A truck loaded with crude oil spotted at Ortum on the Kainuk-Kapenguria road heading to Mombasa under the Early Oil Pilot System on October 5, 2018.
Gulf Energy is targeting a 50/50 profit-sharing model from Turkana oil in the first phase of the project, ahead of commercial production scheduled for 2026.
The equal profit split will apply when production reaches 20,000 stock tank barrels per day (stb/d) from 2026 to 2031, replacing an earlier plan that favoured the government.
The approved Field Development Plan (FDP) initially proposed a 55/45 split for Block 10BB and a 50/50 ratio for Block 13T in the first phase.
Gulf has now proposed a single model for both blocks in the first year of production, with the ratio set to adjust over time.
It is unclear whether the earlier profit-sharing plan is the one that had been proposed by Tullow Kenya BV.
“Given the current cost environment and in view of the investments required to achieve the considered development plan, the contractor is confident that the current fiscal terms included in the 10BB and 13T PSCs would not allow the economic viability of the project,” Gulf says.
Critical component
Revenues from the two blocks in South Lokichar are estimated at $16.4 million (Sh2.1 billion at current rates) in 2026 (first year of production), according to the FDP.
They will jump to $228.1 million (Sh29.4 billion) the following year and hit $972.1 million (Sh125.6 billion) in 2040 when production is expected to hit over 150,000 stb/d.
Sharing of profit is a critical component in oil production, ensuring investors recoup their money while the local community and government receive their fair share. Profit sharing also supports political stability and compensates communities for the environmental and social costs of extraction.
Tullow Oil facility at Ngamia 8 in Lokichar, Turkana County, on February 18, 2020.
The 50/50 profit split in the first phase will cover all six discoveries in blocks 10BB and 13T. The ratio will gradually shift in favour of the government, moving to 65/35 when production reaches 50,000 stb/d and 75/25 once it exceeds 150,000 stb/d.
Parliament is expected to rule on whether to accept or reject the proposed profit-sharing change. Lawmakers have 90 days to ratify the FDP recently approved by the Ministry of Energy and Petroleum.
Besides deciding on the proposed change to the profit-sharing plan, Members of Parliament are also expected to ratify Gulf’s tax exemption.
Tullow Oil engineers work at the oil rig at Ngamia One Well in Turkana County in 2012.
The ministry has agreed to exempt Gulf from Withholding Tax on income, as well as VAT, Import Declaration Fee, and Railway Development Levy on equipment imported for the project.
Commercial production
Kenya aims to start commercial production from the two blocks by the end of 2026, ending a 13-year wait since the discovery of crude oil in the South Lokichar basin.
Tullow Kenya BV, the local subsidiary of British oil firm Tullow, discovered commercially viable oil in 2012 but could not start production due to lack of a strategic investor and rejection of its FDP.
The company sold the project to Gulf for $120 million (Sh15.5 billion) in a deal closed in September this year.
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