An oil rig at Ngamia 1 in Turkana County where Tullow discovered oil in
Kenya. Currently, the country relies on an open-door policy where
exploration firms and governments sign PSCs. File
Nation Media Group
By Kennedy Senelwa, Special Correspondent
In Summary
Kenya’s proposed draft regulations for the
exploration of crude oil and natural gas will see production-sharing
contracts (PSCs) that firms and the government enter into, maximise
future tax from oil and gas.
“The profit splitting formula of calculating
government revenue based on the daily rate of production in PSCs, will
be replaced by the ratio R-factor derived from a firm’s relative
hydrocarbon revenues to total costs,’’ said Energy Cabinet Secretary
Davis Chirchir.
The new formula for calculating revenue will
ensure Kenya’s share increases in tandem with hydrocarbon output.
Currently, profit-sharing is computed on the basis of the first tranche
of 20,000 barrels of oil per day; the next level is 30,000, then 50,000
and over 100,000 BOPD.
Hunton & Williams of the US and Challenge
Energy Ltd of Britain, who were contracted by the World Bank and the
Kenyan government as consultants for the review of the Petroleum
Exploration and Production Act of 1986, recommended the R-factor.
It balances taxation with project profitability,
and ensures the state receives a significant share of money while
assuring investors returns will not reduce due to additional taxation.
The R-factor will also ensure that Kenya remains competitive and that it
attracts investments.
The Petroleum Bill, to be tabled in Parliament for
debate in October, also seeks to create a new regulatory framework for
awarding exploration areas to firms, by introducing competitive bidding
rounds to be overseen by an independent regulator.
Currently, the country relies on an open-door policy where exploration firms and governments sign PSCs.
Kenya is looking at the possibility of offering
investors 15 blocks available through relinquishment, but a decision has
not been reached on whether this will be done under the open-door
policy or the new competitive bidding round.
“It is a debate that has opened. We have many
applications that have piled up from 2012 when the ministry froze the
awarding of blocks,” said Mr Chirchir.
Unfortunately, the majority of local enterprises
are unable to tap into lucrative deals in the oil exploration sector as
Kenya does not have legislation requiring prospecting firms to procure
most of their goods and services from local companies.
Nairobi-based Oil and Energy Services Ltd said an
emerging theme in legislative changes in East Africa is local content
obligations to be imposed on investors.
Local content
“Local content requires an investor to develop
skills and increase technology transfer by spending an agreed amount of
money on training or investment, besides the use of local goods and
manpower,’’ said the consulting firm.
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