Financial analysis

Kenya is an Oil Exporter; How Much Do We Receive For The Oil We Sell?

Posted on by InVhestia

HOW WILL THE REVENUE BE SPLIT AND WHAT DOES THIS MEAN?

Turkana is Kenya’s first oilfield. It was discovered in 2012 by the Anglo-Irish firm Tullow Oil which has aroused great interest in Kenya. Kenya introduced new rules to share revenues from natural resources as part of a broader move to strengthen the county governments.

The fiscal regime is challenging since the contracts for the two areas in the Turkana project, 10BB and 13T, have not been published. We modelled the fiscal regime on the contract for 10BA, which was licensed in the same round and for which headline terms are available and, where appropriate, public comments by officials.

The President of Kenya, Uhuru Kenyatta on August 1st 2019 said the following:
“We (Kenya) are now an oil exporter. Our first deal was concluded this afternoon with 200,000 barrels at a price of USD 12 million.”

The USD 12 million is good income for the economy for various reasons including forex flows, jobs, GDP contributions etc but it would be good to understand how much would actually flow to the country and the split among various parties. It would be good to know how much would flow to the National Government, Counties and to the Community.

To answer these questions, one needs to have a view on assumptions around the project’s economics and on the fiscal regime. Below we highlight the assumptions we used to come up with approximate values of how the revenue generated would be shared.

So how would the USD 12 Million be distributed?

  1. Cost recovery: Tullow oil has incurred development costs, exploration costs and recurrently incurring operating costs. Before sharing, the company is allowed to use 60% of the oil revenue to recover the costs incurred until full recovery. In our case, since it’s the initial sale the company is required to use 60% of the USD 12 Million to recover the costs, that is, USD 7,200,000. This results to a profit oil of USD 4,800,000.

 

  1. Government and the company profit oil sharing:
  • The government receives 60% of the profit oil, that is, USD 2,880,000
  • The company receives 40% of the profit oil, that is, USD 1,920,000

  1. National Government, County Government and Community Share
  • National government receives 75% of total government share (USD 2,880,000), that is, USD 2,160,000
  • Turkana county receives 20% of total government share (USD 2,880,000), that is, USD 576,000
  • Turkana community receives 5% of total government share (USD 2,880,000), that is, USD 144,000

 

Summary of the Oil Export Proceeds

What does this mean?

The sale of oil does not mean actual income to the Government. One has to look at the production sharing contracts to arrive at how much the Country would make from a sale and how much the company ends up making. Unfortunately, in Kenya we do not have the details of the production sharing contracts and as such cannot tell how much cash SHOULD go to the National Government, the Counties or the Community. This is quite unfortunate because it then means numbers cannot be verified!

However, based on publicly available data one can see that there’s a long way to go before Oil can become a key contributor to the economy. To put the numbers in perspective, the just announced 2019/2020 budget is at USD 28 Billion. The amount earned from the initial oil sale contributes to just 0.043% of this. Further if you look at the Turkana County Allocation for the budget 2019/2020 of USD 111,778,110, the Turkana County earnings from this sale would only contribute to 0.515%. Lastly if you look at the community in Turkana (in this case understood to mean the inhabitants of the county), there is a population of 1,341,972 as at 2016 as per County Allocation of Revenue Bill 2019. If the amount was to be shared among each of them, the per head amount would be USD 0.107.

Early oil is definitely a good start in proving viability of the Kenya’s Oil, however a lot still needs to be done to ensure Kenya’s Oil play the role it should in the Country’s growth!

Sources:

How Profitable is the Turkana Oil Project?

Posted on by InVhestia

InVhestia has been in existence for several years, the company was founded in the year 2012 and has grown from a company offering services in Kenya only, to one which is active and offering services in over 5 African countries. Apart from Kenya our brand has been felt in Uganda, Rwanda, Tanzania, Nigeria, Ethiopia, Zambia and counting.

Other than geographical growth we have also realized over time that our services are not only useful in the private and public sector to answer purely commercial questions, but could also be quite useful in the public sector and the civil society space to contribute to pertinent debates which, in most cases, have a bearing on livelihoods on millions of persons.

In 2017 we launched our foray into this public and civil society space by deciding to commit resources to answer questions which to us looked to be interesting; questions which had a significant bearing on policy, law and eventually on cashflows to various arms of government and the population as a whole. Together with Open Oil, a Germany based company, we decided to work on a financial model on one of the oil blocks in Turkana. There had been lots of debate around how the revenues from the Oil discovered in Kenya were going to be shared, between the National Government, County Government and the Community. In all the articles we read we felt there was one thing missing, a financial model showing the impact of various options that one could review, make changes to and draw their own conclusions. Further there was the question of just how profitable these oil projects are; were they going to benefit the private oil companies at the expense of Kenyans?

File Photo of Oil Rig in Turkana County – The Star

The results to these questions are shared in our recently published report, Turkana oil field, Kenya Narrative Report, which can be accessed on this link. What is different about this report is that it does not only give the results of an exercise, it also publishes the financial model that was used to arrive at these conclusions. This is BIG since anyone interested in challenging our findings or seeking to answer other questions which we did not cover can easily do so by making changes on this FAST (Flexible Appropriate Structured and Transparent) compliant financial model.

While this is BIG for us we did not stop there. We have now worked with the Government of Kenya and that of Zambia on assignments by the Extractives Hub  to answer these kinds of questions and offer capacity building around financial modelling which is a critical piece to analyzing any kind of project, in this case mining projects.

Do enjoy the report and as always we welcome your comments.

Download Model

Authored by Stephen Gugu