Oil: Kenya's game Changer

Oil Pipeline: Japan interested in the
2000km pipeline from Juba to Lamu

 THE NEWS THAT Kenya’s Oil finds announced only last year are commercially viable is definitely a game changer in Kenya.  The prospecting company, Tullow oil has announced that one of the wells, Twiga South 1 has commercially viable deposits. It has also announced that flow Tests for the Ngamia 1 present “real encouragement.”

Commercial viability means that the Oil quality and quantity in a well can be sold at market rates plus there are enough stocks to run for a few years.

  

The flow tests show that the well can produce up to 2,850 barrel per day, way above the 500 barrels per day initially expected.  It is not surprise then that the market both in London and Nairobi, reacted with untamed excitement.  In London, Tullow’s shares gained 5.2 per cent, the highest gain in Europe.

The Lapsset Corridor:n Isiolo is a major junction city 

Apart from the potential macro-economic gains, the news has immense development benefits in Kenya. Among these gains are potential forex savings, low general prices and larger profits for the business sector.

According official sources, in the year to November 2012, Kenya spend a staggering US$2.105 billion importing 21.7 million barrels of crude oil. Although the commercially viable output is still a drop in the ocean, the prospect of cutting this this bill significantly is exciting to Kenyans.

Last month, the Oil industry intelligence publication, oil.com, www.oil.com branded Kenya a hot spot for oil exploration. It seems now the spot will get even hotter and more aggressive activity in oil exploration.is expected in the near future.  A local business publication reported last November that oil and Gas exploration brought in US$1.2 billion in FDI. This figure is expected to rise as more players are expected to bid for a piece of the action. 19 exploration blocks are said on the table for auctioning this year.

In addition to savings and FDI generation, the oil prospect raises the potential of some projects that were treated with muted pessimism. The greatest beneficiary of this development will definitely be LAPSSET corridor.

The US$23 billion Lamu Fort - South Sudan- Ethiopia Transport Corridor (Lapsset), is the biggest business venture ever to be undertaken in east Africa and probably beyond. It is a combination of five ventures that were juicy even before the discovery of Oil in the project’s path. Now they will be mouthwatering as the returns are attractive ranging between 14 per cent and 24 per cent for some of the projects.

LAPSSET that will serve an estimated 100 million People in Northern Kenya, Ethiopia and South Sudan comprises of: 1,710 KM of standard Gauge railway line; 880 KM of a standard highway, 1260 KM of crude oil pipeline, 980KM of white oils pipeline, a 120,000 bpd refinery and a 32 berths sea port and two international airports.  According to its feasibility study, it is to be undertaken on a Private- Public Partnership (PPP) basis either through leases or DBFOs.  It also comprises of three resort cities in Lamu, Isiolo and Turkana.

A proto type of Isiolo Resort city

 Finance is a major hurdle in projects of this kind and Magnitude. Although components of the project could be developed on PPP basis, a majority of them, it seems will be developed by the government together with its partners in the east. Even the consultant has recommended that the venture would be viable if private sector were to lease the infrastructure from the government, rather than participate in building them.

 Initially, it was thought that a huge proportion of the components will be developed by government. However, the discovery of oil is likely to raise their profile and attract a lot of investors with deep pockets. Already China and japan have made their intentions clears. Toyota Tshusho, the investment arm of Toyota Motor Corporation has bid for the US$3 billion 2000 KM oil Pipeline from Juba to Lamu. And China has sent signals that it is willing to finance some components.

Even then, there is plenty of activity on Kenya’s second transport and economic corridor over the next 20 years or so. Already, the government has set aside some US$300 million for the construction of the first three- berths at the Port of Lamu.

The three are; a general cargo berth, a bulk cargo berth and a container berth. These three will be used to transport material for the development of the corridor.

The entire port itself will cost an estimated US$3.5 billion. Located on 1000 acres of land at Manda Bay within Lamu, the Port will comprise of 32 berths three of which will be financed by the Kenya government. The other 29 will be built on PPP basis.

A 1,710 KM Railway line from Lamu to Juba in South Sudan will be constructed at a cost of US$8.1 billion according to Kenya railways Corporation, www.krc.co.ke

The line is seen as the beginning of the Equatorial Land Bridge linking the Port of Lamu on the Indian Ocean to the East to the Port of Doula in Cameroon on the Atlantic Ocean to the West. Such a link, it is envisaged, will cut freight travel time by at least two to three weeks and increase shipping lines’ turn-around times and hence their revenue.

The bulk of the entire cost of the Lamu-Transport corridor will fall on Kenya. At the peak of the project, between 2013 and 2018 sources say, it is expected that the Kenyan government will be spending about 6 percent of the country's Gross Domestic Product or 16 per cent of its annual budget on the project. The project is in turn expected to generate an additional five percent increase in Kenya's GDP once operational.

At the time of the feasibility study, had not been discovered in Turkana County. This discovery raises the viability of the project on Kenya’s economy. Some observers are looking at an EIRR greater than 25 per cent.