BY Michael Duncan
The absence of a law to govern petroleum exploration and production in Kenya has stalled the issuance of new licences even as foreign companies register interest in the country’s blocks resulting from discoveries of crude oil deposits.
The Nairobi Law Monthly has established that the Energy ministry is yet to gazette new blocks close to three years now. The government is said to be awaiting the new law, which will update the current Petroleum (Exploration & Production) Act that dates back to 1984.
The Petroleum (Exploration & Production) Bill 2015, together with the Energy Bill 2015, is set to be presented to cabinet before discussion in the National Assembly. The laws are meant to align regulation of activities in the energy sector to provisions of the constitution.
“A decision has not been made on which law to rely on to consolidate the blocks. Some blocks have been released in full while others comprise of just part of acreages currently held by licensed companies,” says Daniel Kiptoo, a petroleum legal advisor at the ministry.
The current law has often faced criticism from industry players and analysts who claim that it fails to address emerging issues in oil and gas exploration. For instance, while traces of natural gas deposits have been discovered in the country, along with crude oil deposits, the existing law does not provide a mechanism of drafting production sharing contracts to govern the exploration of gas.
The law also fails to define a model of sharing revenue resulting from exploitation of gas and oil deposits between oil marketing companies, local communities and the two-tier government (national and county) that exists today.
It has also been faulted for providing a formula for sharing oil revenues that many, including the International Monetary Fund (IMF), think does not give the country a fair share of her revenues.
Consideration of a new revenue sharing model in the draft legislation comes out of recommendations made by a team of International Monetary Fund experts which visited the country in 2013 to review existing petroleum exploration contracts.
The IMF backs the R-factor revenue sharing model which will see government’s share of profits from sale of crude oil based on a ratio between the contractor’s cumulative net revenue and the total exploration and development costs.
The revenue sharing model, according to the IMF, ensures that when the price of crude is low, the contractor (Oil Exploration Company) recovers its cost of investment at a lower rate thus securing government revenue. The current revenue sharing model, which is captured in the production sharing contracts (PSCs) that locally operating oil exploration firms have signed with the government, is based on the daily rate of production.
“Since the first oil discovery in 2012, we have seen very high interest in applications for blocks. We are currently doing the third revision and we expect that the total number of blocks will be about 61 by the end of this year,” Martin Heya, commissioner for petroleum at the Energy ministry told participants of the third East Africa upstream summit held towards the end of last year.
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