Inadequate laws could delay exploitation of Kenya's oil deposits

Kenya, which announced with fanfare this week it had struck oil, risks similar delays in producing crude oil that neighbouring Uganda has faced due to lack of a regulatory framework for the sector, oil firms say.

While State officials acknowledge there are some hazy parts of the law surrounding oil production, they say they are confident Kenya is ready.

But the industry is sceptical, with much at stake due to high costs and scant laws for recovering and marketing oil found. The oil firms are discouraged by the example of Uganda where oil finds lay stagnant for long.

James Phillips, chief operating officer of Canada’s Africa Oil Corporation, the company, which discovered gas in Block 9, said the company won’t spend any money or move ahead with its plans in the area until Energy Ministry develops rules that would determine how that gas could be produced and sold.

"The Government here is good and they’re very easy to work with, but they’re still finding their way," Phillips told Reuters at an oil, gas and energy conference in Nairobi.

"If you don’t have reserves, you don’t have the expertise and knowledge that comes with experience."

Kenya said on Monday Africa-focused British firm Tullow Oil, the operator in a joint venture with Africa Oil, had found oil in Turkana County, and was checking on the commercial viability of the find.

East Africa has become a hot spot for oil and gas exploration in recent years, spurred by new finds, but has yet to come to terms with a legal framework for the sector.

Analysts say the current laws are short and do not account for the vast complications such as environmental concerns, production rates and revenue sharing agreements.

For now, the oil and gas production and exploration process in Kenya is regulated by the Kenya Petroleum Act, a 13-page law passed around 1986, decades before its first oil find, and government officials say this needs to be revamped.

Analysts said because Kenya is inexperienced, contracts can be skewed toward commercial interests, a risk factor from inadequate regulation.

Its regulations will fall short in handling environmental disasters such as oil spills, and in protecting property rights of oil companies negotiating with one another.

In some cases, reservoirs of hydrocarbons can extend into multiple blocks, each with a different licensed owner. Rules usually dictate how companies extract the deposits without infringing one another’s property rights. The law is unclear on how to handle such a situation if it arises.

Commercial hydrocarbon deposits were discovered in Uganda in 2006 by Tullow, but a tax dispute between Kampala and Heritage Oil, Tullow’s former partner, and wrangling over the production sharing agreements, resulted in delays to oil production.

In a similar tax dispute over unclear rules, Cove Energy said it was seeking clarity from Mozambique on a possible levy related to the sale of the British gas explorer, raising the prospect of a tax battle and potential delay to the $1.8 billion deal.

—Reuters