Opinion and Analysis

Review of oil sector’s licensing regime timely

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Posted  Wednesday, January 30  2013 at  18:21
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In recent years, small oil companies have turned Kenya’s exploration oil market into a speculative business, minting billions through share sale of prime national assets without breaking a sweat.

The explorers have been acquiring oil blocks on the cheap before ceding their interests to cash-rich oil majors, in the process earning earnings billions of shillings in sumptuous profits.

This is improper not only because these dealmakers spend little sums on the exploration blocks before their auction, but the proceeds of the deal making do not trickle down to the citizens.

Therefore, we support the decision by the Energy minister to review the licensing regime through higher entry fees and the demand for financially healthy firms to participate in the bidding for the oil blocks.

The State will now require firms to show proof of their financial and technical expertise with a balance sheet of at least $100 (Sh8.7 billion) besides their entry fees having been tripled to $1 million (Sh87 million).

The explorers will also be required to ink a performance bond equivalent to 50 per cent of their exploration expenditure to guard against the firm sleeping on the job.

The shift from the regime of dishing out exploration acreage in a discretionary manner to that of subjecting block applicants to bidding and thorough background screening is also welcomed to ensure that only firms keen on finding get the go-ahead.

These tough rules bode well for Kenya’s oil exploration business in many ways.

First, the rules will ensure that Kenya ends up with oil explorers keen on tapping the commodity rather than deal makers whose brief is to profit from license sales without having done any work on the blocks.

The presence of big players with superior capital and technical abilities will deepens Kenya’s quest to strike commercially viable oil and gas akin to neighbours Tanzania and Uganda.

Secondly, they will help weed out cartels whose brief is to profit at the expense of the country. The cartels have evolved into a business unto itself - complete with local agents and politically-well-connected middlemen at hand to lobby the government to play by the speculators’ whims.

Times have evolved from events of a few years ago when governments in East Africa would practically pay companies to set shop in the regions, thanks to the oil finds that have sparked a scramble for exploration blocks.

Therefore, this dynamic presents a strong case for the governments to be tough on the oil explorers.