This law will boost oil exploration and production

Oil exploration in northern Kenya. FILE PHOTO | NMG 

By GEORGE WACHIRA

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Summary

• We need to ensure that when investment decisions are eventually made, projects implementation is expeditious, and community relations positive.

It is when the upstream petroleum law is in place that Kenya can expect to make impactful progress in oil and gas exploration and production. Until this happens the investors will mostly take small measured steps as they cautiously delay committing final investment decisions.

The law is a critical sector enabler. It provides regulatory and fiscal frameworks that govern investments and operations in the sector while setting up institutions that are responsible for making it happen. The law is also the basis for protection of the environment and stakeholder interests, while providing basis for conflict resolution.

To the investors, having current and effective legal frameworks reduces the country’s investment and political risks. Experience tells us that drafting regulations and setting up institutions usually takes time, and that is why we need to speed up. Any day that passes without the law is an economic opportunity missed by Kenya.

Signing off the petroleum law is apparently held up by absence of “political” concurrence on the modality for oil revenue sharing among national government, county governments, and local communities.

The latest draft petroleum bill recommends a 5 per cent revenue share for local communities down from a previous recommendation of 10 per cent. The county’s share of 20 per cent is recommended for capping based on the county annual budget allocation.

The pros and cons on various options for oil revenue sharing is a wide subject that can qualify for a PhD thesis for indeed arguments and justifications can be as many and varied depending on the perspective one is arguing from.

This is why level-headed reasonableness and consensus among various players should prevail in determining formula for oil revenue sharing.

To the host counties and local communities, my sincere advice is that as they await resolution on revenue sharing, they should continue to scale up their capacity to gainfully participate in all economic sectors including oil.

This includes training in various skills and developing enterprises to help their populations to multiply the benefits that will directly or indirectly accrue from whatever amount of oil revenues they are allocated.

Since early 2014, it has been difficult for investors to commit sufficient capital and operational spending for upstream oil investments due to a slump of global oil prices. Prices fell from above $100 to about $25 per barrel.

Recent indications are that prices are progressively settling at new higher levels between $65-70, and this should allow investors to start loosening up their budgetary purses.

However, this requires qualification because investor capital has options to move to countries and areas with higher oil reserves potential; with more mature enabling legal and fiscal frameworks; and with fewer technical and country risks.

The reality is that, technically Kenya remains a marginal frontier territory for oil investors. We need to improve Kenya’s attractiveness not increase its hurdles.

As much as 750 million barrels of commercial oil reserves in the Turkana basins are ready for production, with potential to scale up to 1.0 billion barrels.

The oil export pipeline via Lamu is a critical success factor for Turkana oil commercialization, making it a priority project. Realistically, the earliest that oil exports via Lamu can happen looks like 2022.

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The ongoing “early oil” activity is an operational necessity to relieve a containment problem for oil produced during exploration and appraisal.

Early oil capacity also helps in technical testing of individual well production. Trucking of early oil to existing facilities in Mombasa is the disposal method that the investors and government have selected and are apparently implementing.

Early oil is a means not an end. It is a temporary but essential operation that should not be politicized, or allowed to detract our focus from the ultimate goal of an oil export pipeline via Lamu. Nor should it be used as leverage during revenue sharing discussions, which should be done freely and honestly.

Finally, we need to ensure that when investment decisions are eventually made, projects implementation is expeditious, and community relations positive.

The government, investors and communities all need each other to drive a successful extractive sector. And the Upstream Petroleum Law is certainly a critical binding common denominator