Companies prospecting for oil face higher entry barriers and tough penalties for breaching operational schedules under new industry rules approved by the government.
The rules will guide the bidding expected in March following the creation of eight new exploration areas. Acreage for exploration will now be competitively awarded to the highest bidder through a public auction.
Previously, they were assigned on a first-come-first served basis which created millionaires out of shadowy briefcase firms which made money from hawking prospecting licences.
Ministry of Energy officials said competitive bidding would ensure that only companies with the capacity applied for bidding.
“The new terms are some of the best in the region,” commissioner for Petroleum Martin Heya said, adding that the changes were approved on Friday last week by the National Fossil Fuels Advisory Committee (Naffac), the licensing arm of government.
The terms prescribe higher royalties, taxes and revocation of mining and exploration licences in cases where companies lag behind on on-site activities.
The measure is expected to speed up actual work on the sites following experiences where poorly-funded licensees could sit on the blocks without doing much until a well-heeled farm-in, industry jargon for sale of shares, came along.
Naffac has sent the rules — known as Minimum Proposed PSC terms for New Petroleum Exploration blocks — to the Attorney General for publication in the Kenya Gazette, which will give them the force of law.
The changes would see the commitment fee paid to the government per exploration area rise threefold to $1 million (Sh86 million) from $300,000 (Sh26 million) to discourage speculation on the blocks. The payment is a precondition for signing of production sharing contracts (PSCs).
Bank guarantees, annual training fees for civil servants involved in petroleum activities and terms for new PSCs have all been increased after recent discoveries moved Kenya from a frontier to an emerging exploration area.
Oil industry experts welcomed the new rules saying additional revenues should enhance the management.
“It is okay for the government to get as much as it can at this stage. Terms must be negotiated now as they cannot be changed at the production stage,” said Mwendia Nyaga, an industry consultant with Oil and Gas Group, a consultancy based in Nairobi.
Companies seeking oil exploration permits must provide annual audited reports and proof of technical experience with a balance sheet of at least $100 million (Sh8.6 billion).
Naffac has with the help of the World Bank hired Hunton and Williams, a consultant, to develop terms for natural gas.
Under the rules, arrears in payments to the government will attract an interest rate of three per cent, over and above the London Inter Bank Overdraft Rate (LIBOR) which stood at 0.20 per cent on Monday.
The Government is also demanding a performance bond equivalent to 50 per cent to guard against prospecting firms sleeping on the job.
Public interest in the blocks has been set at 10 per cent during exploration, a further 10 per cent once commercial viability is confirmed and another 20 per cent during extraction. However, the government could opt not to take up the stakes.
Companies are also required to inject $108.2 million (about Sh9.2 billion) within the first six years of acquiring the licenses in the case of on shore blocks and Sh14.6 billion ($171.2 million) for off shore/deepwater prospectors.
“The minimum work and expenditure obligations must acquire, process and interpret 1, 500 kilometres two dimensional seismic data at a minimum expenditure of $8 million (Sh688 million),” the rules state.
Other obligations include field studies and interpreting of existing data on blocks adding an expense of $1.2 million ( about Sh102 million).
“The Government is not only making terms harder to attract only serious companies. They are demanding a firm work programme and commitment to the blocks,” said My Nyaga.
The profit from oil production would be shared between the government and the company in the ratio of 78:22, respectively, after deduction of expenses where production is above 100,000 barrels per year.
The new rules say the size of new exploration blocks and leases would be minimised.
“Oil companies will review all the terms on offer at the time of bid submission and compare them to the attractiveness of the acreage,” said Taipan Resources CEO Michael Birley in an interview with the Business Daily.
Exploration licenses are currently valued at a flat rate of $3,000. The licence holder then pays five dollars per square kilometre annually in the first two years, $10 for each of the subsequent years and $15 in the final two of the six year period.
After this, the explorers leave, if unsuccessful, or negotiate for an extension.
Currently, there are two laws covering mining and the oil and gas sectors. The 35 per cent local shareholding rule is covered under the Mining Act (of minerals like gold and coal). A 25 per cent local shareholding structure is covered under the Petroleum Exploration and Production Act.
With Kenya becoming a hot spot for oil, gas and mineral exploration, all acreage was licensed in the last three years. The twin discoveries during 2012 by British firm Tullow Oil saw 24 firms licensed last year.
Ten exploration wells are expected to be drilled this year while eight new ones are to be licensed to different prospectors. The fresh demarcation will be achieved from the acreage relinquished by five explorers.
The Ministry of Energy has previously had run-ins with some oil explorers over the terms of operations with proposals especially the one requiring that foreign mining companies assign a 35 per cent stake to local investors.
A quarter of the stakes in foreign oil and gas companies operating in Kenya should also be surrendered to the National Oil Corporation (Nock).
A licence for Norwegian state firm, Statoil, was in November last year cancelled because of what ministry officials termed as breach of contract. The firm, however, said the terms of operations in Kenya were unreasonable.
The ministry also blocked the transfer of shares in Kenyan blocks valued at Sh15 billion to PTTEP, a Thai company, which was buying out UK’s Cove Energy’s interests in Africa.