Sound laws on oil and gas deals crucial for Kenya to gain from natural resources

Workers at the Ngamia 1 oil rig in Turkana County. Kenya needs adequate laws on taxation and local content to boost gains from the oil and gas sector. PHOTO | FILE 

By ELSIE OYOO

In Summary

• State should avoid knee-jerk reactions and set rules for long-term benefits.

Trouble has been brewing in Kenya’s petroleum paradise since oil prices started falling last year. Back in 2012, prices peaked at $125 per barrel. Moreover, a lax and archaic regulatory framework characterised the industry.

The laws did not reflect the current reality of petroleum business. They also gave the government a raw deal in matters like the production sharing contracts.

Prospecting companies were falling all over themselves to lease blocks both on and off the Kenyan shore. Petroleum looked like it would propel us to economic prosperity.

That is all in the past now. Petroleum prices have plummeted to $46. At that rate, investors probably cannot break even. To add, the government has had knee jerk reactions, not altogether beneficial, to correct the warped regulatory framework.

Therefore, it has re-introduced capital gains tax on extractives at between 30 per cent and 37 per cent, much higher than that levied on other industries.

It has also redrafted the model production sharing contract to favour it more, removing some of the buffers that investors had. The draft local content requirements place even greater onus on the investors.

Further, conflicts dominate the relationship between local communities and investors. The former feel entitled to benefit from oil wealth while the latter claim that there is no revenue to speak of as yet.

Getting the product to the market also raises serious concerns. Kenya and Uganda finally agreed on the route the pipeline will take.

Yet, shortly afterwards, Total Uganda still seemed to be exploring an alternative route through Tanzania instead. The earliest production date has been put at 2022, five years later than initial projections.

Do these factors spell doom for the petroleum industry in Kenya? Not necessarily. With proper management by the stakeholders, the industry can still deliver on Vision 2030. 

The government must put in place a regulatory framework in sync with reality. The oil and gas industry has revolutionised since Shell and BP first prospected in Kenya in 1958. Additionally, booms and busts significantly mark the industry. 

Adequate laws are particularly necessary with regard to taxation and local content. Instead of focusing on the short-term benefits it could accrue by taxing capital gains, the government should look at the long-haul. It should put in place economically sound taxes that help, not hinder investment. 

Moreover, to ensure that investors transfer their skills to the Kenyan value chain, the local content requirements should be well defined both at the policy and legal levels.

The policy and law-making processes should include local communities and investors. This need not take an unduly long time. It is not rocket science. 

Further, Kenya, Uganda and Tanzania should identify their aims in constructing the pipeline and align their relationship to these goals. They should then meticulously stick to their obligations and demand such compliance from all parties acting under them.