The first half of 2020 has been brutal to the oil and gas industry in Kenya. First came the news that the joint venture partners of Kenya’s first oil development project - Tullow and Total - had launched a joint sale of their stakes in Project Oil Kenya.

Then came the COVID-19 pandemic, and the global economicdownturn that suppressedoil’s global demand. The global oil industry was already experiencing hard times due to an oil war between Russia, OPEC (led by Saudi Arabia), and to some extent the USA that created a glut - or oversupply -of oil in the global market. The result has been devastating for countries that heavily rely on oil revenues to support their economies.

Meanwhile, the drastic reduction in fuel prices has been a welcomed relief for motorists and households in Kenya. Further upstream in the sector however, the news was not exciting, as Tullow and its partners submitted notices of “force majeure” on Project Oil Kenya– freeing themselves from contractual obligations and liabilities. The British oil firm cited the impact of Covid-19 pandemic measures, including the Kenyan government's restrictions on domestic and international travel and tax changes that adversely impact the project economics, as reasons for the force majeure declaration.

As the adage goes, you never let a crisis go to waste. The pandemic and the resultant force majeure invoked on Project Oil Kenya is an opportunity for the oil and gas industry in Kenya to reflect and put its house in order in these key areas;

 

Better transparency and accountability

There continue to be gaps between promising laws and policies for meaningful transparency and accountability in the extractives sector, and their actual implementation.

Under the Open Government Partnership (OGP), the Government of Kenya committed to improve transparency and reduce corruption, by enhancing openness and accessibility of the Public Procurement Information portal. According to the Kenya Mid-Term Report 2016-2018, there was no progress made on the release of data, contracts nor financial information on oil and gas.

It is commendable that the Petroleum Act of 2019 has provisions on transparency and accountability, including a requirement to disclose Production Sharing Contracts (PSCs) signed after the law was enacted to the public and a requirement to develop a framework for transparency and accountability for the extractives sector. The framework has been developed, but it is yet to be adopted by the government.

With Kenya having scored 28 out of 100 in global Corruption Perception Index (Transparency International 2019 ), transparency and accountability is a key ingredient in achieving good governance in the extractives sector.

 

Faster legal and regulatory processes

Early this year, Tullow expressed fears of never producing oil in Kenya – citing delays in the signing of key agreements by the Kenyan government. The government needs to expeditethe pending laws and regulations that govern the oil and gas industry, and the necessary consultations with relevant stakeholders. Regulations for Petroleum Act 2019 will need to come on-line for the Act to be interpreted and applied accordingly. The success of the proposed Sovereign Wealth Fund (SWF) as envisioned in the draft Sovereign Wealth Fund Bill is highly dependent on the establishment of a strong legal and operational framework to safeguard the independence of the fund. The effectiveness of our local content policies should be analysed to determine whether they have so far produced their intended results.

 

More timely and expanded audits of the extractives sector

 

An Oxfam study underscores the importance of a timely and well-coordinated audit process as a means of maximizing oil revenue collection. Findings from Kenya’s first cost recovery audit- commissioned in 2018-  has seen government contesting Tullow’s Compensation Bill worth USD 2 Billion for work done on the Turkana oilfields. An audit commissioned by the Ministry of Petroleum and Mining revealed that 8% of the aforementioned amount was not eligible for cost recovery.

In the future, it is crucial that these audits are conducted sooner otherwise government risks not being able to review costs that have fallen outside the legal time frame for audit. The scope of extractive industry audits should be expanded to include performance and environmental audits. The Kenyan Government should also consider strengthening public oversight of the project by engaging citizens, journalists and activists.    

 

Free Prior and Informed Consent needs to be achieved

Project Oil Kenya is obliged to comply with the International Finance Corporation (IFC) Performance Standards, including requirements to obtain Free Prior and Informed Consent (FPIC) from communities affected by the oil project.

The draft Environmental and Social Impact Assessment (ESIA) for the project states that only about one-third of the oil intended for extraction could be recoveredwithout water injection and that this would not be enough to make the project economically viable. Project Oil Kenya proposes to utilize 104,000 barrels per day (‘bpd’) of fresh water from the Turkwel Reservoir, but Turkana County’s water resources are severely strained due to recurring periods of drought over the last decade. The people of Turkana and their livestock depend on these water sources, especially during droughts. However, there is no discussion in the draft ESIA of the impact of taking 104,000 bpd of fresh water on the lives and livelihoods of the residents of Turkana.

In March 2019 Turkana County Government moved to court seeking orders to stop the National Land Commission (NLC) from acquiring 6,348 ha of land for Project Oil Kenya citing lack of consultation. 

Achieving FPIC requires an affected community’s participation in setting the terms and conditions that address the economic, social and environmental impacts of all the phases of a project. We have already seen how communities’ agitations have resulted in delays in getting to First Oil. Multiple Community Based Organizations (CBOs) in Turkana have complained about the project. The Turkana County Government has also criticised the lack of local residents' consideration for opportunities arising from the oil project.

 

Conclusion

These setbacks have made it clear that for Kenya to benefit from its much-anticipated petrodollars, comprehensive legal frameworks with strong provisions for transparency & accountability and audits must be put into place and enforced. Social and environmental impacts of the project must also be carefully considered, local communities must be adequately consulted and FPIC achieved.

Project Oil Kenya is an integrated project consisting of upstream -production from Blocks 13T and 10BB in South Lokichar Basin to be transported via the proposed Lokichar- Lamu Crude Oil Pipeline (LLCOP) - midstream for monetization.

Blog topic
Oil and Gas