Kenya Developing New Oil & Gas Regulation

A senior official from the Kenyan energy ministry announced on 17 September 2013 that the government would be releasing seven oil blocks totalling 30,000 square metres in Marsabit, Lamu, and Turkana exploration basins.The blocks were surrendered due to production sharing contract (PSCs) regulations that require exploration firms to cede 25% of their licensed acreage to the government if they lay dormant for two years (onshore) or three years (offshore). 

Unlike previous licensing arrangements, which were agreed on a first-come, first-serve basis, energy ministry officials have repeatedly stated that new blocks will be assigned following public bidding rounds. However, the bidding round is unlikely to be held until the current review of the energy legislation is completed.

Cabinet Secretary for Energy and Petroleum Davis Chirchir has stated the new draft bill, which is intended to update the 1984 Petroleum (Exploration and Production) Act, will be sent to parliament in November and will bring the sector in line with the 2010 constitution, particularly as related to the devolution process. However, the passage of the bill is likely to be delayed until early 2014 by the ongoing trials of President Uhuru Kenyatta and Deputy President William Ruto at the International Criminal Court (ICC).

New oil and gas legislation is likely to include a number of profit-maximising measures including new taxes, a minimum state stake in projects and local content provision laws. Under the current legislation, the NOCK receives a 10% share in production once commercial quantities of oil or gas are found. However, in October 2012, the then-energy minister, Kiraitu Murungi, stated that this would be amended to a 10% initial stake, which increases to 25% once production begins.

In January 2013, then-Commissioner for Petroleum Energy Martin Mwaisakenyi Heya stated that once production had begun, oil companies would be entitled to recover 60% in ‘cost oil'. The 'profit oil' would then be split between the oil companies and the government on a sliding scale, with the government claiming 50% of up to 30,000 barrels per day (40,000 b/d offshore) and 78% of 100,000 b/d or above (120,000 b/d offshore).

If companies fail to find oil within a two-year (onshore) or three-year (offshore) period, they are required to return 25% of acreage to the government. Although many of these proposals were drafted under the previous administration, the current energy secretary is unlikely to deviate from them.

In July 2013, the government, supported by the World Bank, commissioned consultants Hunton and Williams and Challenge Energy to review the draft legislation. The government has already committed to a number of the consultant's suggestions, including the use of competitive public bidding rounds. The consultants also recommended the introduction of a capital gains tax, which the government is likely to adopt given their desire to maximise revenue from the oil sector in order to balance the current account.

Significance 

Since it is unlikely that a clear regulatory framework will be in place in the six-month outlook, existing investors will become increasingly dependent on political influencers, or industry gatekeepers. These are well-connected business stakeholders or policy-makers that wield considerable influence over energy sector licensing, regulations, and policy. Gatekeepers are likely to be members of the National Fossil Fuel Advisory Committee (NFFAC), as well as senators of the oil-producing regions.

Following the implementation of the new energy bill, the government has committed to review the terms for the natural gas sector, which are omitted from the current regulations. Due to the lack of legislation, energy ministry officials have stated that energy companies have avoided drilling in areas with the potential for natural gas as their contracts were solely focused on crude oil exploration.