Kenya has announced new rules that will sharply increase licensing fees and introduce tough penalties for non-adherence to exploration schedules.

The changes include higher royalties and taxes, and revocation of mining and exploration licences of companies that do not keep to their exploration schedules.

The Ministry of Energy hopes to introduce the regulations under the reviewed Petroleum Exploration and Production Act by mid 2013, ushering in licensing bid rounds to award oil and gas exploration areas to prospecting firms.

Energy Permanent Secretary Patrick Nyoike said the ministry has already filed the rules on competitive bidding for gazetting and the first round will be held in June 2013 after the creation of new exploration areas.

Acreage will now be awarded to the highest bidder who offers the best terms to the government and agrees to pay requisite fees. This exercise will be carried out publicly, replacing the current system where exploration rights are issued on a first-come first-serve basis.

“The amount of money paid to the government as a one-off commitment fee per exploration area by a prospecting firm before signing of production sharing contracts (PSCs) will be raised from $300,000 to $1 million to discourage speculators,” said Mr Nyoike in an interview.

“Bank guarantees, annual training fees for civil servants involved in petroleum activities and terms for new PSCs will be reviewed upwards as Kenya is no longer a frontier exploration area,” said Mr Nyoike.

Joining ranks

By introducing competitive bidding, Kenya will join the ranks of countries like Tanzania that already have the system. Uganda plans to have a bidding process as well.

With Kenya becoming a hot spot for oil, gas and mineral exploration, the country has in the past three years attracted millions of dollars in foreign investments.

READ: Mineral discoveries put Kenya’s policies under the spotlight

Kenya also wants all foreign mining companies to cede 35 per cent shares to local investors and institutions. The rule, expected to be effected by March 2013, has triggered opposition from executives in mining firms doing business in the country.

READ: Stringent mining laws leave oil explorers jittery

It comes as Australian consulting firm Hartleys projects that drilling activity will significantly increase offshore Kenya, with up to 10 wells expected in 2013.

In September, US-based oil and gas explorer Apache said it had struck 50 metres of net gas pay in Block L8, operated jointly with Origin Oil and Gas, which owns 20 per cent of the block, while Tullow and Pancontinental own 15 per cent each. Tullow has also found oil in two wells in northern Kenya.

Oil executives attending the Economist’s East Africa Summit in Kigali on December 7 cited government unpredictability as the biggest threat to doing business in the region.

They argued that uncertainty surrounded the issue of whether explorers would enjoy revenues in the event of commercial oil and gas production and what amounts governments would set aside for them.

“The biggest threat to business is governments changing the goal posts. In our game, everything is a risk. Tax regimes and laws are changing overnight. To us, this is as risky as drilling a dry well,” said Tim O’Hanlon, Tullow Oil’s vice president for African business.

“Sanctity of contracts is the only fixed point in a moving world — if it changes after you have taken the risk, that’s the nightmare scenario. We are worried about windfall taxes and governments raiding the industry,” he added.

The government has also resolved to start imposing capital gains tax when licensed firms transfer rights and interests of a PSC for an exploration area to third parties for monetary gain.

Already, Kenya has declined to approve the transfer of the oil and gas exploration interests of Cove Energy Plc to a Thai state-owned company over a tax dispute.

READ: Kenya, Cove Energy in tax dispute

The Ministry of Energy said the approval will only be granted after Cove pays Kenya tax on proceeds realised from sale of seven offshore exploration areas to Thailand’s PTT Exploration and Production Public Company Ltd (PTTEP).

Kenya is seeking at least Ksh3 billion ($35.7 million) in tax from Cove over the sale. PTTEP in August agreed to acquire Cove’s 15 per cent stake in five exploration areas. Cove was also to cede 25 per cent and 15 per cent interest in two more blocks. The deal was valued at $1.8 billion.

The ministry will also be harmonising the Petroleum Exploration and Production Act with sections relating to fees and charges payable to county councils by prospecting firms under the Local Government Act.

Kenya plans to raise the royalties on gold and diamond mining from three to five, and 10 per cent respectively of the minerals’ gross value.

Some analysts said changes in mining and exploration laws as well as prolonged contract negotiations could scare away firms planning to invest in the oil and gas business in the region. “The biggest worry among businesses is whether the laws are going to be made in an orderly and systematic way.

The new 35 per cent ownership requirement in Kenya for example is impractical,” said John Ngumi, Standard Bank’s head of coverage and investment banking for East Africa. “Government unpredictability has become a big issue in East Africa,” he added.

Mr Nyoike said the Act will provide for sharing of revenues with counties, besides compensation and resettlement of property owners affected by the development of production facilities.

“The ministry is committed to fast tracking the review of relevant petroleum statutes to make them conform to industry best practices,” said Mr Nyoike.

What it means

With the proposed laws, the Ministry of Energy will require a 50 per cent bank guarantee upfront and a 50 per cent parent guarantee by major oil companies. Small firms will provide 100 per cent bank guarantee to ensure well drilling and other programmes are carried out on time.

Hydrocarbons Management Consultants, an industry consultancy, said small firms that fail to meet work obligations will forfeit the guarantees to the government, meaning in future the sector is likely to be dominated by financially well endowed majors.

“As the industry develops, small firms are really going to feel the squeeze of raising capital to comply with work requirements or surrender acreage for award to competitors,” said Robert Shisoka Hydrocarbons’ lead consultant.

Smaller explorers with material acreage positions offshore Kenya are increasingly becoming targets for big companies, pointing to the likelihood of a fresh round of mergers and acquisitions in the lucrative oil exploration business.

Kenya’s Ministry of Energy is currently developing natural gas terms, which BG Group is waiting for in order to drill an exploration well in 2013 in offshore acreage L10A, and L10B in Lamu basin.

Kenya also wants to improve the content of local companies providing goods and services to exploration firms. Tullow Oil in 2011 spent $23.6 million on local suppliers, representing 23 per cent of its overall spending in Kenya.

“A key part of our business is in supporting development of Kenyan contractors and suppliers and ensuring as many jobs as possible are filled by local people,” said Tom Gray supply chain manager Tullow Oil Kenya.