Politics and policy

New rules seek to boost revenues from oil ventures

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Acreage for exploration will now be competitively awarded to the highest bidder through a public auction. Photo/File

Acreage for exploration will now be competitively awarded to the highest bidder through a public auction. Photo/File 

By Zeddy Sambu

Posted  Tuesday, January 29  2013 at  21:29

In Summary

  • 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.
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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.

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