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Tax capital gains only after discovery, says oil, gas industry

Saturday August 30 2014
PIX1

An oil rig. Kenya’s ability to attract investments in oil and gas exploration could be affected by a plan by the government to impose capital gains tax (CGT) on profits made from selling exploration blocks. PHOTO | FILE

Kenya’s ability to attract investments in oil and gas exploration could be affected by a plan by the government to impose capital gains tax (CGT) on profits made from selling exploration blocks.

The National Assembly’s Finance Trade and Planning Committee on Wednesday amended the Finance Bill 2014, requiring that a CGT of five per cent be charged on earnings from property transactions from January next year.

“Income on which tax is chargeable is the whole gain that accrues to a company or an individual on or after January 1, 2015 on the transaction of property situated in Kenya,” reads the amended Finance Bill, which is awaiting assent from President Uhuru Kenyatta to become law.

The government expects to earn Ksh9 billion ($102 million) annually from the CGT, which had been abolished 36 years ago in 1978.

This is likely to make prospecting blocks less attractive as CGT on transfer of shares before discovery of oil or gas increases the risk profile. The amendments will also see the withholding tax on dividends from mining operations rise from 10 per cent to 20 per cent.

Eduardo and Associates, a consulting firm, said CGT and windfall taxes may discourage investors from prospecting in other parts of the country, as commercial oil exists only in the Lokichar basin in northwestern Kenya.

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“During farm-in (buying) and farm-out (sale) of interests in exploration blocks, there is no gain. Capital gains tax is applicable only when either commercial oil or gas has been discovered, and the amount quantified,” Eduardo’s managing consultant Patrick Obath said.

He added that the meaning of CGT and windfall taxes needs to be well defined with clear rules on when the taxation regimes come into effect without being applied retrospectively.

Windfall tax is influenced by changes in the international market such as when the price of a barrel of crude oil increases from $100 to $200. Investors need to be cushioned when prices fall.

Windfall taxes

Oil and Energy Services Ltd, a consulting firm, said since 2005, windfall taxes have been included in production sharing contracts (PSCs) that companies negotiate and sign with the Kenyan government.

“There is no gain in farm-in or farm-out as it covers exploration costs. CGT and windfall taxes ought to be well structured as the sector is nascent,” said Oil and Energy Services chief executive Mwendia Nyaga.

Introduction of CGT and windfall taxes would enhance government revenues in the short term. The impact on the hydrocarbons sector is still unclear but it could be disruptive if the interests of investors and the government are not balanced.

Africa Oil Corporation is working with joint venture partners and the government to ensure the range of taxes does not hamper the exploration phase of the industry’s development in Kenya. 

The discussions are being held parallel to a World Bank- supported project to develop a petroleum master plan for Kenya that will ensure that such decisions are focused on maximising long term benefits to the country. 

Africa Oil’s vice president of external relations Alex Budden said the company and its partners have spent approximately $1 billion exploring various blocks in Kenya. Africa Oil’s share is over $400 million.  

“We are currently spending around $80 million net per quarter in Kenya and see that level continuing through 2015.  This is important foreign investment for Kenya and any decision must take all of these factors into account,” said Mr Budden.

Africa Oil and Tullow Oil Plc each own 50 per cent of block 10BA, 10BB and 13T. Tullow has 65 per cent stake in block 12A while Africa Oil holds 20 per cent and Marathon Oil Corporation 15 per cent.

Mixed feelings

“We would not want to speculate on the implications of the proposed taxes,’’ said Marathon’s external communications specialist John Porretto.
Africa Oil and Marathon Oil each own 50 per cent stake in block nine.

FAR Ltd of Australia is in early stages of exploration activities in Kenya and the company said it looks forward to working closely with government, regulatory agencies and partners in joint ventures.

“It would be inappropriate at this time to comment publicly on domestic matters in Kenya where FAR Ltd expects to begin an exploration programme in the future,” said the company’s spokesman, Ian Howarth.

Camac Energy on its part said it was proud to be part of the future energy industry in Kenya. The company has a combined 37,000 square kilometres in the Lamu Basin, including two onshore and two offshore blocks. 

“Kenya has a conducive business environment, and we continue to encourage other companies to also invest in the country,” said Camac’s director of corporate finance and investor relations Christopher D Heath.

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