Background

Since 2012 when exploratory drilling at US independent Apache’s Mbawa 1 well, offshore Kenya, encountered 170 feet of natural gas in three zones, international investors have held high hopes for the nascent Kenyan oil and gas industry.

The Apache find in Block L8, offshore Kenya (in which Apache holds operatorship and a 50% participating interest, Origin Energy holds 20%, Pancontinental holds 15% and Tullow holds 15%) was the first major hydrocarbon discovery offshore Kenya and created tremendous optimism that Kenya might hold reserves similar to that of neighbouring Uganda where we have seen significant activity in recent years.

The Block L8 discovery awaits full appraisal and Apache announced in October 2013 its intention to dispose of its oil and gas interests in Kenya in order to concentrate its resources in the US.

International attention has also turned to Kenya’s onshore prospects as Tullow announced further discoveries of oil at their Block 10BB in December 2013. This discovery followed their earlier successful drilling results in nearby Block 13T. Tullow estimates that its discovered hydrocarbons in the Rift Valley basin are over 600 million boe and believes that overall, the Rift Valley basin may hold over 1 billion boe. Tullow operates these fields with 50% participating interest with African Oil Limited holding the other 50%.

Potential export pipeline

With these significant discoveries, Tullow has announced plans to commence development studies and, together with its partner and the Government to conduct a comprehensive pre-FEED study of an export pipeline. Both the Government and the partners have indicated their target date for project sanction (final investment decision on a development plan) including the export pipeline to be in 2015 or 2016. Any discussions on an export pipeline will almost certainly also need to consider the long mooted East African crude pipeline from Uganda that is proposed to end at Kenya’s seaport of Lamu.

However in November 2013 Tullow temporarily suspended its drilling operations in Kenya due to local protests regarding lack of employment and tendering opportunities for the local population. This followed the tragic terrorist attacks on the Westgate Shopping Mall in September that brought international attention to Kenya’s security situation.

Tax issues

On the regulatory front, in February 2013 the Kenyan Government introduced a 20% capital gains tax on the sale of the shares or property of overseas companies that hold Kenyan petroleum and mineral exploration assets. This tax change has come in the midst of the continuing public disagreement between the Kenyan Government and Cove Energy plc about whether the Government is entitled to block the indirect transfer of Cove’s oil and gas exploration interests to Thailand’s PTTEP following PTTEP’s takeover of Cove and therefore a change of control of Cove.

The Kenyan Government continues to insist that these transfers require their consent and that the capital gains tax is to be paid on such transfers.

Other legislative changes

In 2013 the Government’s hopes of holding its first competitive bidding round for petroleum exploration licences were held back because of delays in passing key proposed legislation.

The Government has proposed an Energy Bill addressing a wide number of elements of the energy sector from upstream oil and gas to nuclear power. We understand the Bill is currently in its 4th draft in committee stage and has yet to start its legislative progress. Amongst other things, the proposed Energy Bill is anticipated to bring in changes in respect of:

  • the process and terms for the awarding of new petroleum licences;
  • revisions to tax and royalty regulations for the natural resources sector;
  • a new model petroleum Production Sharing Contract;
  • enhanced powers for the Government to compel operators to carry out work obligations and to provide operational directions; and
  • provisions for the establishment of a Sovereign Wealth Fund to invest petroleum revenue.

The Energy Bill is part of the Government’s broader reform agenda in the natural resources sector which also includes a review of the Petroleum (Exploration & Production) Act that could introduce provisions on:

  • gas-sharing compensation and terms;
  • windfall profits;
  • environmental and corporate social responsibility requirements; and
  • changes to the terms of assignment and change of control provisions for petroleum licences.

Details on these proposed changes have not yet been released.

Once the Energy Bill has been passed into law, it is expected that the government will start the first Kenyan competitive bid round.