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US mining rules turn the heat on Kenya-based oil explorers

A Tullow Oil oil rig in the Lokichar basin, Turkana County. PHOTO | FILE
A Tullow Oil oil rig in the Lokichar basin, Turkana County. PHOTO | FILE 

New rules requiring oil and mineral companies to disclose all payments made to governments around the world have come into force in the United States, turning the heat on oil exploration and mining firms with operations in Kenya, including Tullow Oil.

The newly published industry rules, derived from the Dodd-Frank Wall Street Reform and Consumer Protection Act, require extraction firms to make public all financial dealings with government agencies for commercial development of oil, natural gas or minerals.

Petroleum principal secretary Andrew Kamau said Kenya plans to adopt and localise the American statute, arguing that it sets a new global threshold and best practice in the governance of the extractive sector.

“It’s a good move and we have even covered it in the Petroleum Bill. If passed, oil firms will have to make these declarations in countries they are domiciled,” Mr Kamau said.

The list of payments that qualify to be declared includes taxes, royalties, fees (including licence fees), production entitlements, bonuses, dividends, payments for infrastructure improvements, and, if required by law or contract, community and social responsibility payments.

The transparency rules for oil, gas and mining come as Kenya opened a fresh search for a consultant to audit Tullow Oil’s finances, more than three years after an earlier hunt failed to attract qualified candidates.

The Ministry of Energy said the consultancy firm will carry out a comprehensive audit of Tullow Oil Kenya’s costs, and classify the costs as appropriate into the qualifying/non-qualifying, as per the production sharing contract agreement.

Kenya has so far licensed 44 out of its 46 oil blocks for exploration and to date only Tullow Oil has discovered commercially viable deposits. Tullow plans to begin exporting 2,000 barrels of oil per day from the Lokichar fields beginning mid-2017, the firm said in a June trading update.

Tullow said the deal dubbed ‘early oil pilot scheme’ involves “transporting oil from South Lokichar to Mombasa, by road or a combination on of road and rail”. 

The fresh impetus to audit Tullow Oil comes two months after the Irish oil explorer disclosed that it has so far incurred $1.5 billion (Sh150 billion) in exploration costs to be recovered once production begins.

Even though Tullow Oil shares a work programme and budget update with the Kenyan government on a quarterly and annual basis, Mr Kamau could not vouch for the authenticity of the reports in the absence of an audit.

The government is yet to begin auditing the expenses four years since Tullow Oil announced the discovery of Kenya’s first commercial oil deposits in March 2012.

The list of global explorers scouring for oil in Kenya and are therefore directly affected by the new regulations includes New York Stock Exchange-listed Erin Energy (formerly CAMAC Energy), Texas-based Anadarko, American firm ERHC Energy, and BG Group, which was acquired by Royal Dutch Shell plc.

Other oil explorers with interests in Kenya and are expected to make full disclosures on their payments to governments and costs incurred are Australia’s Swala Energy, Canada’s Vanoil Energy, Statoil from Norway, London-based Ophir Energy, Italian multinational Eni, Edgo from Jordan, Nigerian firm A-Z Petroleum and State-owned National Oil Corporation of Kenya (Nock).

“I am pleased that the commission has completed these final rules, which will provide enhanced transparency to further the statutory goal,” said Mary Jo White, chairperson of the U.S. Securities and Exchange Commission.

The civil society lobby group, Kenya Civil Society Platform on Oil and Gas has previously expressed fears that in the absence of proper audits explorers such as Tullow may inflate recoverable costs, ultimately denying Kenya the full benefits of its national resource.

“We hope that the new rules by the SEC will go a long way in promoting transparency and accountability and a significant step towards curbing corruption in both the extractives industry and the government,” said Charles Wanguhu, platform coordinator at the lobby.

Improved governance

The US capital markets rules are similar to the reporting requirements of the European Union’s transparency and accounting directives, Canada’s Extractive Sector Transparency Measures Act, and the extractive industry transparency initiative, a voluntary mechanism which promotes and supports improved governance among players in the mining, oil and gas industries.

Tullow Oil is yet to disclose a breakdown of the $1.5 billion (Sh150 billion) it has made public in exploration costs, and which remain unaudited.

Tullow and its partner Africa Oil in March 2012 announced they had struck black gold in Turkana. More than 30 exploration and appraisal wells have been drilled so far, said the companies, which own blocks 10BB and 13T.

The firm has, however, been revealing payments to governments such as income taxes, royalties, dividends, bonuses, licence fees, and infrastructure improvement spending in all countries of operations.

Tullow paid the Kenya Revenue Authority (KRA) $9,000 (Sh900,000) in income taxes and a further $486,000 (Sh48.6 million) in licence fees to the Ministry of Energy, according to the latest regulatory filings for the year to December 2015. Mr Wanguhu said civil society was awaiting the oil explorer’s full disclosures outlining amounts spent in exploration as well as pay-as-you-earn to KRA on behalf of their employees to the KRA.

The lobby group has warned that without transparency and proper audits, explorers may inflate recoverable costs ultimately denying Kenyans the full benefits of their national resource.

Lokichar basin, with proven reserves of 600 million barrels of oil, is estimated to have a 25-year life span at a production rate of 80,000 barrels of oil per day, according to Tullow’s regulatory filings.

The lobby group together with the charity, Oxfam in April 2016 released a report which indicated that annual receipts could range from Sh8 billion ($800 Million) to as much as Sh300 billion ($3 billion).

The break-even price for waxy oil from the Lokichar basin is set at about $42 per barrel, according to studies by Oxfam and the civil society lobby.
It sets the pipeline tariff at $10.70 per barrel and takes an $8 per barrel discount due to the waxy quality of the oil.

But Mr Kamau, the Petroleum PS, put the break-even at $34 a barrel, and said Kenya’s oil is viable given the current global average prices for crude at $46.66 per barrel.

Morningstar Inc., a Chicago-based research and investment management firm, says that the break-even price for oil from Lokichar basin is at about $50 per barrel.

Tullow in February revealed that $25 per barrel as the cost covering capital expense, operating expense and tariffs.
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