Tullow's Kenya oil operations threatened as impasse endures

NAIROBI and JOHANNESBURG (Bloomberg) -- Tullow Oil Plc may shut down operations in northern Kenya in two weeks unless persistent issues with local residents, which threaten progress of the project, are resolved.

Disruptions in the remote Turkana region have already halted the shipments of a pilot program to test early production and deliver oil from Lokichar to the port of Mombasa about 1,000 km (640 mi) away, for future export. Tullow, along with partners Africa Oil Corp. and Total SA, plans to make a final investment decision next year to ramp up production by 2021 and develop a pipeline to ultimately transport the estimated 560-MMbbl resource.

Tullow has enough supplies to run its Kapese Integrated Operation Base for another 14 days, “after which we will have no option other than a complete shut-down of the camp,” the company said in an emailed statement. “This will further delay resumption of crude oil trucking by about two months.”

Kenya’s recent celebration of the first oil shipments, a milestone since Tullow’s discoveries in 2012, has been short lived. Aggrieved local community members seized trucks transporting crude on June 28 and broke into Tullow’s Ngamia 8 oil well and storage site, protesting rampant insecurity in Turkana county. Lawmakers have linked the protests to local residents having their share of oil revenue halved to 5% by the government and demands for jobs and business opportunities such as supply tenders.

The companies and both local and national governments need to resolve the issue of equitable distribution of revenue from the oil or they may face more public discontent, according to Ahmed Salim, an analyst with Teneo Intelligence.

“Until they get that right, this is going to be something that’s going to disrupt Turkana and it’s going to disrupt Tullow Oil for the foreseeable future,” he said in an interview.

Tullow encountered protests as early as 2013 in Kenya over a demand for jobs and benefits when the company was on an ongoing drilling schedule. Exploration director Angus McCoss at the time said the action was a “good wake-up call” to be more aware of local needs. The National Bureau of Statistics ranks Turkana as the poorest of Kenya’s 47 counties.

The government is working with the community to resolve the impasse, Petroleum Principal Secretary Andrew Kamau said by phone from the capital, Nairobi. He declined to give any estimate for how long that would take.

The local community wants to decide how to spend their 5% share of oil revenue, James Lomenen, a lawmaker for Turkana South, said in an interview. “Their argument is that you can’t build infrastructure where people are struggling to meet daily basic needs; it would be of no use,” he said. “These are people who can’t even afford a meal.”

From miners to oil explorers, companies need to maintain strong ties with both the national government and local communities, Salim said. “Once things get moving, I think the shift in focus will go back to the fact that oil and gas is a very profitable business and Turkana is one of the poorest counties in the country.”