HOW KENYA PLANS TO GET MORE MONEY FROM OIL, GAS

An oil rig at Ngamia 1 in Turkana County, Kenya. PHOTO | FILE | NATION MEDIA GROUP  Nation Media Group                                                  

Kenya is reviewing how revenues from oil and natural gas sales will be shared in a bid to maximise the benefits to the government, communities and counties while safeguarding the interests of investors.

A production contract now under discussion by government officials proposes a model of sharing that is not based on volumes of oil brought to the surface but is calculated on profitability, known as “R-factor” in industry-speak.

“With a progressive R-factor, if a discovery is not made, the investor’s loss is limited to costs incurred during exploration phase,” said Hunton & William’s lead consultant John Beardworth.

Hunton & Williams of the US and Challenge Energy Ltd of Britain were contracted by the Kenyan government and the World Bank to advise on how the revenues should be shared.

The R-factor is the ratio of revenue earned from oil divided by the costs of bringing the oil to the market. The smaller the ratio, the less the profit realised, with a ratio of less than one indicating a loss-making operation.

In the proposed formula, the government would earn more from production as the profitability rises, starting with sharing of the losses equally with the operator when the R is less than one.

The government’s share will increase to 65 per cent of the profit where R is between one and 2.5 and 75 per cent when it is 2.5 per cent or above. The three bands were proposed by the International Monetary Fund (IMF) in the draft Extractive Industries Fiscal Regimes report.

However, a consultant report seen by The EastAfrican recommends that the middle band be split into three so that, for R of between one and 1.5, the government’s share would be 55 per cent, 60 per cent for between 1.5 and 2.0 and 65 per cent for2.0-2.5.

“This would maintain the higher flexibility afforded by a five-band R-factor framework while providing returns for contractors that are still competitive with Mozambique,” the report said. 

As an alternative, the consultant recommended a sliding rate such as that used in Cyprus and Kurdistan, where the tax rate is calculated for a given R factor. 

“This provides much more granularity when fewer bands are used,” the report said.

READ: IMF urges caution over Kenya’s oil and gas revenue potential

Energy Principal Secretary Joseph Njoroge said the model production sharing agreement (PSA) would be used to negotiate agreements with contractors — including those involved in natural gas exploration, who were not covered in previous documents.

Currently, the profit will be shared based on daily output in four bands — the first 20,000 barrels, the next 30,000 barrels; the next 50,000 barrels and above 100,000 barrels. The accruing percentages were kept strictly under wraps in line with confidentiality clauses that make the extraction industry one of the most opaque in the world.
  BY NATION