Oil drilling at Ngamia 1 in Turkana County. Kenya is set to adopt open tendering in awarding exploration licences as more foreign players show interest in the recently discovered natural gas and oil. Photo/FILE
What you need to know:
Open tendering for exploration would boost transparency and attract competent contractors to the country’s oil and gas fields.
The consultants recommend that government should only resort to direct negotiations of contracts in case a public tender fails to attract bids that satisfy the criteria for award.
The consultants have also rejected the royalty payment system favoured by UK, Norway, Brazil and Australia, settling instead on the production sharing contracts (PSC).
Kenya is set to adopt open tendering in awarding exploration licences as more foreign players show interest in the recently discovered natural gas and oil.
Consultants hired by the World Bank to help draft a regulatory framework for the country’s nascent oil sector said open tendering for exploration would boost transparency and attract competent contractors to the country’s oil and gas fields.
“We recommend that Kenya adopts a public tendering regime for contract awards as more interest in the country’s exploration blocks yields competitive environment,” Hunton & Williams and Challenge Energy Consultants said in the final draft of regulatory framework.
The draft was made public last week at a forum attended by Energy and Petroleum secretary Davis Chirchir and World Bank officials.
“We want to incorporate the experience of other producers to come up with detailed laws to regulate recent oil and gas discoveries,” said Hudson Andambi, senior principal superintending petroleum genealogist at the ministry.
Under the current regime, the Cabinet Secretary in charge of petroleum simply puts out a notice of available open blocks, paving way for interested contractors to submit applications for petroleum agreement negotiations.
The approach rooted in the first-come-first-served principle, has been criticised in recent weeks for handing mining rights to highly connected speculators who make billions of shillings by selling them to real investors.
The public tendering of oil drilling rights has worked well in post-conflict governments of Mozambique and Angola.
The consultants recommend that government should only resort to direct negotiations of contracts in case a public tender fails to attract bids that satisfy the criteria for award.
“Such public tenders should be conducted pursuant to procedures specified in regulations issued by the Cabinet Secretary, including safeguards against corruption in direct negotiations,” the consultants said.
The consultants have also rejected the royalty payment system favoured by UK, Norway, Brazil and Australia, settling instead on the production sharing contracts (PSC).
For years, Kenya has been collecting three per cent in royalties on its key mineral wealth and other natural resources, only introducing the PSC model after Tullow discovered oil in Turkana last year.
“We intend to use the comments raised to come up with a legal regime that favours our country and attracts investments,” said Mr Chirchir.
Under the tax and royalties approach, contractors share the cash with the government in the form of a payment per unit of production or percentage of gross revenues while also paying taxes on the contractor’s income.
Firms which discover commercial quantities of oil will still pay corporate tax at 42 per cent on their net profits even as they enter into a PSC arrangement with the government.
The consultants did not give a revenue sharing formula, saying the sensitive issue should be settled in a consultative process.
The Final Draft of the National Energy Policy concluded in March proposes that 15 per cent out of the proportion of revenue accruing for the government should be handed to county government with additional five per cent going directly to communities.
The consultants also recommend that the Income Tax Act, be amended to ensure that transfers of interests in PSCs, including sale of shares, be subjected to capital gain tax.
For natural gas, the consultants recommend that the State’s share will range from 40 per cent to 80 per cent depending on the quality.
In addition, the contractor will be allowed to recover between 60 and 75 per cent of annual production to cover costs of operation. The county governments have demanded to be involved in negotiating the PSCs.
“The PSCs will only make sense where counties take part in the negotiations since some of the functions such as matriculation have been devolved,” said Mohamed Ibrahim Abdi, Mombasa executive member in charge of trade, energy and industry.
