Economy

New Kenyan law to regulate oil, gas exploration

Summary

  • If the law is passed, the national government will retain 75 per cent of the profit from commercial oil and gas produced, with the county governments hosting the deposits getting 20 per cent and the local community 5 per cent.
  • The aim of establishing a sovereign wealth fund is to provide an endowment to support development for the benefit of future generations and develop infrastructure.
  • Analysts say that if it is passed, the law will “de-risk” Kenya as a hydrocarbons exploration destination, pointing out that the absence of an upstream law has delayed investments.

Kenya’s parliament is scheduled to debate a new petroleum Bill that will establish an independent upstream regulatory authority and a sovereign wealth fund.

If the law is passed, the national government will retain 75 per cent of the profit from commercial oil and gas produced, with the county governments hosting the deposits getting 20 per cent and the local community 5 per cent.

The county governments are expected to legislate on the establishment of boards of trustees and the prudent utilisation of the funds received, says the Petroleum Exploration and Production Bill, 2015, which is already before parliament.

The aim of establishing a sovereign wealth fund is to provide an endowment to support development for the benefit of future generations and develop infrastructure.

The Bill further requires the national government to create a conducive environment for exploration of crude oil and natural gas.

The model production sharing contract (PSC) has adopted the (R)-factor ratio derived from cumulative hydrocarbons revenues to total costs for sharing of revenue between the government and companies. The R-factor was recommended by the World Bank.

The government and exploration firms will each get 50 per cent of revenue from hydrocarbons when the R-factor is less than 1.

Kenya will take 65 per cent of the revenue if the R-factor is equal to or greater than 1 and less than 2.5. The government will get 75 per cent if the R-factor is equal to or greater than 2.5.

Kenya’s current PSCs have profit sharing computed on the basis of the first 20,000 barrels of oil per day (bpd). The   next level is 30,000bpd, then 50,000 bpd and over 100,000bpd.

The new petroleum Bill was prepared by a technical committee of Ministry of Energy after reviewing the Petroleum Exploration and Production Act of 1986 that was deemed oil-centric.

The Bill proposes the establishment of the Upstream Petroleum Regulatory Authority (UPRA) and National Upstream Petroleum Advisory Committee (NUPAC).

Analysts say that if it is passed, the law will “de-risk” Kenya as a hydrocarbons exploration destination, pointing out that the absence of an upstream law has delayed investments.

“The greatest value added by the Bill is the creation of institutions to regulate the sector,” said George Wachira, an oil consultant.

UPRA will regulate the industry while NUPAC, comprising a panel from the Energy and Finance Ministries as well as the Kenya Revenue Authority, will advise the Energy Cabinet Secretary.

UPRA will also manage a national data centre for storage, analysis, interpretation and management of petroleum data and information from sedimentary basins and field operations on behalf of the government.

Acting Energy Cabinet Secretary Henry Rotich said that within one year of enactment of the law, UPRA will come into force. The powers and functions of the authority will in the meantime be exercised by the Energy Regulatory Commission.

The Bill proposes awarding of exploration blocks through competitive tendering.

The proposed law also requires the Cabinet Secretary to develop a framework for reporting, transparency and accountability in the sector. This requires publication of all agreements, records, annual accounts, reports of revenues and fees.

It includes taxes, royalties and other charges, relevant data and information support payments made by a contractor and payments received by the national government, county governments and local communities.

The Energy Cabinet Secretary will, upon an exploration company declaring a commercial discovery, approve the field development plan, which has to be submitted to Parliament for ratification.