New petroleum law to boost Turkana oil plan

The Petroleum Act 2019 signed off by the President last week replaces an old 1986 upstream petroleum law which is now repealed, while accommodating the downstream and mid-stream petroleum sub-sectors which were previously domiciled in the Energy Act 2006. Here I will focus on the upstream sub-sector with specific reference to the Turkana oil project which plans to pump first oil for export via Lamu by 2022.

The new law sufficiently saves all the commitments and decisions made under the provisions of the repealed law. All the terms and agreements so far signed, including those for the Turkana oil project, shall remain preserved and protected. This is important for investor’s legal assurances and also for continuity of the ongoing projects.

Going forward, the Parliament shall now be involved in review and ratification of future production sharing contracts (PSC) and field development plans which is in conformity with Article 71 of the Constitution. It is the parliament that shall now be responsible for organising public participation during their reviews.

To ensure effectiveness and value addition in their review and approval roles, it is important that the parliamentary energy committees are sufficiently familiar with the issues and workings of the upstream sector, including global best practices.

The 75-20-5 per cent oil revenue sharing formula between national government, counties and local communities is now in effect. In essence, the formula now binds the three partners to seek shared success by constructively engaging each other. Disruptive conflicts should now be something of the past. It is also important that oil resource counties and local communities develop capacity to responsibly and transparently absorb the allocations.

The new law seeks compliance with local content requirements in all upstream operations; including services and locally manufactured goods; and employment or engagement of qualified and skilled Kenyans at all levels of the value chain. Local content opportunities normally peak during project construction time, which for the Turkana oil project will be 2020/22.

The Cabinet Secretary needs to draft local content regulations, while creating capacity to monitor compliance. The ministry will also need to work closely with the oil investors and various stakeholders to ensure that optimum local content benefits accrue, at all levels down to local communities. This can be achieved through proactive capacity building.

Local content

Reasonableness and reality must however prevail in the local content expectations and compliance enforcements to avoid unintended consequences which may include project delays and bloated project costs.

The upstream petroleum regulator is now the Upstream Petroleum Regulatory Authority. However until this institution is set up , the upstream regulatory tasks shall be temporarily carried out by the Energy Regulatory Commission(ERC) , which has since last week been renamed Energy and Petroleum Regulatory Authority by another new law, the Energy Act 2019 .

The Cabinet Secretary will be advised by a National Upstream Petroleum Advisory Committee which includes experts, and representatives from relevant line ministries. The committee will mainly focus on matters of upstream petroleum operations, and specifically investor agreements negotiations.

Although the new law is not explicit about the upstream role of the current National Oil Corporation of Kenya (NOCK), it is expected that any government participation in upstream oil and gas activities will be though a National Oil Company. The existing NOCK may require to be institutionally reformatted if it has to play this role while still undertaking downstream marketing.

For effective technical and economic regulation of the upstream sector according to the requirements of the new law, it is necessary to urgently create expert capacity at both the authority and the ministry.

Specifically we need to create expertise to monitor economic compliance, especially in areas of project cost and revenue monitoring and auditing. This is a very sensitive area as it impacts final net cash available for sharing between investors and the three Kenyan revenue recipients.

Finally, a word of advice to the leadership of Turkana County is to urgently and prudently prepare their people to benefit from the trappings of the new law – 25 per cent revenue allocations, and economic opportunities from local content requirements.