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Personal Finance

The tiny legal steps to exporting crude

President Uhuru Kenyatta flags off the first
President Uhuru Kenyatta flags off the first crude oil vessel at Kipevu, Mombasa last week. PHOTO | PSCU 

Kenya flagged off her first consignment of crude oil to China last week, marking a major milestone.

Kenya has joined a list of oil exporters and is the first East African nation to do that. Hopefully, this will change our fortunes as the first consignment is estimated to be just over Sh1 billion.

Incidentally, a new Petroleum Act was passed in March 2019, perhaps in readiness for the exports. The new Act contains important provisions that will be highlighted in this article.

Oil is deemed a natural resource whose governance is regulated and provided for under the Constitution.

Article 71 specifically provides that agreements relating to exploitation of natural resources require Parliament nod. While the law on natural resources on benefit sharing is yet to be enacted, the Petroleum Act gives regulatory insight into the exploitation of crude.

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The law regulates exploration, production, separation, treatment and transportation of petroleum. All the foregoing activities are clustered into what are known as “upstream petroleum operations.”

Under the law, the government is required to put in place a national petroleum policy in conjunction with stakeholders and a report on implementation of this policy is supposed to be publicised.

This enhances transparency, accountability and governance in the sector whereby the public is made aware of the implementation of this resource.

This is because crude oil and other natural resources are owned by the Government as trustee for the people of Kenya. One major principle that guides utilisation of resources is public good.

Where any implementation measures do not enhance public good, the measure may be rejected. The Government is required to provide incentives to investors in the sector while balancing this with public good.

Before any upstream activity can be undertaken, the applicant has to apply for a licence and enter into a petroleum agreement. If this petroleum agreement is deemed to be against public good then it can be revoked.

Any unlicensed upstream operations are illegal and the penalty is a fine of Sh10 million or a 10-year jail sentence.

For upstream operations, including delivery of crude oil, the law provides that a petroleum agreement is compulsory.

This means that last week’s dispatch of the crude oil may have been governed by a petroleum agreement.

If the Government gets capacity to engage in upstream activities, then it can do so on its own volition or it can choose to contract third party entities to undertake the upstream activities.

However, the key thing is that the third parties must be licensed to undertake the upstream activities and to mine.

UPSTREAM ACTIVITY

The Cabinet Secretary oversees all upstream activity and is also advised by a committee comprising of persons from various sectors as provided for in the Act.

A lot of regulation is applied when licensing a contractor.

For example, the contractor must show that it has the financial and technical capacity to undertake the work.

Furthermore, the local content clause provides that the contractor must use locally available raw materials, transfer technology to the people and also build capacity.

Any further oil discoveries that the contractor may come across must be reported to the government within two days.

Contractors are required to adhere to both national and county laws in undertaking downstream and upstream operations.

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