Oil rig at Ngamia in Turkana County, Photo: DEMOSH /flickr
Kenya has hit it rich.
In May this year multinational oil and gas exploration company Tullow Oil discovered additional oil reserves worth US $10 billion in the South Lokichar basin of arid Turkana land northwest of Nairobi.
A World Bank interest free loan of US $50 million was approved on July 24 this year to set up the Kenya Petroleum Technical Assistance Project (KEPTAP).
The project, to be run by the Kenyan government, is designed to strengthen the capacity of the government to manage its petroleum sector and wealth for sustainable development, according to the project’s abstract.
The wealth from Kenya’s natural resources is required under section 71 of the Kenyan Constitution to be managed in the interests of all Kenyans.
Further exploration and development is continuing throughout the onshore region of Kenya and other areas of East Africa with Kenya anticipated to commence commercial oil production by 2016.
Tullow Oil, which first discovered oil in Kenya in 2012, is a British company with a 50 percent equal holding with partner Canadian Africa Oil Corporation in the Lokichar basin area where oil was found. Both companies hold considerable assets elsewhere in East Africa.
Other key players in the area include multinational exploration and production companies Anadarko, Apache, Cove Energy and British Gas, with competition hot in Kenya and other oil rich areas on the African continent, often considered the last true oil and gas frontier, especially between Europe, China and India.
Nigeria on Africa’s west coast began oil and gas operations in 1956.
Joint Operating Agreements (JOA) that allow joint venture co-operation between the Nigerian government and multinationals were introduced in 1971. However, in part due to lack of government resources there has been a recent shift from operating agreements towards production sharing contracts (PSCs).
“Under a PSC the contractor, usually a foreign oil company, bears the entire cost and risk of exploration activities, and only reaps the rewards after a
commercial find explains a paper on the history of oil and gas in Nigeria.
The company recovers costs (Cost Oil) and royalties before sharing the remaining profit (Profit Oil) with the government in previously agreed proportions. Income tax is subsequently paid by the oil company based on its overall profit.
Nigeria has the largest gas and second largest oil reserves in Africa yet its annual production of 2.2 million oil barrels per day (bbl/d) was well below the government’s target of 4 million bbl/d in 2013 with the country still in receipt of World Bank funding.
The Transparency International’s Corruption Perception Index, which scores perceived levels of public sector corruption in particular countries, in 2013 rated Nigeria and some other African countries, including Kenya, among the most globally corrupt. But the Nigerian Extractive Industries Transparency Initiative (NEITI) reported that overseas oil companies seemed to be guilty of underpaying royalties.
NEITI, a state funded domestic watchdog, used data from 2006-08 in its 2012 audit report to show that foreign oil firms may have neglected to pay royalties amounting to $2.33 billion “arising from subjective interpretation of volume, pricing” and grading variables, ”Reuters reported.
Orji Ogbonnaya Orji, who sits on NEITI’s board of directors, questioned the watchdog’s calculations. “They are not calculated on the basis of empirical fact. And there is connivance by officials,” he said.
Indeed, NEITI additionally listed an apparent underpayment of over US $1 billion in petroleum profit tax.
Price Waterhouse Cooper, the world’s leading industry energy advisor, reports that to rectify the situation the Nigerian government’s, “proposed and much-delayed Petroleum Industry Bill aims to create a more stringent fiscal regime, with increased taxes, increasedrents and royalties”.
Its 2013 report reveals: “Angola has drafted legislation requiring oil firms to open accounts with domestic banking institutions, from which all payments related to their oil operations must be processed”.
“Meanwhile, Mozambique is considering requiring all oil and gas companies currently operating, or those wishing to extract gas and oil, to be listed on Mozambique’s stock exchange.”
Other countries are investigating changes in policies to ensure increased local benefit. Kenya is considering altering its current profit-sharing formula and closing a loophole in the Income Tax Act under the Finance Act of 2012, which favours the oil companies.
Tullow Oil, which spent US $49 million with Kenyan suppliers in 2013 and whose international contractors spent US $47 million in the local area, has a strategic policy relating to shared prosperity though.
Its website states an intention to, “nurture long-term relationships with local governments, communities and key stakeholders, with the ultimate aim of creating a positive and lasting contribution to economic and social development in the communities and countries where we operate”.
The Tullow group set up a scholarship scheme four years ago to fund students enrolling in oil and gas related postgraduate degrees at top universities in the UK, France and Ireland.
But despite the endeavours of some oil companies to share their energy finds with the people, it still remains to be seen how much of the great wealth Kenyans are sitting on ends up in local pockets and how much makes a great escape out of the country.
The article originally appeared on Megaphone OZ