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Transparency in managing expectations of energy sector

Saturday April 16 2016

Debate has been going on recently about the regional pipeline debate. Will Uganda go with Kenya or Tanzania? Is Kenya going it alone? Can the country go it alone?

But a key component missing from the conversation on the pipeline route is the economics of the Uganda-Kenya project. What revenue would be earned from oil resources to justify a $4 billion pipeline?

This week a group of organisations including the Platform on Oil and Gas in Kenya launched an analysis titled Potential Revenues from Turkana Oil, from the proposed development.

The report seeks to inform debate on the project and collates information from different sources.

Similar work was undertaken in Uganda by Global Witness in 2014 and offered a review of the economics of the Uganda project.

The platform report indicates that revenues to the government of Kenya will peak in the late 2020s at $650 million per year with oil prices at $45 per barrel, and at $1.7 billion at $65 per barrel.

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The report highlights a short window of peak revenues with a rapid decline after peak production in late 2020s. This calls for a prudent approach to planning for these future revenues including ensuring that pipeline costs and the subsequent tariff are kept low.

READ: Civil society models estimate Kenya’s potential earnings from Turkana oil

It also covers the importance of managing expectations of future earnings while presenting a profile of likely revenues.

Having the government track the costs accrued from oil production is a key determinant of the ability to access future revenues.

Although there are limits to the analysis based exclusively on public domain information, it also points to the need for increased transparency and accountability in the oil and gas sector in Kenya. Transparency in the sector in East Africa is limited, with citizens left to glean information from public officials quoted in the press.

Civil society interventions promoting transparency and accountability are therefore a critical cog in debate on the sector.

On a positive note, the Kenyan government committed at the highest levels to make its production sharing contracts (PSCs) public. In the joint communiqué emerging from US President Obama’s visit last July, President Uhuru Kenyatta agreed to adopt a “transparent policy and legislative framework” for the oil and gas sector, including... publication of contracts between oil companies and the government.”

Public document

One year earlier, while on a visit to the United States, President Kenyatta responded to a direct question about whether Kenya would disclose the production sharing contracts by answering “absolutely.”

Additionally the new Petroleum Bill (2015) is explicit that the contract is “a public document and that the Government shall have the right to publish and keep it publicly available.”

Tullow and Africa Oil both indicate that they are willing to disclose the contracts once they receive the agreement from the government.

Unfortunately, it is not uncommon for both companies and government to indicate a willingness to disclose the agreement of the other party without disclosure actually taking place.

The Uganda and Kenya analyses show that both countries have negotiated comparatively good contracts considering that they had no confirmed oil finds at the time of signing the initial contracts.

The global witness analysis report said the Ugandan government should be congratulated for getting “better financial deals.”

The monetisation of these resources calls for partnerships to ensure that the significant costs to be borne by countries in the transportation of the oil is minimised, in order to maximise revenues to their respective coffers.

If managed correctly, the money will have a huge contribution to the development of the two nations and especially in the regions where the resources are located.
Going forward, the report points to the need for adequate communication as the publicly declared timelines are largely unrealistic.

The Toyota Tsusho report indicates that the minimum time to build the pipeline is three and a half years. Therefore, 2021 is currently the best-case scenario for first oil exports from Turkana.

However, the risks of further delays due to pipeline complications and low oil prices are high, making first oil production well beyond 2021 a more realistic prospect.

Uganda and Kenya should take the time to ensure that communities concerns around benefit sharing, environmental standards and other crucial regulatory frameworks are up to speed.

Disclosure of contracts signed will also enhance transparency and shed light on the sector as projects in both countries move from discovery towards development and eventual production.

Charles Wanguhu is the co-ordinator at the Kenya Civil Society Platform on Oil and Gas. The full report is available at www.kcspog.org

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