Civil society organisations in Kenya have developed economic models of the revenue the government is expected to earn when commercial production in Turkana starts in 2020 or 2021.

In a report titled Potential Government Revenues from Turkana Oil, the five organisations — Oxfam, Cordaid, Kenya Civil Society Platform on Oil and Gas (KCSPOG) and Timu Community Development Associates — said there is a need to keep expectations of the earnings from oil at realistic levels as hydrocarbons are finite.

They said successful oil exploration in South Lokichar basin in block 10B and 13T in northwestern part of Kenya have generated high expectations.

The government is projected to earn between $800 million and $3 billion annually depending on global prices.

The projected earnings peg the price of a barrel of crude oil at between $45 and $85.

The sources of government revenue include profit from oil, windfall tax, if the price of crude goes over $50 a barrel, and the country’s right to acquire equity in the project.

“Assuming the project moves ahead, the oil price will have profound impact on the volume of revenue flowing to national and sub-national governments,” said the organisations.

The Petroleum Bill of 2015 provides for Treasury to retain 75 per cent of the revenue from crude oil and natural gas, give 20 per cent to the county, and 5 per cent to the local community.

It is projected that oil output will reach its peak in 2025 to 2030 and then decline. Government earnings will peak in late 2020s to $650 million annually at $45 a barrel, $1.7 billion at $65 barrel and $2.7 billion at $85.

Under the current production sharing contracts (PSCs) signed by prospecting firms and the government, companies are allowed to recover exploration and development costs once output starts, capped at 60 per cent of oil produced and spread over several years. The remaining 40 per cent of crude oil revenue is shared.

Oxfam’s tax justice programme manager Wairu Kinyori said Kenya’s fiscal system enploys the 40 per cent crude shared by the government and the firm, under a sliding rule computed on daily rate of oil production (DROP).

“PSCs allow firms to recover expenses through initial allocation of production, called cost oil, and the remaining 40 per cent referred to as profit oil shared. There is a limit of production portion devoted to costs,” she said.

Kenya under the DROP method will receive 50 per cent of the first 20,000 barrels of oil per day (BOPD)sold, and 60 per cent of the next 30,000 barrels.

The government will get 63 per cent of next 50,000 BOPD, 68 per cent of a of the following 100, 000 BOPD, and 78 per cent of over 100,000 BOPD.

KCSPOG co-ordinator Charles Wanguhu said large returns could come from the PSCs that Kenya signed with exploration firms.

“Windfall tax is applied to a company’s share of profit when oil prices exceed the threshold of $50. If the price is$75, an additional tax of 26 per cent would be applicable to $25 per barrel of windfall profit,” he said.

Windfall tax at $85 a barrel could generate more than $1 billion to account for about 15 per cent of the government’s revenue.