Experts push for laws on sharing of Kenya oil revenues

Stephen Mudiari | NATION Visitors during a tour of the oil rig at Ngamia 1 in Turkana County on April 05, 2012.
Stephen Mudiari | NATION Visitors during a tour of the oil rig at Ngamia 1 in Turkana County on April 05, 2012. 

It was widely expected that oil barons will soon make their way to the country should the Ngamia 1 oil block produce adequate quantities.
The Energy ministry reports a marked interest in petroleum exploration after the news in March of first oil discovery in the dry and dusty northwest town of Turkana where Tullow Oil Plc, the operator of the Ngamia 1 well located at Lokichar in Turkana. Various interests are waiting for the news of commercial viability.

The main reasons for the oil scramble have been attributed to rising world crude oil prices, discoveries of commercial quantities in neighbouring Uganda, and the attractive legal, regulatory, fiscal and acceptable risk reward allowance.
“My office has been invaded by all manner of business elite, multinational oil companies, investors, financiers, lobbyists, politicians, human rights organisations, non-governmental organisations, environmentalists and community leaders seeking to be involved in the exploitation or sharing of the oil resources,” Energy minister Kiraitu Murungi said last week.

“When commercial oil is confirmed, NGOs will predictably mushroom across the country pushing for transparency and accountability, while others will be lobbying for local community rights,” said industry consultant Mr George Wachira.

The Energy ministry says it will re-examine laws to satisfy the emerging demands of transparency, disclosure, fairness and justice in the sharing of oil revenues among explorers, host governments and the local communities.

“The recent positive development in the exploration of fossils, especially petroleum and coal, also calls for a review of the current legal and regulatory frameworks to cater for emerging needs,” said the Energy PS Patrick Nyoike.

‘The National Energy Policy recognises that. We have a five- year window to put issues in place,” he told stakeholders discussing a draft Bill.

“We have set August as the deadline for the enactment of the new laws but sharing of resources is a point of contention,” said Kaburu Mwirichia, director general of the Energy Regulatory Commission (ERC).

The Kenyan oil find is also generating debate on whether it is a blessing or a curse. Progress along the Indian coastline — boosted by geological successes by Mozambique and Tanzania — shows that deposits of natural gas may “soon” be confirmed.

Residents within the Turkana oil and the Kitui coal fields are demanding more compensation in line with the Constitution that has brought major changes and opportunities in the way the affairs of the sector are managed .

The oil find in Turkana is touching on land ownership and compensation and last week a meeting to discuss the discovery aborted as locals and legislators demanded more involvement in the decisions on the black gold resource.

“Engagement with the locals has not been smooth. We had planned a forum for Wednesday on the oil discovery but it has aborted on account of consensus. MPs from the two counties and those in relevant committees of Parliament have said they were not consulted,” said Mr Nyoike.

Experts want policy makers to come up with open and fair oil exploration contracts, uphold sound governance and economic management, in view of the competing demands.

Industry players are proposing revenue sharing in the ration of three per cent for local community, 20 per cent county and the balance for all the country’s minerals.

Apart from oil and coal, significant quantities of soda ash around Lake Magadi, fluorspar in Kerio Valley as well as titanium in Kwale, Malindi and Lamu have been discovered. There is reasonable potential for gold in Kakamega and Vihiga, coal in Mwingi and Kitui and iron ore in parts of Taita, Meru, Kitui and Kilifi. Niobium and rare earth have also been found in Kwale and parts of Nyanza.

Patrick Obath, a veteran industry player, proposes the setting up of a sovereign fund developed by the central government.

“We need laws in the country for all commodities including coal, titanium, gold, oil. We need a proper accounting on royalties and taxes and deciding the revenue stream for counties,” said Mr Obath.

Standards for management of natural resources and sharing revenues are spelt out by global bodies such as the Extractive Industry Transparency Initiative (EITI) that guarantees best practices and transparency, helping governments to avoid political meddling in oil exploitation.

Other success stories include Norway, which banned politicking on oil in election campaigns.

In the European wealthy nation of five million people, the main decisions on objectives, risk tolerance and ethical criteria lie with Parliament, with a clear division of roles between the owner (Parliament, Ministry of Finance) and the manager (Norges Bank), and its Central Bank.

In Norway, petroleum sector accounts for 25 per cent of GDP, 36 per cent of state revenues and 24 per cent of total investment, and 51 per cent of total export.

Its petroleum fund is large and still growing. The $560 billion fund is intended to safeguard the sector wealth and stabilise the economy.

Its function is to diversify from one asset (petroleum) to a portfolio of international securities, reducing the risk and increases returns.

The key decision is the strategic allocation to equities and to other asset classes (this defines the risk tolerance rather than return requirements). Parliament also sets ethical guidelines while the operational management is set aside for the Central Bank (Norges Bank).

Consultant economist Mbui Wagacha says unexpected wealth from natural resources is destabilising unless enjoyed responsibly.
“Saudi Arabia, the world’s biggest producer and owner of the biggest known reserves, is accused of being unfair, even cruel, to foreign hired hands. The Norwegians stand out for disciplined use of their bounty,” says Dr Wagacha.

In Ghana, oil and gas policy offers a good starting point for preparing a national oil and gas policy, which Kenya can customise. Through Tullow Oil, Ghana made an offshore oil discovery — as is the case for Kenya— and made its first export of oil in 2010. Offshore oil, unlike inland discoveries, is faster to develop.

The Democratic Republic of Congo, Africa’s third largest country by land area, is rich in precious minerals such as diamonds and gold but its people have gained little from this wealth because of conflict and bad governance. It then follows the argument that high quantities of oil is a curse for poor countries.

A recent report by Human Rights Watch says gold deposits in the volatile north-east of DRC have catalysed conflict in the area. Nigeria’s Niger Delta is the example of where oil wealth is blamed for corrupting Africa’s political elite, perpetuating exploitation, destroying the environment, provoking social conflicts, civil wars, abuse of human rights, distorting economies and increasing poverty.

The energy sector has for close to eight years been guided by Sessional Paper No. 4 of 2004. But a policy shift to diversify into renewable energy sources and unbundled generation and transmission of electricity have called for stronger laws.

Under the current regime governing the sector, there are laws which need to be brought under one Act for ease of administration.

Weaknesses in the Petroleum (Exploration and Production) Act Cap 308 and Model Production Sharing Contract (PSC) include lack of provisions for compensation, licensing, community awareness and participation.