Prepare Kenya for oil, gas exploration

Kenya struck oil, which is in the process of being quantified for commercial viability, only six months ago.

Since then, there has been an influx of big-name upstream companies intent on participating in oil and gas exploration, both offshore and onshore, an indication of good prospects for finding more hydrocarbons.

The country is now moving from the earlier phase of “wooing” investors through lenient contract terms to invest in a hitherto frontier country to a strengthened negotiating position when commercial quantities of oil are confirmed.

The new emphasis now should be on how to fully leverage Kenya’s financial advantage in upstream contracts.

As the country moves forward, it will need to fully execute its obligations to investors by ensuring facilitation that would allow quick oil and gas development. This would in turn lead to early monetisation of oil and gas finds.

As excitement for finding oil ebbs, we should now focus on establishing a comprehensive oil and gas policy and strategy; creating governance structures and institutions to steward potential oil and gas development; and create human capacity to manage the newly found wealth.

The coverage of upstream oil and gas in the Draft Energy Policy may not be sufficiently detailed to fully address all the sector issues and challenges. A separate, more detailed upstream oil and gas policy and strategy, is essential.

The government should commence training Kenyans to equip them with skills to exploit the new resources.

Deserving Kenyans will require to be sponsored to overseas universities to acquire knowledge in various fields like legal contracting, geophysics, drilling engineering, and refining economics.

The skills will enable the country to acquire competencies and legal-technical independence in managing the resources.

There is also need for the government to establish a first class petroleum faculty at a local university to offer courses on petroleum.

To ensure quality, the faculty should be funded and monitored directly by a special petroleum education fund.

Ultimately, there will also be need to focus on training of technicians in oil and gas drilling and engineering.

As mentioned before, the gas policy and strategy should outline preferred options to monetise oil and gas production, and how to integrate oil revenues into the growing economy.

This is an area that will require a lot of input from fiscal policy experts and economic planners so as to get it right. This process should not be rushed and should be given the widest expert debate possible.

Investors will welcome direction on how hydrocarbons will be marketed. There is the option of direct exports, which most investors normally favour. Other options are value addition through refining; and integration into local energy demands.

These options will determine infrastructure requirements which in turn will call for funding.

On revenues management and investments, we should start entertaining the idea of a sovereign fund.

Tanzania has just announced that it is considering the launch of a sovereign fund to manage revenues from their ever growing natural gas reserves.

A sovereign fund allows a country to save money for future generations; stabilises inflows of cash into the economy to ensure macro-economic stability; while also ensuring balanced national economic development.

Setting up of a sovereign fund also prompts creation of institutions and systems to account for and allocate revenues.

Best practices on revenue management are available in many oil producing countries. The Extractive Industries Transparency Initiative (EITI) is a guiding protocol on management and accountability of oil and gas revenue.

The policy should be clear on how local businesses will participate in provision of logistics services, and how local ventures will be protected from unfair competition from established overseas contractors.

If Kenya’s leaders ponder the policies and strategies early enough, they will avoid delays in oil production development that have been experienced in Uganda.

Oil was first discovered in the country in 2006 and upstream petroleum policy drafted in 2008, but only approved in 2011. Sector institutions are now in the process of being set up.

Acrimonious litigations

Acrimonious litigations between investors and the government on the application of capital gains tax laws caused a lot of delays in Uganda.

The absence of early agreements between investors and the government on monetisation of oil finds may have delayed development of production and associated infrastructure.

Further, political meddling in Uganda may also have contributed to the slow pace of decision making and project implementation.

Inadequate public information and sensitisation may also have created room for civil and political activism in the sector, creating delays.

Uganda will take about 10 years — from initial oil discovery to getting cash from the resource — which is too long for investors and the country.

Grassroots onshore oil production development and export should not exceed five years.

Source: www.businessdailyafrica.com

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