Kenya’s proposed draft regulations for the exploration of crude oil and natural gas will see production-sharing contracts (PSCs) that firms and the government enter into, maximise future tax from oil and gas.

“The profit splitting formula of calculating government revenue based on the daily rate of production in PSCs, will be replaced by the ratio R-factor derived from a firm’s relative hydrocarbon revenues to total costs,’’ said Energy Cabinet Secretary Davis Chirchir.

The new formula for calculating revenue will ensure Kenya’s share increases in tandem with hydrocarbon output. Currently, profit-sharing is computed on the basis of the first tranche of 20,000 barrels of oil per day; the next level is 30,000, then 50,000 and over 100,000 BOPD.

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Hunton & Williams of the US and Challenge Energy Ltd of Britain, who were contracted by the World Bank and the Kenyan government as consultants for the review of the Petroleum Exploration and Production Act of 1986, recommended the R-factor.

It balances taxation with project profitability, and ensures the state receives a significant share of money while assuring investors returns will not reduce due to additional taxation. The R-factor will also ensure that Kenya remains competitive and that it attracts investments.

The Petroleum Bill, to be tabled in Parliament for debate in October, also seeks to create a new regulatory framework for awarding exploration areas to firms, by introducing competitive bidding rounds to be overseen by an independent regulator.

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Currently, the country relies on an open-door policy where exploration firms and governments sign PSCs.

Kenya is looking at the possibility of offering investors 15 blocks available through relinquishment, but a decision has not been reached on whether this will be done under the open-door policy or the new competitive bidding round.

“It is a debate that has opened. We have many applications that have piled up from 2012 when the ministry froze the awarding of blocks,” said Mr Chirchir.

Unfortunately, the majority of local enterprises are unable to tap into lucrative deals in the oil exploration sector as Kenya does not have legislation requiring prospecting firms to procure most of their goods and services from local companies.

Nairobi-based Oil and Energy Services Ltd said an emerging theme in legislative changes in East Africa is local content obligations to be imposed on investors.

Local content

“Local content requires an investor to develop skills and increase technology transfer by spending an agreed amount of money on training or investment, besides the use of local goods and manpower,’’ said the consulting firm.

International firms prospecting for oil and gas require companies interested in providing machinery, transport of equipment and consultancy services, to prove they have adequate capital to qualify for tenders.

Oil and Energy Services chief executive Mwendia Nyaga said opportunities available in Kenya include indirect services like catering and security.

“There is a need to have legislation and policy that encourages companies operating in the exploration and production (upstream) sector to use local skills and services,” he said.

Kenya has started reform initiatives under the national local content facet to give preference to local goods and services for upstream operations in accordance with international standards. “This will enable existing skills gaps to be identified for purposes of planning capacity-building programmes,’’ said Mr Chirchir.

Local content regulations will be reviewed in the proposed Petroleum Bill.

Indirect services like catering and waste management are not specialised hence some expertise and investment will be needed to improve standards. Direct, more specialised services like site preparation and mechanical works require stringent compliance to safety and operational standards. They need significant investment and not many Kenyan-owned firms provide them.

Specialist fields like rig hire and seismic survey are not provided by local firms as heavy investments required. The services need strict standards for safety as mistakes ground operations and increase losses exponentially.

Officials in the Ministry of Energy and the National Oil Corporation of Kenya (NOCK) said a draft law on the provision of goods and services will be presented to stakeholders this year, while one on local content is set to be in place by 2016.

“The legislation could have a requirement for foreign service companies to partner with a local firm in order to operate in Kenya, as well as utilisation of local banking, financing, insurance and legal services and re-insurance,” said the officials.

The regulations will provide for the creation of a monitoring unit with oversight on local content policy implementation besides the requirement for prospecting firms to have a plan to employ and train Kenyans at all levels.

The approach will entail setting up of a database for pre-qualified and certified local suppliers of goods and services and industry requirements alongside monitoring and evaluation of progress made annually.

Other aspects include creation of an independent financial institution to provide funds to support the start of local oil and gas service businesses and related small and medium enterprises.

The scope also covers defining what constitutes local value addition. There will be a requirement that exploration firms ensure front end engineering design work for production facilities and pipelines is done locally.

University of Nairobi, Kenya University and Petroleum Institute of East Africa are among institutions to be designated as centres of excellence to be involved in research and development initiatives.