CHALLENGES AND OPPORTUNITIES FOR KENYAS UPSTREAM PETROLEUM SECTOR

Kenya is poised to enter the frontier of oil and gas production following the discoveries made in onshore and offshore locations of the country. The discoveries have led to a flurry of exploration interest not only in Kenya but in the rest of East African and other neighboring States such as Malawi and Mozambique. This recent development is accompanied by both challenges and opportunities. The challenges posed require responses that are common in many oil producing countries, principal of which is the establishment of a robust regulatory framework and institutional capacity for effective governance and management of the activities relevant to the industry. The exploration and subsequent development and production of oil has generated wealth for some countries and created socio-economic instability in others. Preparedness is therefore imperative to avoid the oil curse that has befallen some of the resource rich Nations of Africa, while valuable lessons are to be drawn from countries that have performed well and emerged successful in ensuring that the wealth from natural resources extraction is transferred to the citizens, through increased economic growth and accelerated industrialization. It is therefore important to take stock of the manner in which an industry that will be critical for our internal economic growth, is presently performing and then determine how it can to be transformed so that the attendant benefits to the economy are realized and maximized. The expected investments in oil and gas exploration in Kenyas is estimated to be more than $500 million worth of expenditure in 2013, with higher amounts during subsequent phases of field appraisal and development, provide a unique opportunity for the country to capture some early benefits. In many countries this has been achieved by creating various instruments to implement national local content policies that include among others: (a) simple contractual requirements favoring the use of local goods and services; (b) training and capacity building obligations; (c) regulation and taxation that are discriminatory in favor of local industries; (d) regulation or contractual obligations that foster the transfer of technology from international to domestic companies; (e) bidding parameters that include local content among the criteria for winning oil and gas exploration and production licenses and contracts; (f) incentives to foster reinvestment of foreign company profits domestically; (g) the mandatory local incorporation of foreign companies; (h) local ownership requirements; (i) investment in infrastructure and education; and (j) direct government intervention through empowerment of a state owned oil company. As opposed to the oil and gas industry, where there tends to be a spike of capital spending at the beginning of a project that rapidly declines after the asset has gone live to a significantly lower level of operational expenditure, the mining industry experiences the same initial spike but a subsequent and sustained capital spending as equipments require replacement and operations expand above or below ground over time. The attraction of such rolling capital expenditure presents a long-term opportunity to build domestic capability and competitiveness to supply the mining sector with materials and stimulate manufacturing. The location of mining operations in geographically remote regions often requires mining companies to aggregate parts of their procurement expenditure, thereby increasing the overall demand for certain goods and services. This then increases the incentives for domestic suppliers to invest in new capability and improves their ability to raise risk finance. While the oil and gas industry has been a major harbinger of domestic development, it seems that the metals and minerals sector may prove to be an even richer vein in the local content field. Therefore any local content legislation must include the metal and minerals mining industry also.

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Recognizing the importance of local content and participation to sustainable development and the rapid acceleration of industrializing the country in line with Vision 2030 it is crucial to immediately enact a specific legislative instrument and related regulations to address local content and participation. The legislation will require among other things: (a) the requirement to create a database of local suppliers capable of supplying goods and services to the industry and the supply needs of the operating companies in order to facilitate matchmaking; (b) processes for evaluating and qualifying tenders; and (c) a system for evaluating the progress of local participation against set standards and targets. It is observed that the boundary between the National Oil Corporation and the Ministry of Energy for the past several years has been blurred and characterized by overlapping and often conflicting roles. A most common reform trend that has been deployed to address this has been to transfer licensing and regulatory functions from National Oil Companies to newly-formed independent bodies, and to eventually aim for an institutional setup that transfers sector regulation and policy making, a responsibility that has been the preserve of the government to an independent regulatory body. A body corporate with an uninterrupted succession to regulate monitor and manage the activities and utilization of petroleum resources therefore needs to be established through legislation. The same body will promote exploration licensing, receive applications for issuing licenses for specific petroleum activities and perform as an advisory to the Cabinet Secretary responsible for petroleum and mining activities in the country. The body would also promote and monitor local content and local participation as prescribed in the Local Content legislation. The National Oil Company should be the greatest beneficiary of such reform. The idea being to transform it from being an amorphous cost centre saddled with the multiple and often time conflicting roles of policy maker, regulator and commercial operator into a company that is commercially-focused, profit driven and sensitive to the bottom-line. Ultimately it should be capable of raising its own funding and then moving beyond the Kenya borders into international territories the way many National Oil Companies have done. In order to reach such goals it will need to build on capacity and develop the requisite competencies required to venture into oil and gas exploration, development and production and create subsidiary business support services that advance the local content mandate. At the start it will be necessary for the National Oil Company to partner with the best in class in the international oil industry in order to deliver on these promises. This transformation will allow the National Oil Corporation to engage in activities across the entire petroleum value chain and play the important role of enhancing greater control of an important national asset through privileged access to exploration and production opportunities and a greater local presence. This will have the effect of strengthening local capital accumulation in the national interest. Another separate body will need to be formed for monitoring oil company expenses and reporting on revenues and expenditures related to production, in a manner that is accountable and transparent. Revenues emanating from petroleum should be dedicated to a single fund for ease of monitoring receipts from the sector, their utilization and disbursement. In Ghana, which has been hailed for developing an innovative system for independent oversight on the management of oil revenues, a civil society body drawing membership from organized professional bodies, think tanks, pressure groups and traditional institutions may be formed to serve as a platform for ensuring public accountability and debate on how revenues are spent. The National Energy Policy has provided broad and general guidelines that cover the aforementioned observations and requirements that that must evolve into concrete laws, institutions and processes now.

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