In 2016, the Kenyan Government approved a much-anticipated plan to kick-off production of crude oil in the east African country. Kenya – having only recently discovered that it sits atop oil reserves – aims to eventually start exporting 4,000 barrels a day.
Kenya’s oil reserves were discovered in 2012 by British firm Tullow Oil. A joint venture between Tullow Oil, Maersk Oil and Africa Oil is due start drilling and constructing wells this year, with the aim of producing up to 2,000 barrels a day by the end of 2016. Kenya’s oil reserves are located primarily in the north-west of the country, most notably the South Lokichar field. In order to facilitate the transportation of Kenya’s crude to the coast, the construction of a pipeline running from the north-west to the country’s new port on the Indian Ocean is underway. Stretching nearly 900km, the pipeline comes at a cost of $2.1bn.
At such a cost, one may wonder if such an investment from the Kenyan Government is worth it. For many developing nations, oil has proven to be nearly as much a hindrance as a blessing for the progress of their economies and institutions – the so-called ‘resource curse’.
In its favour, Kenya’s oil reserves are relatively small in a global sense. Increased output by Kenya will be of negligible consequence on the world stage, leaving the current supply glut unaffected. More importantly, this means Kenya is not at risk of becoming a petro-state. Oil revenues should supplement, not supplant the country’s already developing economy.
Often, oil has a distorting effect on the institutions and governance of a developing country. Large revenues facilitate a culture of corruption and rent seeking
According to the World Bank Country Economic Memorandum (CEM) on Kenya, released in March, one of the major problems afflicting the Kenyan economy is the need for increased investment in the nation’s capital stock and population.
As the report noted: “For sustained and rapid growth, Kenya needs further investment in physical and human capital to promote productivity growth.” To this end, resource extraction should “generate fiscal resources that could be used to raise public investment, human capital, and productivity in the non-resource sectors of the economy”. The windfall from the oil reserves, then, should “help bridge Kenya’s infrastructure gaps and skills deficiencies, and expand the provision of health or other social services”.
Often, oil has a distorting effect on the institutions and governance of a developing country. Large revenues facilitate a culture of corruption and rent seeking. However, Kenya’s current position in the trajectory of economic development should prevent this. As the World Bank CEM also noted: “The timing of the discoveries relative to Kenya’s development cycle is appropriate. Kenya’s level of development is sufficiently high to be able to absorb the windfall revenue and establish the needed legal framework and infrastructure for developing the oil sector.”
Kenya’s oil reserves should be able to facilitate modest economic progress. Its reserves and revenues are not large enough to cause the usual negative distortions that befall many resource-rich developing economies. Kenya has a relatively healthy and growing economy, alongside moderately developed institutions that should be able to safeguard against the many potential downsides oil can bring. At the same time, the windfall in taxes from exporting oil should be able to provide the country with critical revenue to allow it to invest in both the human and physical capital of the economy, which will further spur Kenya’s growth.