Since oil discoveries were made in the East Africa region in the early 2010’s, the expectation has largely been that East Africa will soon join the league of oil producing regions – a seemingly highly lucrative league. However, years have gone by without sight of first oil, let alone the expected petrodollars. This is largely chocked down to the dynamics of the oil industry – which we seem to have misunderstood from the very beginning. The gestation period from the discovery of oil reserves to production of first oil is quite lengthy – taking up to well over ten years in some instances.
This period of waiting seems to be coming to a close, with the flagging off of Kenya’s first oil (and indeed East Africa’s) from Lokichar basin in Turkana County under the Early Oil Pilot Scheme (EOPS). Long touted as a political move, and marred by delays, EOPS finally came to fruition with the first trucks leaving Turkana on Sunday 03 June 2018, flagged off by H.E. Uhuru Kenyatta.
The underpinning tenant of the EOPS scheme, i.e. testing the viability of our crude oil on the global markets, has attracted nationalist criticisms from all fronts. Particularly, many question why we are opting to export crude oil to international markets, rather than value add in-country and subsequently export a refined product. As with our expectation of quick petrodollars from the discovery of oil reserves back in 2012, this misconception stems from a lack of understanding of the technical aspects of the oil industry.
Given the high cost factors involved in the refinery process, economics of scale dictate that the higher the capacity of the refinery, the lower costs involved per barrel of oil refined. With this in mind, new investments in refineries world over are resulting in larger refineries so as to benefit from the economics of scale – case in point being the Al Zour Refinery in Kuwait, with an estimated price tag of USD 16 Billion, capable of refining 615,000 barrels per day (bpd).
In contrast, Kenya is eyeing an optimum production output of 150,000 bpd. To refine such a relatively low capacity, we would either have to construct a small refinery, which leads to high operational costs per barrel of oil, or expend a similar amount to modernise our existing refinery and slightly increase its capacity from the current 90,000 bpd. However, in both instances, the refinery would be operating at lower efficiencies than globally established refineries capable of refining higher capacities. Consequently, our refined product will be higher priced on the international markets and therefore uncompetitive with cheaper refined products from the Middle East and Asia.
Given these cost factors, it is more beneficial for Kenya, in both the medium term and long term, to export unrefined crude oil than attempt to enter the oil refining business with an uncompetitively priced product.