Low global oil prices: local dynamics, challenges & opportunities

Introduction Alongside the COVID-19 pandemic, geopolitical debate amongst the world’s oil producers has centred on appropriate production levels in an environment of weak demand. The unprecedented decline in global demand has led to a major slump in crude oil prices; at one point, the WTI crude reference price dipped as far as negative US$ 40 per barrel, a phenomenon never-before witnessed. Whilst oil prices have since rebounded to the US$ 40 per barrel range for Brent, prices are still close to half of what they were one year ago. For Kenyans, this volatility has meant lower petrol, diesel and kerosene pump prices and indeed the Energy and Petroleum Regulatory Authority (EPRA) proscribed maximum pump prices in April, May and June 2020 were reflective of prices not seen in very many years. Further reductions may not be anticipated as crude prices seem to be stabilising. How do low global oil prices impact Kenya’s ambition of joining the league of crude oil exporting nations? Currently, the predominant participant in Kenya’s oil exploration, Tullow, is experiencing significant challenges at a global level and as happened in Uganda, their ownership of Kenya’s blocks may also soon change hands. A low global oil price regime lowers the motivation of players like Tullow to make a final investment decision (FID) on the production of Turkana’s light and sweet crude. However, there is likely to be investor appetite for Tullow’s stake, should it become available. A patient investor with sufficient muscle might make the acquisition in anticipation of higher prices in the not-too-distant future when a positive FID would become more likely. The government has reiterated its commitment to progressing the Lamu Lokichar pipeline and it has communicated that low oil prices are an opportunity to procure idle exploration and production equipment at lower costs. On the downstream side, one of the issues that has been under debate is whether now is a good time for Kenya to invest in strategic reserves. Under normal demand conditions, Kenya does not generally hold more than 14 days of stock at any one time. This is far less than the International Energy Agency’s (IEA) 90 day recommendation. (Kenya is not currently a member of the IEA.) In the report, Towards a Petroleum Masterplan, prepared by a PwC consortium for the World Bank and Kenya’s Ministry of Energy and Petroleum in 2015, we estimated that for Kenya to immediately increase and maintain storage capacity to 40 days of strategic stock, the combined cost for infrastructure and stock holding finance would be US$ 1 billion between 2014 and 2040. This amount needs to be funded, most likely through a pass-through to the consumer, effectively increasing pump prices and the costs of other goods and services dependent on fuel. When the report was developed in 2015, oil prices were at around current levels. However, Kenya’s current lack of storage capacity would necessitate leasing storage from other countries, which other oil-producing countries have had to do recently since they too have exhausted their domestic storage capacity in an environment of low demand. Leasing storage capacity also incurs a cost (which is rising, in this environment) and consumer buy-in for taxes and levies on fuel may be a challenge, in addition to the costs associated with funding increased domestic strategic reserve capacity.