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Legislation for the Nascent Oil and Gas Sector in the EAC: Kenya Print E-mail
Friday, 03 August 2012
Kenya, hopeful oil economy, faces a number of similar regulatory challenges as Uganda – and should try to avoid the mistakes its neighbour made.

The legislative style under former president Daniel Moi may prove to be a major challenge for the oil sector in Kenya. The laws places emphasis on the executive, which starkly contrasts with the greater oversight role granted to parliament by new constitution of 2010.

Host Community Interests
Similar to Uganda, Kenya’s 1986 Petroleum (Exploration and Production) Act vests  almost all powers in the minister concerned. This may not have mattered much at the time when the legislation was written, as oil prospects were minimal then, but with the recent oil finds in Turkana, there is pressure to update and review the legislation. Allegations of corruption in the acquisition of Block 10BB where Tullow have struck about 150m of net oil pay have reinforced this. But the biggest concern is the division of revenues between the company developing a field and the country and the latter’s allocation to the immediate community, the county and national governments. This has quickly become an issue and renders exploration companies vulnerable to local politics.

In Turkana areas where exploration has yielded positive results, local Turkana leaders have expressed concern over the unpreparedness. ‘The license exploration contracts have never been shared with anyone. What we are still insisting on is that the Energy Minister (Kiraitu Murungi) should declare publicly what is in the contract they have signed with the exploration companies,’ Turkana South MP Josephat Nanok said.

Model Production Sharing Agreement  

The act directs the minister to offer a model production sharing agreement as a basis for negotiation. It has been pointed out that the act fails to address several crucial areas, for example the case where the recoverable reserves extend to an adjacent contract area held by other interests, environmental protection, taxation, and so on. These concerns are to some extent covered in the Kenya model production sharing contract, but this is not a legally binding document until it is signed and is subject to reviews and alterations by the minister and exploration/production companies in the course of negotiations.

The model contract states, for example: Where the recoverable reserves of a commercial discovery extend into an area adjacent to the contract area, the Minister may require the contractor to produce petroleum therefore in co-operation with the contractor of the adjacent area. Where non-commercial deposits of petroleum in the contract area if exploited with deposits in an area adjacent to the contract area, would be commercial, the Minister may make a similar requirement to the contractor of that adjacent area.’

New Legislations, New Institutions
But besides the act’s review, Kenyan legislators need to write a raft of legislations to address other areas of the nascent oil industry: Kenya should establish a petroleum authority, ideally an independent institution that has teeth – a step that Uganda still has not been able to conclude. Despite political interference, the various industry regulators in Kenya like CBK, CMA, KPA, KAA and KRA have some level of autonomy if the clash between KRA and parliament on tax payment is anything to go by, and the resultant authority would be expected to match these.

There have also been suggestions that an entirely new tax law on the sector would be useful if only to clearly determine everyone’s obligations and avoid clashes with KRA – another area where Uganda’s government ran into problems when it tried to claim capital gains tax on the sale of Heritage Oil’s assets to Tullow Oil. The case is still in mediation and has led to repeat delays in the transition to production. A revenue management law will also have to be written – especially important to ensure the productive, equitable use of oil revenues in the context of Kenya’s entrenched corruption.

Financial transparency in oil dealings has been strongly advocated for. Gichugu MP Martha Karua advised that Kenya ought to join the Extractive Industries Transparency Initiative (EITI). The body, a coalition of governments, companies, civil society groups, investors and international organisations, commits member companies publish what they pay, and governments publish what they receive. Besides that, the law would direct on how such funds would be used. Laws guiding environmental issues like spills would also be necessary.

More Parliamentary Oversight – After the Elections
According to the current legislation, ‘the Minister may, on behalf of the Government, negotiate, enter into and sign petroleum agreements with a contractor and petroleum agreements shall, subject to the provisions of this Act, be in the prescribed form.’ This is unlikely to persist: Parliament will try to take away the unilateral powers vested in the minister and give itself a bigger oversight role in the scrutiny of production sharing agreements.

The current members of parliament are in the final months of their tenure and still have a significant work load with the laws required for the implementation of the constitution, so it is likely that these oil-sector specific legislations will be pushed to the next parliament. According to Prime Minister Raila Odinga, ‘Exploration campaigns can last several years and the timeframe from exploration to realising production revenue in an onshore environment is typically in excess of six years. We therefore remain cautiously optimistic.’ This should give Kenya enough time to prepare quality bills – assuming there is the political will to do so.

Border Disputes
One other possible sticking point in the constantly changing petroleum sector is the border dispute between Kenya and Somalia. While Kenya insists that the border should run east from the point it touches sea, Somalia says that the border should continue southeast which would leave Kenya with a considerably small maritime claim. Seven new offshore blocks in the disputed area granted to international companies including Anadarko, Eni and Total may remain unexplored if the dispute is not resolved.

The situation is additionally difficult to resolve for Kenya as Somalia, in the absence of a stable government, may be unable to make binding treaties. Delimitation might become impossible if the two countries maintain their stance with the dispute likely to be referred to the United Nations. Borders are touchy issues and arbitration is not always able to resolve them. In cases where these disputes may take long to resolve, countries have formed Joint Development Zones (JDZ) in the contested area where the countries exploit resources and share revenues as agreed. However, Somalia’s lack of a stable government and of established sector institutions will be a challenge. Kenya’s recent military intervention in Somalia may have been conceived not just with a view to shielding Kenya from further terrorist attacks and kidnaps, but also with the intent of fostering a more stable government to do oil-related business with.


Related:
Legislating for the Nascent Oil and Gas Sector in the EAC: Tanzania
Legislation for the Nascent Oil and Gas Sector in the EAC: Uganda



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