In March 2012 the Government of Kenya made the big announcement that Kenya was on the verge of joining the club of oil producing economies. Tullow and Africa Oil had finally found potentially commercial deposits of hydrocarbons in the Lokichar area in the badlands of Turkana.
Almost immediately, the country became nostalgic at the prospects of huge economic growth driven by an oil boom, with crude prices then at USD 104 per barrel. There was also a flurry of enquiries on the pricing and availability of plots of land up north.
Four years later, just as Kenya was gearing up to make concrete steps towards commercialization of these resources, crude prices have fallen toas low as USD 40 per barrel.
That said, oil prices have always been cyclical. I do not have a crystal ball that can estimate when prices will begin to rise again but history tells us that there will be an increase. Exploration companies in Kenya have significantly cut down their activities but the fact they have not packed up and left signals that they too may believe that the country is still worth a shot as a new frontier for exploration that would prove viable when prices rise to above breakeven point. The question is what Kenya can do now in preparation for a potential boom in future.
Before 2012, Kenya’s laws, policies and regulations were largely silent on upstream oil and gas. The last major substantive policy review came under Sessional Paper No. 4 of 2004 on Energy.
The Ministry of Energy and Petroleum and other key stakeholders are currently in advanced stages of drafting a number of key pieces of policy and legislation, including a new National Energy Policy, Energy Act, Petroleum Exploration and Production Act and Production Sharing Contract as well as a gas policy.
As expected, these have a greater focus on upstream oil and gas than current legislation. The passing and enactment of this new legislation will strengthen the regulatory framework for upstream development, as well as the confidence of investors into the sector. This follows significant amendments in 2014 to taxation legislation governing upstream oil and gas.
The Government of Kenya is also developing a petroleum masterplan that will guide development and commercialization of the country’s resources. One of the key objectives of this plan is to assist Kenya in avoiding some of the mistakes that other previously oil and gas frontier nations made in the past. The Kenya Petroleum Technical Assistance Project (KEPTAP), supported by the World Bank, is instrumental through this process.
The biggest matter that needs to be closed with finality is the decision on the crude pipeline route.It was recently reported that the governments of Kenya and Uganda had agreed to use a modified LAPSSET route to jointly evacuate their crude to market, giving exploration companies greater confidence and edging them closer to finalising front end engineering design and making final investment decisions.
The characteristics of Kenya and Uganda’s crude, sweet and waxy, also means that the route to market would require possibly the longest heated crude oil pipeline in the world. This adds to the costs of commercialisation, coupled with the big question of security around this preferred route.
More recently, it has also been reported that the Government of Uganda was considering commissioning a feasibility study for a crude pipeline through Tanzania.In order to calm anxiety, the crude pipeline route decision should be made once and for all.
Using a LAPSSET route implicitly presents other economic advantages to Kenya, more so through the execution of an anchor project on the corridor, which may improve the viability of the other key projects planned and eventually open up the economies of northern Kenya, northern Uganda, South Sudan and southern Ethiopia.
Examples from other parts of the world have shown that local communities benefit most from oil and gas activities during the development phase. There has been huge debate around what level of local content should be in place for various major infrastructure projects in Kenya.
Exploration companies in Kenya have often played the role of quasi-NGOs in the areas of operation. This may not be sustainable in the long run and may even go to the extent of discouraging investment. Kenya needs to develop robust local content legislation in time for development of oil and gas fields, and this should take more of a ‘national’ rather than local (or “inter-county” and “intra-county”) content philosophy.
The legislation should also be harmonized with proposals that have been made for other extractive sectors. In addition, the proposed Upstream Petroleum Regulatory Authority that has been envisaged in the draft legislation should probably move towards being the face of exploration in the country once it is established, rather than the exploration companies themselves.
Its role should partly give some cover to exploration companies from the demands of local communities, while offering local communities structured means to engage with upstream investors.
There are still some questions around taxes applicable to upstream players. With the current level of oil prices, resources and questions around potential finds in future, the Government should consider whether there is a need to review the current legislation to improve attractiveness of the sector to junior exploration companies who typically take on the initial risk before selling down or farming out to other larger players at the field development stages.
Lower exploration costs will make Kenya more attractive relative to other exploration frontiers, and will ultimately lead to a larger share of profit oil for Government in future.
The proposal for a sovereign wealth fund is also noble. While the potential for oil riches may not be well known at the moment, the setting up of this fund will allow for prudent investment of wealth from extractive and other sectors for the benefit of future generations of Kenya.
Therefore, despite some of the hopes of the nation being dimmed by the current low oil prices, there is still a lot that Kenya can do to prepare for a potential boom in future.
Isaac Otolo is an Associate Director with PwC Kenya’s Advisory Practice