The energy sector’s legal environment in Kenya is in flux, with the state in the process of adjusting its laws and approach now that commercial oil production is nearing reality. Several bills are at various stages in the parliamentary process, and politicians and sector leaders are debating other policy points to be implemented in the coming years.
The two main laws under consideration are the Energy Bill and the Petroleum ( Exploration, Development and Production) Bill. The first addresses matters in both the electricity and energy sectors, such as the potential of renewable energy and boosting the enforcement powers of the downstream energy modulator, the Energy Regulatory Commission (ERC). If passed, the bill would repeal the last major energy law from 2006 as well as the Geothermal Resources Act of 1982. It would be the primary law concerning downstream energy activities and reorganise the ERC to encompass several other authorities, including the establishment of a new energy and petroleum tribunal.
The Petroleum Bill is intended to be the main legislation for upstream matters, and would replace a law passed in 1984 and updated in 2012. It includes the creation of the Upstream Petroleum Regulatory Authority and outlines how government revenue would be split: county governments would receive 20% of the national government’s share and local communities, 5%. A version of the bill submitted to Parliament allows two years for initial exploration and two possible extensions. It is expected that 25-year production-sharing contracts (PSCs) will remain the government’s preferred legal arrangement for natural resource extraction.
The Petroleum Bill also has a section regarding local matters, in line with the trend across Africa of using law or regulation to boost local participation in the extractives industry and retain a greater share of profits in the country. Kenya’s plan does not establish specific targets, such as a minimum number of Kenyans to be employed in the sector workforce or for what percentage of procurement should go to local bidders. Instead, foreign investors would be required to submit a local-content plan on an annual basis, detailing how they will boost Kenyan roles in operations, provide for training and technology transfer, and utilise local companies for procurement. The new upstream regulator would be responsible for monitoring the process.
Kenya may also adopt transparency rules in the Petroleum Bill, which are uncommon in Africa but similar to an international trend seen in Norway, Canada, the US and the EU. These laws require companies operating in a jurisdiction – or with a securities listing in the area – to disclose any payments they make to governments, generally at a threshold of 100,000 units of local currency. US companies would be required to disclose payments of $100,000 or more, for example.
Tullow Oil, which operates in Kenya, has disclosed payments for 2015 and reported a total of $295.5m to governments in that year. Of that total, $33.2m went to Kenya’s Ministry of Energy and Petroleum. Even if this type of disclosure does not become law in Kenya, Tullow Oil and some other oil and gas companies operating in the country may still have to disclose what they pay to the Kenyan government in order to comply with laws in other countries.
The government’s interest in transparency has also led the Ministry of Energy and Petroleum to seek an audit of Tullow Oil’s in-country costs, as the company’s PSCs allows it to recover qualifying expenses from the state in some form. The audit will cover Tullow Oil’s work programmes and budget updates going back to March 2012, when commercial oil was first discovered by the firm. The company stated that it has spent $1.5bn in exploration costs in Kenya up through summer 2016.
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