IMF urges caution over Kenya’s oil and gas revenue potential

Turkana governor Josephat Nanok, Tullow Kenya country manager Martin Mbogo and British High Commissioner to Kenya Christian Turner at an exploration site in Turkana. FILE PHOTO | BILLY MUTAI |  NATION MEDIA GROUP

By KENNEDY SENELWA, TEA Special Correspondent

In Summary

• IMF says new discoveries of oil, gas and minerals could improve Kenya’s external fiscal prospects in the medium to long term.
• Kenya is expected to become self-sufficient in oil production within three to five years.
• Kenya’s relatively high external current account deficit, of about 8 per cent of GDP in 2013/14, is due to costly imports like equipment for oil exploration and a decline in agricultural exports.

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The International Monetary Fund has warned that Kenya’s fiscal position could deteriorate if government expenditure increases and the expected high oil and gas revenues fail to materialise.

The IMF said new discoveries of oil, gas and minerals could improve Kenya’s external fiscal prospects in the medium to long term.

Tullow, a major investor in Kenya’s oilfields, estimates reserves to be above 600 million barrels of oil equivalent (mboe), comparable to Equatorial Guinea and the Republic of Congo.

“If this is confirmed, it could bring Kenya’s external current account to surplus soon after exploitation starts,” said the IMF.

Kenya is expected to become self-sufficient in oil production within three to five years.

Prospectors drilled at least 15 exploration wells between March 2012 and June 2014, an average drilling rate of seven wells per year; previously it was at the rate of one well every two years.

Kenya’s relatively high external current account deficit, of about 8 per cent of GDP in 2013/14, is due to costly imports like equipment for oil exploration and a decline in agricultural exports.

The central government deficit in 2013/14 remained unchanged from the previous year, at about 5 per cent of GDP. In addition, there was a higher wage bill and a rise in security spending.

The IMF Staff Report on economic developments and policies says Kenya’s current medium-term budget does not include potential revenues from natural resources and plans for the creation of a sovereign wealth fund are premature.

Treasury has drafted the Sovereign Wealth Fund Bill 2014 to establish the Kenya National Sovereign Wealth Fund (KNSWF) to undertake medium to long-term local and foreign investment. Seed capital of $114.9 million for KNSWF will be provided in the annual estimates of the national budget.

READ: Kenya ponders wealth fund to manage oil dollars

However, the IMF says the sovereign wealth fund proposed by the task force on parastatal reform is premature as long as Kenya’s fiscal position is projected to remain in deficit.

The institution wants the terms of sharing revenues between central government and the counties to be decided once the volume and duration of exploitation of available crude oil with natural gas is known.

Shared revenues

The Petroleum (Exploration and Production) Bill set to be tabled in parliament is expected to provide a formula for oil and gas revenues to be shared between the national government, county government and local communities.

The IMF says Kenya is redesigning the framework for oil exploration with model production sharing contracts (PSCs) as the petroleum regulatory and fiscal regime dating back to 1986 needs modernisation.

“The production sharing scheme for oil does not reflect properly costs, prices, and production volumes, and needs to be revised. New production-sharing terms for gas need to be specified,” said  the report.

The Kenya Petroleum Technical Assistance Programme (KEPTAP), supported by the World Bank, is building  capacity in areas like geotechnical data acquisition, implementation of environmental, social and health and safety standards.

The petroleum master plan is being developed to guide investment in crude oil and natural gas business up to 2044, under KEPTAP, using part of the proceeds of $50 million credit approved by World Bank on July 24.

The Ministry of Energy said, ‘‘Kenya is currently reviewing the Petroleum Exploration and Production Act of 1986, with a model PSC  used to award blocks to companies.” 

The formula for calculating revenue will ensure Kenya’s share increases according to hydrocarbons output. Production costs and total revenues realised by a firm will be used to compute the government’s share.

“A profit split formula of calculating government revenue based on daily rate of production (DROP) in PSCs will be replaced by ratio (R)-factor derived from a firm’s cumulative hydrocarbons revenues to total costs,’’ said the Ministry of Energy.

Kenya’s current production sharing contracts have profit sharing computed on the basis of the first tranche of 20,000 barrels of oil per day (BOPD). The   next level is 30,000 BOPD, 50,000 BOPD and next over 100,000 BOPD.