Why East Africa crude oil exports remain uncertain
Since 2014, global and regional oil and gas sectors have been making more misses than hits with no certainty when turnaround will happen, mainly due to doubts about future oil demands and prices. And as the sector remains down and subdued, the climate change advocates are relentlessly and successfully firing renewable energy bullets, leaving oil investors unsure of what risks to take in new oil ventures. Year after year investors are finding every excuse to postpone Final Investment Decisions (FIDs) on new investments.
And the East African host governments have inadvertently— and often wrongly — played it “tough” with investors while failing to read and interpret global investment moods and predicaments. Official slowness, indecisions, policy flip-flops, have often given investors good reasons to justify their own investment predicaments and delays.
Cycles of delayed investments have exhausted the patience and interest of citizens and local enterprises, who have been waiting to enjoy promised oil and gas fortunes. Yes, oil and gas frenzy in East Africa is all but diminished. Even the governments cannot categorically, and with certainty, say when first oil will be commercialised.
Let us look at Kenya which discovered and confirmed commercial oil reserves in year 2012. The anchor investor, Tullow, has all but “withdrawn” from Turkana oil, with no obvious “capital-ready” investors to take its place. For quite a while, Tullow collapse was inevitable due to under-performance of their global ventures, and Tullow’s evident under capitalisation. The Covid-19 pandemic did not cause Tullow’s collapse – it only accelerated it. A force majeure justified on Covid-19 is a bit wobbly and difficult to convince Kenyans.
With no obvious readiness by any investor to take a risk with Turkana oil deposits, no one can with certainty claim to know when (or if) Kenya will export first oil. With oil export netbacks obviously below oil production costs, and with no firm commitments on the oil export pipeline, and with the growing green energy momentum, Turkana oil is likely to remain in the ground for much longer.
Uganda’s oil (discovered in 2006) faces the same woes and predicaments as Kenya’s. However, the better capitalised investors (Total and the Chinese CNOOC) and higher crude oil volumes with better economies of scale give Uganda better baseline chances of success than Kenya.
However, Total (the presumptive anchor investor in Uganda) is not immune to ongoing budgetary rationalisation that all major oil companies are going through due to diminished cashflows from low oil prices. It is also facing the same green renewable challenges confronting major oil companies in transition from “oil companies” to “energy companies”.
Further, delays in finalising investment decisions and commitments on crude oil export infrastructure through Tanzania, are not helping Total to commit FID on crude oil production.
Uganda government apparent slowness and policy inflexibility may also be helping investors to justify their own unreadiness to commit FIDs. The Chinese CNOOC partner will likely wait and follow the course of action taken by Total. Yes, Uganda cannot say with certainty when first oil will be exported or locally refined.
In Tanzania it is the natural gas story which is either commercialised locally as “natural gas” or planned for offshore exports as Liquefied Natural Gas (LNG). Tanzania has over the past decade successfully commercialised natural gas for local power generation and industrial fuel replacing imported fuel oil.
Natural gas is a fossil fuel with a lower carbon footprint and is currently categorised as an acceptable “transition energy” towards renewable energy, giving it a green lease of life, perhaps for another decade before climate change advocates pounce on it.
It is in export LNG investments where Tanzania may have been too slow and over-cautious in finalising investment policies, laws, and regulations.
Investors have been waiting for years with ready cash, with some losing patience and withdrawing their interest and participation.
It is Mozambicans who are the regional leaders in FIDs, with billions of dollars of investments already committed for LNG development and exports with futures export orders and contracts firmed up.
For Kenya and Uganda oil is a case of either missed or delayed opportunities, a victim of both global and local circumstances.
Source: Business Daily