Why Kenya needs to fast-track oil wealth rules

The dominant talk today is how Kenya will benefit from petro-dollars set to trickle in once oil firms like Tullow start commercial drilling in Turkana.

Of concern to many is if the oil will lift thousands of residents living around the blocks out of poverty.

In October last year, British explorer Tullow Plc and its partner Africa Oil were forced to suspend drilling on two blocks in Turkana due to security concerns, after local residents held protests demanding for more jobs at the sites.

Although these protests caught many by surprise, the government read the work of a hidden political hand trying to call the shots, using the innocent villagers as a smokescreen.

In January, some villagers sensationally went on national TV and claimed they were duped by politicians to participate in the protests against the oil firms.
If true, such behaviour could derail development projects and discourage investors.

Political rent-seeking has stalled many projects and must not creep into key economic sectors and capital-intensive operations such as oil and gas exploration.
Doing so would be akin to economic sabotage.

However, we much not just blame politics for the Turkana protests. These communities hit hard by poverty harbour big expectations on the oil wealth and this is only human.

Nevertheless, let the government tame these expectations early enough by clearly laying out policies that will guide revenue-sharing, jobs allocations to avoid future unrealistic demands that could fuel conflicts.

Globally, oil and gas industries generate significant revenues for the national economy as long as proper macroeconomic management and governance structures are put in place to ensure that the proceeds generated trickle down to development and poverty-reduction projects in local communities.

If well managed, oil and gas operations can provide major benefits to the communities through job creation, transfer of technical and commercial skills and the improvement of roads, healthcare, electricity and education.

The multiplier effect from extractive industry operations is huge and many are bound to benefit from the oil proceeds if proper systems are put in place.

Africa has witnessed scenarios where some oil producing nations such as Nigeria have failed to register inclusive economic growth or reduction in poverty levels, thanks to flawed policies. This has led to the unpopular ‘oil-curse’ characterised by violent conflicts. This can be avoided in Kenya by holding talks with stakeholders.

Several initiatives have been launched by the World Bank to ensure best practices in the oil exploration business.

Many approaches are being adopted, including identification and clear articulation, by governments and investors in consultation with local communities and civil society, of appropriate policies on social impacts and incorporation of policies into laws and contractual obligations.

The Energy and Petroleum Ministry is reviewing the country’s petroleum laws that would address most of these challenges.

The laws, last repealed in 1986, are set for review through the Energy Bill that was scheduled to be tabled in Parliament for approval in November 2013, but has since been pushed to June 2014 to allow for deeper consultations with stakeholders.

Consultants hired to help with the review have recommended that the law includes clearly defined policies for the upstream, midstream and downstream sections to avoid overlaps and reduce inefficiency.

The new law is also expected to provide guidance on natural gas exploitation, a matter not adequately covered in the existing law.

It is also critical that all parties be fully involved in the legislative process as well as in the project design, implementation and operations so that there’s no room for innuendo, especially by politicians and interest groups.

Transparency is critical so that all parties are on the same page with regard to critical aspects such as revenue sharing, job and contract distribution, among others.

Jobs and contracts

For example, communities must know what jobs and contracts they would get at exploration sites and which would be the preserve of experts.

Oil exploration is a high-skilled and sophisticated venture, meaning that certain jobs can only be handled by experts. Well stated rules and regulations have a further advantage of instilling predictability which is vital in attracting investment.

No investor would want to sink money in an environment where terms and conditions are unpredictable. Tanzania has made headway in setting the rules and regulations for its fast growing gas industry.

In November, Tanzania’s cabinet approved a long-delayed natural gas policy, part of new rules that will impose tough conditions on foreign companies and ensure the domestic market gets priority over exports.

Tanzania estimates it has 42.7 trillion cubic feet of gas following big finds off its southern coast. Like in Kenya and Uganda, a key debate in Tanzania has been how much of the nation’s hydrocarbon reserves should be used locally and how much can be exported so that its people can fully benefit.

Uganda is expected to lay emphasis on distribution of the oil wealth because it has barely two years to start commercial production.

The country discovered oil in 2006, but has delayed commercial production partly due to lengthy negotiations over a planned refinery.

Uganda plans to sign a memorandum of understanding with Tullow Oil, France’s Total and China’s CNOOC to pave way for oil production. In Kenya, Tullow Oil is shifting its focus to the construction of infrastructure for tapping crude reserves.

This follows more discoveries in Emosing-1 and Ewoi-1 wells in January that raised the estimated recoverable deposits in Turkana’s Lokichar basin to one billion barrels.