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How oil billions will be shared

BUSINESS
By | March 28th 2012
By | March 28th 2012
BUSINESS

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.

Energy ministry officials were, however, not available yesterday to confirm these figures. But the Energy Regulation Commission said oil exploration and drilling do not fall under its mandate. One of the Government officials who, was in the discussions leading to the Kenya-Tullow agreement, insisted this arrangement could not have changed because it was what the two parties signed before the exploration, which is a mega-billion shilling exercise, started.

Tullow Oil discovery is a breakthrough for Kenya, and an encouraging sign that some of the ongoing explorations could yield more oil wells. It needs to complete drilling of Ngamia-1 exploration to a depth of 2,700m, then carry out tests to ascertain the quality and quantity, something that will answer the question of whether the oil is commercially viable.

Initial tests indicate the oil has an API (measure of how heavy or light petroleum liquid is compared to water) greater than 30 degrees and that its wax-like the oil in Uganda and South Sudan. This means transporting and refining the commodity will not be a challenge because it will not require extreme heating.

It’s after establishing the quantities that the next challenge for Kenya will start. Though so far Kenya has signed a revenue sharing agreement with Tullow Oil as part of the deal to ensure the company recoups its investments, the tendency for international companies to short-charge African governments has been seen in other countries just like the surge of international interests on a third-world country when it strikes oil.

The issues raised include contractual agreements with the drillers, governance issues, sharing of revenues from the wells, mining laws, policy gaps, and environmental protection.

Immediate former Commissioner of Mines Bernard Rop, who did his doctorate research in the area covering the basins where Tullow made the discovery, and has written several papers on the Turkana basin, cautions against early celebrations. "No one can ascertain the viability of the oil until they sink at least three more wells. This will also include sinking to the depth below 1,000m in each of the wells, an exercise that may take months," said Dr Rop.

If the wells are rich, there is the headache of dealing with the local community, who may not understand the details of the contract between Tullow and the Government, he added.

"To make sure that all the parties involved get to benefit from the oil, the attitude of the local community is important. In the contract the Government entered, issues such as environmental, land policy, and payment of royalties are considered," explained Rop. He has taken part in the signing of other local mining concessions.

It also emerged that oil discovery is covered under laws that experts warn are obsolete and cannot hand fair share to local stakeholders.

"We will need to have the logistics in place to enable the transportation and refining of the oil and these will cost a lot of money," said Energy Regulatory Commission Director General Kaburu Mwirichia.

George Cazenove, the Tullow Oil Company spokesman, sought to temper the excitement with a warning that the discovery had only put Kenya at the beginning of a long process to becoming an oil producer. This is the same message the President gave the country on Monday.

He gave the example of neighbouring Uganda where oil was first discovered in 2006, but has not yet reached the production stage.

Rop said mineral dealers have to pay a royalty to the Government as per the provisions of the Mining Act, which has to be negotiated since there are no standard rates.

James Shikwati, the director of Inter-Region Economic Network and co-editor of Geological Resources and Good Governance in Sub-Sahara Africa said, "The contract with the drillers must be harmonised with the laws of devolution to avert fears of exploitation."

"Government neglected these people of Turkana for over 45 years and with this oil find, there is fear of hostility from the local community," Shikwati warned.

"The locals and Kenyans must declare what the contractual terms with the miners are," Shikwati advised.

"Kenyans must not believe that oil barrels will solve all their problems. They must handle this matter of oil with utmost care lest we fall in the traps of countries like Nigeria and Angola," he went on.

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