case of the storage tanks, the document further explains that to prevent wax formation, “each storage tank is equipped with a steam coil designed to maintain the crude oil temperature above the wax appearance temperature.”

Several sources within the Ministry confirmed that KPC had received instructions to start repurposing some of the KPRL tanks.

In the third quarter of last year, sources said, KPC had been advised by the Energy and Petroleum Ministry to look for additional resources to undertake the works in the course of the current financial year.

This had left KPC chiefs scratching their heads as to how they would fit this request into the budget, having already settled into the 2025/26 financial year. 

This directive was, however, superseded by yet another directive from Treasury, freezing investments in major new projects by KPC until the IPO had been finalised. 

“The Treasury directed the company not to undertake any capital expenditure, especially in new projects, until after the IPO,” said a source at the Ministry.

It added that the senior officials from both the Petroleum and Finance Ministries have not been clear as to whether the government’s preference is to have the company raise funds to finance the repurposing of the tanks when the new shareholders get on board or divert funds that had been earmarked for other projects over the current financial year.

In the outline of how it plans to move the Turkana oil project into the commercial phase, Gulf Energy expects the facilities used in executing the Early Oil Pilot Scheme (EOPS) to be scaled up to handle the commercial export of the oil. 

EOPs was a small-scale project that was undertaken by Tullow in 2019 and 2020 to test the market for Kenyan oil. The company produced 2,000 barrels per day and trucked it to KPRL, accumulating it and later sold it in two batches, the first of 240,000 barrels to ChemChina UK Ltd and the second of 174,600 to Glencore Singapore Pte Ltd.  

KPC upgraded some of the facilities at KPRL to handle the crude oil. While some of the facilities are still at KPRL, Gulf targets 20,000 barrels a day and scales this up to 50,000 barrels per day, relatively small compared to major oil producers.

“Currently, there are six storage tanks converted for handling and storage of Kenyan crude oil – they are insulated and fitted with steam heating coils,” said Gulf.

The three tanks are enough to store 468,579 barrels, or about half of the 900,000-barrel capacity that the firm will need at KPRL.

To meet its demand, it has proposed that KPC consider the conversion of some of the tanks currently used to store diesel and super petrol to cater for crude oil, as long as it does not affect the security of supply of petroleum products to the country.

Other than the tanks at KPRL, KPC will also be required to modify the pipelines that connect the storage facilities to the KOTII for pumping into the vessels. 

In the FDP, Gulf Energy proposed either a major refurbishment or replacement of the 18-inch pipeline that was originally built in 1974 and had over the years been moving crude oil from ships to KPRL for refining when the refinery was operational. It has more recently been used during EOPS.

“The line was last used in September 2022 and was packed with water after the crude export. The pipeline coating is not suitable for sustained duty at elevated temperatures (operating temperatures of 80 degrees Celsius),” said Gulf Energy, recommending the excavation of the pipeline and undertaking repairs, as well as equipping it with heating and insulating equipment.

The 18-inch pipeline will then be connected to a 32-inch pipeline from Port Reitz to the Beach Valve Station (BVS). There are two 32-inch pipelines along the route, one for crude oil and another for Heavy Fuel Oil (HFO). While the crude oil pipeline is not heat-traced, the HFO line has the facilities and Gulf it would swap the uses of the two pipelines, using the HFO line for crude oil export.

“KPC has agreed that the (heat) traced line – that is, the HFO – shall be dedicated for crude oil service. Therefore, tie-in from the 18-inch and the 32-inch HFO line shall be required,” reads the FDP.

The final link from the BVS to the KOT II, where oil will be pumped into vessels, has all the facilities but has not been tested.

“The subsea line from BVS to KOT II is insulated and heat-traced. However, the heating system has not been tested and will also need to be tested in readiness for crude oil export. The line is piggable. However, operational procedures will need to be established, reviewed and approved by KPC, GEBV and the pipeline constructors prior to export of the first cargo,” said Gulf Energy.

Kenya Railways will also be required to make major investments, with Gulf Energy proposing to transport the oil from Turkana to Mombasa by 2032 by rail.

By then, the firm says it will scale up oil production from the initial 20,000 barrels per day to 50,000 barrels per day. It is proposing the construction of a metre gauge railway line from Nakuru to Turkana. The railway line is expected to cost Sh220 billion ($1.7 billion). 

Kenya Railways has a long-term plan of expanding the railway network to Lokichar and beyond. The contractor’s ramp-up plans to 50 kstb/d (thousand stock tank barrels per day) are in line with Kenya Railways strategic plan and would provide much-needed southbound cargo, which will add to the viability of Kenya Railways plans,” said Gulf Energy. 

“Subsequently, the contractor has requested the government to extend the railway network to Lokichar by 2032. Apart from extension of the railway line, the Government or its railway agents will need to invest in sufficient rolling stock, railway line rehabilitation and construct appropriate railway siding at KPRL to enable the operation.”

The wagons will also need to have heating and insulating materials to keep the oil liquid.