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How oil billions will be shared

Updated Wednesday, March 28th 2012 at 00:00 GMT +3

By Njiraini Muchira and Peter Orengo

Whereas it may take Kenya another five years before oil discovered in Turkana County hit the pipelines, it will only be after the fourth year that the country can reap maximum value. This is because of a graduated revenue sharing agreement between Kenya and Tullow Oil Company, which did the discovery and will extract the oil.

The agreement covers a four-year period, after which Kenya will keep 100 per cent of the value of oil extracted at Ngamia-1 well. Though it is not clear what may happen if it turns out the oil deposits, which according to declarations posted by Africa Oil Online "is estimated at 1,003 million barrels under the best net estimate, but with a gross best estimate of 2,066 million barrels", are less than projected and runs low before the fifth year of pumping.

"We have no idea how many barrels are there, but our hopes and wishes is two billion barrels," said Tullow Oil Vice-President for Africa Business, Tim O’hanlon.

Energy minister Kiraitu Murungi (left) and Tullow Oil Vice-President for Africa Business Tim O’Hanlon. Kenya and the company will share oil revenue for a four-year period. [Photo:File/Standard]

Africa Oil is the company that owns 50 per cent share in the Ngami-1 prospecting, and the other half is with Tullow, and Anglo-Irish firm.

It is normal for a country to share oil revenues with the prospecting company for a period because it is during this time that the company recoups the money spent on the exploration and drilling, as well as its profits.

But as Kenya celebrates the discovery of oil industry and geology experts are warning that without the relevant Mining and Environment Bills, the country risks putting the cart before the horse.

There also warnings of need to ensure the discovery does not lead to economic ruin through heightened corruption, inter-ethnic skirmishes over control of mining sites and revenue sharing, as well as related land ownership issues.

Highly placed sources familiar with the Kenya-Tullow agreement reveal initial contractual agreements hands over a lion’s share of the cake in the first three years of exploration to the drillers.

Tullow Oil may take home 80 per cent of the oil revenue in the first year, while Kenya keeps only 20 per cent. In the second year, the Government will take home 40 per cent of the produce, while the driller pockets 60 per cent of oil sales.

In the third year, Tullow Oil will still take home 40 per cent of the revenue, and gradually descend to a 20 per cent slice in the fourth year. But Kenya will take all proceeds from the fourth year of pumping.

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