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Government secrecy on deals will not help achieve Kenya’s oil dream

By Charles Wanguhu | July 7th 2019
By Charles Wanguhu | July 7th 2019
An oil exploration rig in South Lokichar, Turkana. [File, Standard]

The Ministry of Petroleum and Mining recently held a press conference to announce the signing of a Head of Terms (HoTs) agreement with the joint venture partners of the South Lokichar Turkana project.

As with previous agreements, the ministry cited official secrecy and commercial confidentiality in declining to disclose details of the agreement reached with three oil majors for development of the oil basin.

The officials went further to indicate that the agreements had taken care of Kenyans’ interests. The good old “trust us we are signing agreements for your benefit but as the beneficiaries you cannot be trusted with the information of the benefits”.

While the details are scanty we can glean some key things from the announcements by the ministry and the oil companies statements. Agreement so far has been reached on the commercial aspects between the Government and the oil companies.

The outstanding issues are land access, water rights including costing for the project and an environmental social impact assessment all needing to be finalised to move to development.

While not a final investment decision, the HoTs are legally binding and basically address contentious issues on the key agreements to be signed. The full set of agreements will just be an elongated version of the HoTs. It could be assumed that the agreement is to be used to secure project finance for the pipeline, which is one of the preconditions for Final Investment Decision (FID) on both the upstream and the pipeline projects.

With the signing of the agreement some bigger questions arise; what are the new timelines for an FID? Are there further incentives given in the upstream project? Does the host agreement effectively protect the Government in the event of undue delays or is it bearing all the costs? What is the ownership structure for the pipeline?

The ministry briefing highlighted the commercial issues such as cost recovery, fiscal review and tax incentives as the commercial aspects of agreement. It is crucial to break these down further. On cost recovery, the joint venture partners had indicated that they had spent close to Sh200 billion on the project.

The Government had undertaken an audit of these costs and is yet to release the report. If agreement has been reached on the costs so far, it would be crucial for Government to publicly disclose how much of the costs were allowed and if any were disallowed after the audit. Two hundred billion is a significant amount considering a phased approach to development of the fields.

On the issue of fiscal review, the ministry should provide clarity on the contents of the agreement. Are the oil companies going to recover more of their costs earlier than anticipated in the contract? This would mean Kenya would have to wait further to receive benefits from its resources.

On tax, what incentives were agreed in partnership with Treasury? With a marginal project like Turkana it would be foolhardy to give additional incentives, further eroding future revenues from the project. Clarity on the terms would be useful in ascertaining that indeed the Government adequately protected Kenya’s interests.

In addition to the commercial aspects there were outstanding issues around State participation, domestic market obligation and the pipeline development. The joint venture partners had also sought some level of Government guarantee to protect them from issues like the stoppages that have plagued the project. This would be risky as it would expose Government to expenses incurred from the companies during stoppages and other delays.

Overall, the signing of the HoTs is a step forward but falls short of the final investment decision required to ensure the project moves towards development. The land access issues have been further complicated with a court decision that renders a section of the law unconstitutional.

It would appear that Kenya’s oil dream is a case of musical chairs with the twist that every time the music stops an extra hurdle is added.

- The writer is coordinator at the Kenya Civil Society Platform on Oil and Gas

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