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Laws take a toll on oil, gas firms

Saturday November 10 2012
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The activities of the oil and gas sectors could be waned by the region’s low rating on political risks and its tough taxation laws. Picture: File

The lure of East Africa’s growing oil and gas industry could wane as political risks and tough taxation laws take their toll.

A report released last week in Johannesburg by consulting firm Ernst & Young warns that while there is significant natural gas potential in the region, countries where these resources are found have a poor risk rating.

The firm rated all countries on the continent that are either already producing natural gas or have the potential to start soon. East African states fared badly in the political, taxation, operations and security risk index.

The report ranked Kenya’s political risk as high for gas exploration or excavation companies. The government is unable to guarantee firms protection against attacks.

East Africa has transformed into a hot spot for oil, gas and mineral exploration, and has in the past three years attracted multi-million dollars in foreign investments into Uganda, Tanzania, Kenya and Mozambique.

The huge flow of foreign investments into the oil and gas sector is raising the need for the region’s governments to craft policies to keep existing explorers and also attract more.

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“East Africa is now seen as the ‘new promised land’ or the ‘next epicentre’ for global natural gas, (but) governments will of course have a critical role to play,” said the report dubbed in part Natural gas in Africa: The frontiers of the Golden Age.

“There is a need to develop a meaningful and practical master gas development plan, one that addresses the upstream tax and licensing models. This is besides making sure there is sufficient infrastructure for getting the product to the market,” said the report.

Over the past one month, Kenya, Uganda and Tanzania have released new regulations as they sought to rethink policies in the oil, gas and minerals business in the wake of increased exploration and mining interest in the region.

Two weeks ago, Kenya issued a new mining law that requires foreign-owned mining companies to give up 35 per cent of their local operations to Kenyans. The law followed a set of new regulations that require a 20 per cent tax on sale of assets by prospecting firms in the oil and mining business, as the government sought to raise more funds to finance its growing expenditure needs.

Two weeks ago, Uganda suspended the issuance of new mining licences following revelations that several were given out illegally. In Tanzania, firms are grappling with new mining regulations, which have raised the amount of revenue the companies should pay the government. The firms are now required to pay at least 0.3 per cent of their annual turnover, up from the previous ceiling of  $200,000.

The rest of the region

Ernst & Young rates Rwanda, Sudan, Ethiopia and Somalia in the same group as Kenya because their political risk is also high. Uganda and Tanzania’s positions keep fluctuating, but they also have a poor rating when it comes to legislating laws for managing the sector and overall security for firms seeking to invest in the mining industry.  Uganda has natural gas reserves of about 14 billion cubic metres; Sudan 84 billion cubic metres; Tanzania and Somalia six cubic metres; Mozambique 126 billion cubic metres and Rwanda 56 billion cubic metres.

Italian firm ENI and US company Anadarko expect to start production in Mozambique by 2020, while BG Group hopes to start production in Tanzania in six years.

In Kenya, gas exploration continues with various multinationals still searching off the Kenyan coast. In September, British firm Tullow Oil Plc announced it had encountered about 53 metres of net gas in sandstones in Mbawa-1 it was jointly drilling with an Australian company, although the finding was later said to be commercially unviable.

“Political will is required for the development of the comprehensive policies.

Kenya which initially was a “non-story” in minerals has suddenly risen on the map with recent discoveries in Turkana of oil deposits. However, there is no comprehensive mining law. It currently uses a law passed during the colonial days” said Wanjiku Manyara the executive director at Kenya Petroleum Institute.

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