New Direction in Kenya’s Oil & Gas Policy & Regulations

As we end 2012 and usher in the year 2013, i wish all my readers happy holidays and a prosperous new year. Please continue reading as i promise more and better content in the new year.

In this article i articulate Kenya's Ministry of Energy policy direction in oil and gas exploration and production going forward.

Oil Block size reduction

In order to ensure that oil companies are not allowed to withhold parts of blocks over which no work activities are committed, The Ministry of Energy has put in place a block size reduction policy. This is intended to make more exploration acreage available and therefore to provide more opportunities to different oil companies to apply for exploration acreages with a view to accelerating surface data acquisition and drilling of exploration wells in all licensed blocks.

The Minister of Energy gazetted additional petroleum blocks in two phases.

Phase one was in December 2006 when the Ministry of Energy increased the number of exploration blocks from the initial twenty-one (21) to thirty-seven (37). That number of blocks was in place until 22nd March, 2012 and by that time thirty (30) out of the 37 blocks had been licensed to 14 international oil companies.

Phase two was on 23^rd March 2012, when the number of exploration blocks was increased from 37 to the current 46. During that time, the Ministry had created nine (9) additional blocks.  One (1) in onshore Lamu Basin and eight (8) in offshore Lamu Basin Blocks. The offshore Lamu Basin blocks now extend up to the ultra-deep waters of the Indian Ocean within the Country’s Exclusive Economic Zone (EEZ) Boundary. 

Tullow Oil continues its 100% drilling success rate

Kenya has intensified its drilling activities and Tullow Oil is concurrently drilling its second and 3^rd well known as Twiga 1 in Block 13T and Pai Pai 1 respectively 1 in Block 10A. The Twiga 1 well will be the 35^th and Pai Pai 1 well the 36^th well to be drilled in the country.  Tentative results from Twiga 1 well shows that the well has encountered oil and is going to be a discovery when drilling operations are completed. 

Upon completion of Twiga1 well, Tullow Oil will commence mobilisation to drill its fourth well at another prospect tentatively called Kongoni in Block 10BB.

Anadarko begins its drilling campaign offshore Kenya

In addition Anadarko (K) Company will commence the drilling of two wells activities in Blocks L7 and L11B on back to back basis.  Anadarko has successfully discovered huge volumes of natural gas of about 70 Trillion Standard Cubic Feet (TCF) in Mozambique. Anadarko will begin drilling either between mid December 2012 or early January, 2013.

Also note that other oil companies such Afren, Ophir and BG Group will be drilling other offshore wells starting from next year 2013.

Oil revenues to reduce Kenya’s importation bill and enhance foreign exchange reserves

The ongoing accelerated oil and gas exploration and drilling activities in Kenya are encouraging especially if the efforts are sustained. As a result of these efforts, the country will be assured of significant socio- economic transformation in terms of wealth creation, and eradication of poverty. This will have the overall benefit of uplifting the standards of living of the citizens of this country. Currently, importation of crude oil and finished petroleum products account for more than 25% of Kenya’s total imports bill as was the case in 2011. 

On the flipside of it, the expenditure on these imports which stood at Kshs.330.71 billion (USD 3.85Billion) was more than 68% of the total foreign exchange earnings from Kenya’s commodity exports in 2011. Commercial discovery will therefore enable the country to realize significant savings of the foreign exchange earnings that are current expended on the importation of petroleum products into this country.

Kenya continues to fast track hydrocarbon exploration and production

It is the Ministry desire and strategy to put in place robust plans in fast tracking development and subsequent production of the hydrocarbons within the shortest time possible ahead of declarations for commercial oil and gas discoveries. The Ministry is benchmarking on Ghana and recently sent a high level delegation to West Africa and was impressed to learn that Ghana was able to fast track development and subsequent production of oil from offshore Jubilee field in 2010 just three (3) years after the declaration of a commercial discovery in 2007.

Kenya’s keen to learn from industry best practice and avoid mistakes of others

In order for Kenya to follow the example of Ghana, there is great need to start plans to put in place robust modalities that would guarantee transparency and accountability in managing oil and natural gas that will be discovered now and in the future. Since the announcement of oil and gas discoveries in Kenya, there have been a lot of concerns about:

1.     Oil being a curse and not a blessing

2.     Dutch Disease,

3.     Local communities where oil is discovered will be subjected to a raw deal regarding with respect to   revenue sharing, employment, compensation and resettlement and other related benefits that may accrue from oil and gas production.

Inspite of political transition in 2013 oil and gas investment secured

Despite political transition in Kenya in early 2013, the Minister for Energy will ensure that appropriate policies, legal and regulatory frameworks are in place to guarantee transparency and accountability in the production and management of the discovered hydrocarbons.

Enhancing and updating oil & gas policy to enhance investment in the sector

The Ministry has embarked on a process of putting in place suitable mechanisms and has already approached the World Bank and the African Development Bank to provide assistance in reviewing the current but old Petroleum Exploration and Production Act Chapter 308 of 1986. The World Bank will also assist in the develop natural gas terms. Many oil companies especially the BG Group are reluctant to proceed with the drilling of exploration wells due to lack of natural gas terms in the current Model Production Contract which has a bias on oil terms.

Consequently, the World Bank has already appointed a Consultant who is going to work in consultation with the Ministry in order to have statutes address areas of concern and other issues that may be necessary as per the standards and practices of the oil industry. Even before they approached World Bank, my Ministry had put in place a Task Force whose mandate was to review the Energy Policy and Energy Act with a view to aligning them to with the relevant articles on Energy minerals in the current Constitution of Kenya 2010. The Task Force has made good progress and during the month of October, 2012 it sought the comments and input of the Parliamentary Committee responsible for Energy at a workshop which was held in Mombasa.

Review of regulations to enhance Kenya’s stake and local content

The review of Statutes will also consider articles on levying Royalties or Capital Gains Tax in transactions where licensed oil companies or any of its Joint Venture Partners will decide to transfer their rights and interests in their Production Sharing Contracts to third parties with monetary gains being realized in favour of the holder of the PSC rights and interests.

The Ministry is also in the process of undertaking a comprehensive capacity building exercises to support upstream activities, starting with the recruitment of trainees with very good first degrees in Civil, Mining and Mechanical Engineering to be trained at Masters Level in Petroleum and Reservoir Engineering. Training at postgraduate level will also be undertaken in Geosciences, Law and Economics. As a long term capacity building strategy, the Ministry of Energy intends to engage a few local Universities in developing appropriate programs in these disciplines.

In addition, lower level tertiary training will be offered to ensure adequate staff complement for the upstream activities.  The other major challenge is to develop Local content capacity for effective and competitive participation in upstream subsector by the Kenyan nationals as active indigenous operators and/or Joint Venture Partners.

The revised Petroleum Act, will ensure the oil revenue is equitably shared between the National Government, County Government and communities where oil is found in a fair share formula.

Contract terms to be reviewed

The discovery of oil and natural gas in Kenya’s Sedimentary basins will lead to review of future PSC terms such as:

1. Open door policy for licensing of blocks will be replaced with Licensing bid rounds in due course
2. The  signature bonus per block will be reviewed upwards
3. Bank Guarantees, annual Training Fees, Surface Fees and related terms for new PSCs will equally be reviewed.
4. The discovery of natural gas in offshore Lamu Basin has greatly helped to put to rest the earlier perception that Kenya’s offshore had a high geological risk due lack source rock that host the necessary organic matter for generation of oil and gas. 

With this i wish you a happy new year.