Unlocking the real potential of oil discovery

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By: David Wanyoike

With the discovery of oil in Turkana, there is dire need to kick off the review of the existing legislation and formulation of new legislations to lay the foundation for the next chapter of the country’s national petroleum program. The legislation on oil would be expected to define and regulate the relationship between the government and the various oil companies currently operating in Kenya, and at the same time address the relationships amongst various interest groups, from landowners and cultural representatives in the oil producing areas to members of the private sector.

While there are obvious weaknesses in the current oil legislation, there has been no priority in reforming it largely explained by the fruitless oil discovery efforts witnessed in the past. The current legislation is inadequate or at worst outdated casting doubts on its ability to successfully thrust the expected development agenda for the country. An ideal oil legislation would be expected to comprehensively cover a wide array of regulatory functions for the institutions, companies and individuals participating in the sector. The government has already initiated efforts to have the existing legislation on oil addressed. It is expected that some of the existing laws may be rendered obsolete when the new oil legislation comes into effect, while other laws will remain in effect and work in tandem with the forthcoming legislation.

With the new constitution dispensation and the adoption of devolution governance, the local community has a big say in the management of resources within their localities. The concept of local interests has developed further in the last two years or so to include public input in the decision-making process. Local community will be expected to participate and have a great influence in the allocation of petroleum proceeds. The regulation of land rights and disposal is also expected to be extremely important to Kenya’s oil story. Oil discovery has been made in an area where land ownership is largely community based. In a field of massive asymmetries in information especially on the titling of land and the maintenance of accurate records, abuses are likely to emerge in earnest. If land is not comprehensively and transparently managed, Kenya may not only suffer an oil curse but also a land curse.

Oil is a key component impacting on the global economies world over. The global importance of oil supplies on the world markets has indeed triggered huge interest by the major foreign oil producers on Kenya’s oil discovery and issues relating to the management and control of petroleum resources in local communities where the oil is extracted are potentially source of heated debate and unrest. There has been persistent unrest in the African oil producing countries essentially floundering their economies into the sea of backwardness. Lack of proper legal framework has been poised as the main source of the challenges that have plagued the petroleum industry in these countries.

Appropriate oil legislation is expected to cut across the three areas of the oil industry: policy, regulatory and commercial. The responsibility for these functions needs to be split between different agencies to avoid overriding roles that may lead to serious compromises.  There is need to introduce and enforce integrated health, safety and environmental quality management systems with specific quality, effluent and emission targets for oil operations in order to ensure compliance with internationally accepted standards. Under such legislation, the government should be mandated to honour international environmental obligations and promote energy efficiency, provide reliable energy and a taxation policy that encourages fuel efficiency by producers and consumers.

To fend off environmental degradation, licensing should be tied to the commitment to properly address the environmental needs. Interested companies should be required to submit an environmental quality management plan alongside their application for a licence or lease, and the plan should spell out precisely how they intend to demonstrate their commitment to comply with the relevant laws, guidelines, regulations and standards. Fiscal concerns need to be well thought out to ensure that the investment in the oil sector does not discriminate against the local investors. It would be essential for the government to come up with well balanced tax regime with possible reduction in the fiscal burdens of companies with substantial Kenyan interest.

It would be crucial to have a legislation tilted towards ensuring participation by Kenyans in all spheres of the oil industry. In addition to the guaranteed participation of Kenyans in both the exploration and the production side of the petroleum industry, training encompassing all areas of petroleum industries should be made available to Kenyans, thus guaranteeing that the country as a whole and local communities benefit from such operations by having access to gainful employment and education opportunities. The legislation should also address the employment policy in the companies that hold petroleum mining leases to ensure adequate Kenyan representation.

All said and done, the formulation of viable oil legislation is expected to face several hurdles before full realization.

The writer is a tax expert with EY. Email: david.wanyoike@ke.ey.com 
Views expressed are not necessarily those of EY.