•It is expected that the Energy Regulatory Commission (ERC) will seek to review the pump price of petroleum products downwards in the second quarter of 2020
•However, the declining prices are likely to have a negative impact on Kenya’s efforts to become a net oil exporter
Roughly a year ago, with oil prices on an upward trend, analysts predicted that prices could potentially hit $100/barrel. As this coincided with the export of Kenya’s first shipment of crude oil, under the Early Oil Pilot Scheme, the rallying oil prices were indeed welcome, particularly by Kenya’s fledgling oil industry. However, as the first quarter of 2020 comes to a close, the picture appears grimmer than anticipated.
Now dubbed ‘Black Monday’, March 9, saw significant slumps in the financial markets, with oil prices not being left behind. This left top financial indexes in the US tumbling seven per cent, while indexes in London closed at eight per cent lower. The slumps, largely triggered by a dispute between Saudi Arabia and Russia over oil output, similarly saw the prices of crude oil sharply decline, with the price of Brent collapsing by nearly a third – the biggest drop since the Gulf War in 1991.
With respect to the price of internationally traded crude oil, it is no secret that the price of crude oil is largely volatile and susceptible to various geopolitical factors. In the present instance, wrangles between OPEC members and Russia over oil output threaten to depress the price of crude further, with Russia opting to maintain its oil output at current levels as opposed to reducing the same, in the face of declining demand due to threats from the coronavirus pandemic. In a surprising move, and one largely viewed as a knee-jerk reaction to the Russian decision to maintain its oil output, Saudi Arabia has indicated that it intends to increase its oil production from the current 9.7 million barrels per day up to 12.3 million barrels per day. This increase in production, coupled with demand-side risks due to the coronavirus pandemic, is likely to further depress the price of crude oil in international markets, all factors being constant.
Drilling down to the Kenyan impact of the above, it is expected that the Energy Regulatory Commission will seek to review the pump price of petroleum products downwards in the second quarter of 2020 to factor in the declining prices of the internationally traded commodity – a move that will be more than welcome by the Kenyan populace.
On the flip side, however, the declining prices are likely to have a negative impact on Kenya’s efforts to become a net oil exporter. Specifically, price uncertainty, if it persists, may directly impact investments in Kenya’s fledgling upstream industry with investors likely delaying the Final Investment Decision with respect to Kenya’s crude in favour of more certain investment decisions. This, coupled with recent reports of Tullow, Total and Africa Oil’s intention to farm-out from their Kenya licenses, does not bode well for Kenya’s production target of 100,000 barrels per day by 2022.
Karen Kandie – MD IDB Capital