Turkana oil deal sparks concerns over skewed revenue sharing deal

Truck ferrying the first crude oil consignment from Lokichar, Turkana, arrives at the Changamwe KPRL storage facility in Mombasa, on June 7, 2018. [File, Standard]

Concerns are emerging over whether Kenya may have short-changed itself in negotiating a deal with Gulf Energy, the firm now expected to move the Lokichar oil fields in Turkana County to the commercial phase following Tullow Oil’s exit.

The government agreed to terms that are now said to be heavily skewed in favour of the company, including allowing Gulf Energy to use the bulk of revenues generated in the initial years to recover its investments and expenses, as well as granting major tax holidays.

The Ministry of Energy and Petroleum amended the Production Sharing Contract (PSC) that it previously had with Tullow, increasing the maximum recoverable costs to 85 per cent of annual revenues from 65 per cent. The balance of 15 per cent, which will be considered profit oil, will be shared between the Government and Gulf Energy on a 50/50 basis. 

In the first addendum to the PSC made on November 24 this year, the government also exempted the firm from Value Added Tax, Railway Development Levy and Withholding Tax. 

Nairobi Senator Edwin Sifuna said recent developments would mean that Kenya is unlikely to feel the impact of the oil. 

The senator also claimed that Gulf had in “a matter of weeks” changed names and hands, which is “symptomatic of attempts to mask real ownership” and that its Field Development Plan (FDP) was approved after its “last ownership changes”. 

According to the Addendum to the PSC, Tullow changed its name in the Netherlands to Gulf Energy E&P BV on September 25 this year. This followed approvals to take over the Turkana project from Tullow earlier in April. 

On October 13, Tullow changed its Kenyan branch name to Gulf Energy E&P Limited and subsequently to Gulf Energy E&P BV on October 24. Gulf Energy acquired Tullow Oil’s rights in the Lokichar project though its affiliate Auron Energy, a Mauritius incorporated company, which in 2024 acquired an 80 per cent stake in Gulf Energy.

Sifuna also noted that the PSC was “amended to expand the definition of capital expenditure to include expenditure on labour, fuel, repairs, maintenance, hauling, mobilisation and supplies and materials relating to production, development, exploration and appraisal and decommissioning costs”. 

An expanded definition of activities that can be termed as recoverable cost will mean that more of the oil revenue earned from exports will be used in paying back the company’s investments in the project.

“We may basically never see a coin from our oil,” he said, further noting that the exemptions given to the company might see the firm exempt from using local labour and supplies.

“We in the Senate passed the Local Content bill which requires the oil company to utilize locally available resources including labour and supplies. They have cleverly made the current agreement with Gulf Energy exempt from such legislation,” he said.

Gulf Energy’s FDP  was approved by the Ministry of Energy and Petroleum early November and has now been sent to Parliament for ratification. The Senate, in a public notice, has called on Kenyans to give their views on the plan, which details how Gulf Energy will move the project to its commercial phase. 

Gulf Energy acquired Tullow Oil’s rights in the project in a transaction completed in July for a minimum cash consideration of Sh15.5 billion ($120 million). 

Tullow discovered oil in Lokichar in 2012. Gulf has been active in Kenya’s petroleum sector and is currently the key oil firm in the State brokered Government-to-Government fuel importation deal with Middle Eastern oil companies. It has in the past been involved in the retail sale of petroleum but sold its network of petrol stations to Rubis in 2019. 

The firm expects to start oil production by the end of 2026, targeting 20,000 barrels of oil per day through the first phase to 2031. It will then increase production to 50,000 barrels per day.

The firm plans to invest Sh786.9 billion ($6.1 billion), nearly double the Sh438.6 billion ($3.4 billion) that Tullow had said it would require to invest in the production facilities at Lokichar.