Oil investors pocket Sh22bn in Kenya in past two years

Aerial view of a Tullow oil rig in Turkana County. Oil explorers in Kenya may have pocketed a whopping Sh22 billion in the past two years, as investors cash in on the boom triggered by the confirmation of commercial crude deposits. PHOTO | FILE  NATION MEDIA GROUP

In Summary

• Three such deals have taken place this year in various exploration areas in Turkana, Mandera, and Lamu, but it is not immediately clear whether the government earned any revenue from these transactions.

By ZEDDY SAMBU
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Oil explorers in Kenya may have pocketed a whopping Sh22 billion in the past two years, as investors cash in on the boom triggered by the confirmation of commercial crude deposits.

Three such deals have taken place this year in various exploration areas in Turkana, Mandera, and Lamu. But it is not immediately clear whether the government earned any revenue from these transactions.

 

While the deals are subject to taxation on the income from the sale of the resources, a fresh challenge arises from the fact that most of these transactions are happening offshore. And at the moment, Capital Gains Tax remains suspended.

INCREASED INTEREST

Since March 2012, when the first oil find was made in Kenya by British firm Tullow Oil, multinationals have shown greater interest in the country’s exploration blocks.

US firm EHRC entered into a deal worth 20 million Canadian dollars (about Sh1.6 billion) with Compania Espanola de Petroleos (CEPSA). Other transactions saw Swala sell a 25 per cent stake, while Simba Energy sold 40 per cent interest in Block 2B, weeks after another co-owner, Taipan Resources, sold 55 per cent of its interests in Block 2B to Premier Oil for $30.5 million (about Sh2.7 billion).

In 2013, Africa Oil transferred half of its stake in Block 9 to Marathon Oil in a transaction worth $78 million.

In a note to investors, Taipan Resources estimated that there had been more than $250 million farm-in activity in Kenya.

CONTROL OF SHARES

Such transactions effectively change the control of shares of the Kenyan assets to a third party. However, Cove Energy sold 100 per cent of its interests in Mozambique and Kenya, bucking the trend of partial sales known as farm-in and farm-outs in industry jargon. This prompted the government to demand the equivalent of 30 per cent of the total cost of the oil blocks.

According to the Kenya Revenue Authority (KRA), there have been several such transactions, which earned the government nothing in tax due to the way the deals had been structured.

“The challenge is that most of them are offshore transactions,” said Mr Pancrasius Nyaga, KRA’s commissioner for domestic taxes, in a recent interview.

Article 35 (2) of the model production sharing contract on assignments empowers the minister (Cabinet Secretary) responsible for Energy to give consent.

EXPLORATION PERMITS

The Petroleum Act allows companies to transfer exploration permits only when such transfers are approved by the minister.

The move to halt the transfer of exploration rights to third parties is one of the administrative actions that the ministry has taken to kick out cartels from the oil industry.

Current laws create regulatory uncertainty around the buying, selling and development of oil, but the enactment of new laws under the Energy Act by July 1 could see more powers go to the Cabinet Secretary in cases of a transfer of rights or change of control of the oil assets.

Tullow is expected to submit a plan showing how it intends to extract oil from the South Lokichar basin by the fourth quarter of next year, an indication that Kenya may soon join the league of oil producers.

SOME OF THE MASSIVE TRANSACTIONS

1. May 2014 Simba/Ajax: In mid this month, Simba Energy unveiled a deal that could see drilling on its first exploration well in Kenya start next year. It announced the signing of a memorandum of understanding with Ajax Exploration for a farm-out.

Ajax, a private equity-backed oil and gas explorer, will take a 66 per cent stake in Block 2A, in eastern Kenya. In return, it will shoulder exploration costs, including one well, and refund Simba around $3.1 million in costs.

As part of the deal, Ajax will become the operator of Block 2A. The work programme will represent a $36.5 million investment by Ajax, Simba said. The deal covers Simba’s planned commitments in Kenya for the next two years.

In a statement, Hassan Hassan, Simba's managing director in charge of operations, said: “The MoU with Ajax provides Simba and its stakeholders with the opportunity to accelerate its exploration programme in Kenya.

“Simba’s first farm-out agreement provides an attractive valuation marker for part of its asset portfolio and delivers the required funding for our upcoming exploration campaign.”

2. ERHC-Block 11A, Turkana, Nov 2013: ERHC Energy Inc is a publicly traded US firm with oil and gas assets in Kenya, Chad and São Tome and Principé. The agreement with CEPSA transferred 55 per cent of its interests in Block 11A as well as operatorship to the farm-out partner. The company said the farm-out includes a carry and other considerations.

3. Lion Petroleum Corp/New Age Ltd, 2012: In mid-2012, the two firms signed an agreement whereby NewAge farmed-in 50 per cent interest in Block 2B in Kenya by funding 50 per cent of the costs of the proposed programme.

4. African Oil/Marathon Corp, 2012: In the deal, Marathon will acquire 50 per cent interest in Block 9 and 15 per cent interest in Block 12A. Marathon paid $35 million, which included prior expenditures and will underwrite Africa Oil expenditure for the next three years up to a maximum of $43.5 million.

5. Taipan-Premier Deal ($30.5 million), Block 2B, Garissa.

6. Taipan-Tower deal (undisclosed ), Block 2B, Garissa.