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East Africa’s oil export ambitions start to gel: Fuel for Thought

A recent flurry of progress on pipeline plans and field approvals in East Africa means Kenya is set to become the region’s first oil exporter, beating its land-locked neighbor and regional rival Uganda to the punch.

Under a deal struck with Tullow Oil last month, crude flows from Kenya’s north western Lokichar basin to the port of Lamu on the Indian Ocean could begin by the middle of next year.

Initial trucked volumes will be small but Nairobi hopes a new oil export pipeline will bring much bigger revenue streams from 2021.

To the east, Uganda’s own oil ambitions are finally taking shape after it picked a pipeline route via Tanzania, snubbing the initial favorite Kenya, to bring its own crude to international markets by 2020.

The Uganda pipeline unlocks the development of 1.7 billion barrels of recoverable oil operated by Tullow, Total, and CNOOC in the Albertine basin and would bring 200,000 b/d of crude to the market.

Kenya’s 750 million barrels of recoverable crude will feed a 100,000 b/d export line to the port of Lamu.

Both targets are seen as optimistic, however, vulnerable to red tape, logistical hurdles and the mutability of regional politics. Energy analysts Wood Mackenzie see crude exports starting in 2022 at the earliest.

Before then, Kenya’s trucked exports are limited to just 2,000 b/d, effectively little more than extended well tests for Tullow and its partners Africa Oil.

Tullow itself remains resolutely upbeat over the economics of full commercial flows from Uganda and Kenya. The explorer believes both developments will enjoy low full cycle costs of around $25/b, which includes pipeline tariffs, helped by highly permeable rocks.

The value of the exports would be also supported by relative good quality crude that Tullow believes would attract potential buyers from Europe and the Far East.

The Ugandan and Kenyan oil finds have much in common. Both hold very low sulfur, intermediate API gravity crude comparable to medium sweet grades such as Indonesia’s Minas, and Angola’s Cabinda crude. Both crudes yield high proportions of fuel oil, gasoil and VGO, some of the most valuable cuts of the barrel.

There is one proverbial fly in the ointment. Both deposits hold waxy, high viscosity crude which remains solid below 40°C and requires a heated, insulated pipeline to flow.

The drawback raises the logistical headache of heating stations along the pipeline routes, raising costs and presenting a blockage risk if flow is stopped.

Wood Mac’s Sub-Saharan Africa upstream analyst Alasdair Reid expects pipeline tariffs of $12/b for the Ugandan route and slightly more for transit on the Kenyan line. With the crudes fetching about 90% of value of Brent, Reid estimates breakevens of between $40-60/b for the East African projects.

Future export expansion

Tullow and its partners are banking on further exploration in discoveries which could lift future export volumes. In Kenya, the company has flagged a 1 billion barrel upside potential in the South Lokichar Basin alone where further drilling is planned.

The countries themselves are also quick to talk up regional deals, which see the capacity of  the export routes raised in the future, boosting their economic rationale.

Uganda and Tanzania are courting the Democratic Republic of Congo, which is exploring blocks close to Lake Albert on the Ugandan border, to participate in pipeline plans in order to expand the Tanzania link to 300,000 b/d.

Despite claimed interest from DRC, talks of a future expansion to DRC are seen as a bit early.

“It’s kind of running before you can walk,” Reid said. “The acreage is prospective in DRC but all they’ve done is to run some seismic so it’s a bit premature to start talking about production from DRC yet.”

Kenya also harbors hopes of enticing neighboring South Sudan to commit to a later spur as an alternative to Juba’s fractious oil transit relations with its northern neighbor. But relations between Khartoum and Juba appear to be thawing and optimism over a transit deal for Sudan’s cross-border pipelines are growing.

“South Sudan is not conducive at the moment,” Reid said, due to lack of infrastructure. “It could happen 10 years down the line but it’s not an immediate option for Kenya.”

Either way Kenya’s jump on Uganda to claim the region’s first oil exports may prove a short-lived victory. Kenya’s port of Lamu doesn’t yet have a deepwater oil jetty and access to private land for a commercial pipeline could become a further costly hurdle to oil exports.

Source: Platts