Kenya’s elusive dream of becoming an oil-producing nation

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It has been widely reported that Tullow Oil, a British oil exploration company and a key player in the region since commercially viable oil reserves were discovered in 2012, has written off Sh18.8 billion from its Kenyan assets, citing significant hurdles in the long-delayed Turkana oil project.

The announcement highlights the mounting challenges facing Kenya’s ambition to become an oil-exporting nation.

Tullow Oil’s latest write-off has reignited concerns about the viability of the Turkana oil project, which was once hailed as a game-changer for Kenya’s economy.

The write-off stems from a combination of government approval delays, a lack of investor interest and uncertainty surrounding critical infrastructure needed to commercialise the oil reserves in Turkana, a fairly remote region in northwestern Kenya.

With initial estimates pegging production capacity at 70,000 barrels per day (bpd), a 2024 audit by British petroleum consulting firm Gaffney, Cline & Associates revised this figure upward to 120,000 bpd, raising hopes that Kenya could begin exporting oil by 2028.

However, the latest setback has cast doubt on the project’s timeline and feasibility.

This is not the first time Tullow Oil has faced financial setbacks in Kenya. In March last year, the company wrote off $17.9 million from its Kenyan assets due to uncertainty over the sale of its stake to a strategic investor and the commercial exploitation of the Turkana oil deposits.

That impairment was the first since 2020, when Tullow wrote off $410 million. The company had hoped to reverse these impairments if the Kenyan government approved its updated Field Development Plan.

However, the government rejected the latest FDP in July 2024, citing the plan’s failure to address the financial gap needed to fully commercialise the reserves, given Tullow’s limited asset value.

This rejection forced Tullow to write off the entire $242.2 million book value of its Kenyan assets. The company has been reporting a negative book value over the past four years, with its 2023 book value standing at -$359.4 million, raising concerns about its financial stability.

A negative book value indicates that a company’s liabilities exceed its assets, a potential sign of insolvency.

Kenyan MPs have since given the Energy ministry and British firm Tullow a deadline of June 30, 2025, to finalise the approval of the field development plan.

For the oil and gas industry, the legal structures that regulate the development of hydrocarbon resources can be divided into micro and macro governance structures.

At the macro level, the government can provide legislation regulating investment in the petroleum and gas sectors and related taxation.

It can also enter into a range of bilateral and multilateral investment treaties to encourage and protect foreign direct investment. At the micro level, the government can negotiate contractual arrangements that will govern specific projects.

The FDP is a key document between the licensee, in this case, Tullow Oil and the host country Kenya. A FDP generally outlines an oil exploration company’s plans to manage the impact of oil extraction on the environment and the society and gives forecasts on production and costs.

FDP is therefore a work commitment used by hundreds of oil companies worldwide that are engaged in petroleum exploration.

The FDP virtually becomes an addendum to the licence contract. It addresses specific issues related to the development and production from the field. The plan therefore provides an important basis for the government’s monitoring of development and production operations as well as a basis for its own plans.

The major components in an FDP and the important issues normally addressed in an FDP include: Comprehensive documentation of reservoir conditions, with emphasis on the remaining uncertainties and the risks that need to be resolved, a plan for putting in place the required facilities/installations to enable the execution of the production strategy.

Incase of staggered development, the plan must describe the present stage in detail while outlining previous and future stages and explaining the reasons for choosing them, transport of oil and gas to a selected point(s) of sale, costs for the development phase, a financial analysis of the entire project, a strategy for the tail-end and decommissioning phases and options for handling government’s share of crude oil in accordance with legislation and the contract.

An approved FDP therefore represents a work programme for the development and production phase and the licensee will be held accountable for its implementation. Any major departure from the approved FDP must be explained to the government. If the deviation is significant, the licensee is expected to revise the plan and resubmit it for approval.

Both sides will accordingly want to ensure compliance with the main conditions in the FDP in order to provide a reliable and predictable basis for protecting their respective interests - including those related to project economics and optimum recovery.

One of the most significant barriers to the Turkana project stems from a combination of government approval delays of infrastructure, particularly the proposed 825km Lokichar-Lamu oil pipeline. The pipeline, which would transport oil from Turkana to the Port of Lamu on Kenya’s Coast, was expected to commence operations in 2026.

The pipeline, with a maximum diameter of 20 inches, is to be operated by Tullow Kenya in partnership with Africa Oil and TotalEnergies.

However, the project has stalled, with the Kenyan government yet to formally approve the withdrawal of Total Energies and Africa Oil from the venture, further complicating Tullow’s efforts to secure funding, resulting in Tullow writing off Sh18.8 billion from its Kenyan assets.

Tullow has also pointed out the uncertainty surrounding critical infrastructure and resources like land and water access rights needed to commercialise the oil reserves in Turkana.

The process of approving an FDP is a multidisciplinary and multi-institutional process involving several ministries.

This is necessary, since the plan deals with numerous issues that cut across many government agencies and will affect the public interest. Coordinating this comprehensive review by several government agencies should, therefore, be given particular focus.

A minimum of time and effort will always be required for all relevant public agencies to provide their comments and for the responsible ministry to consolidate these into a coherent response to the FDP. In addition, several private and public institutions may be asked to offer their comment before the final approval of government.

As Tullow searches for a way forward, the Kenyan government faces mounting pressure to address the structural and bureaucratic issues that have stalled the Turkana project. Without swift action, Kenya’s dream of joining the ranks of oil-exporting nations may remain just that—a dream.

It should be equally noted that Kenya is a no-brainer for Tullow, with the projected output from the Turkana fields more than double the company’s entire production. Having said that, the government’s approval is necessary before development operations can be allowed to begin.

The writer is a petroleum and energy economist