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Petrodollars? Not any time soon for Kenyans

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Kenya’s petrodollar dream seems far off as foreign oil companies angle to recover their investments when the country’s crude hits the international market.

In what is emerging as a major win for Tullow Oil Plc and its joint venture partners Total SA and Africa Oil Corp, the Kenyan government has agreed to cede massive earnings from the initial crude exports to the oil companies to recover their investments.

Prioritising investment recovery was at the heart of a standoff over the development of Kenya’s oil industry around revenue-sharing and shareholding of Project Oil Kenya.

The breakthrough has resulted in the signing of legally binding head of terms (HoTs) agreements this past week, a move that received rare praise from companies that have been accusing the government of excessive bureaucracy.

Kenyans, however, will have to wait much longer to benefit from the resource, whose revenues will mainly go towards paying Tullow’s $1.8 billion investment.

“If government prioritises oil companies recovering their investment, Kenyans will have to wait further to benefit,” said Charles Wanguhu, the Kenya Civil Society Platform on Oil and Gas co-ordinator.

However, a source familiar with the talks that dragged on for 15 months said the government did a good job in the negotiations.

“The government was not even in a hurry to sign but an agreement had to be reached for the project to move to the development stage,” said the source.

Tullow Oil has the largest interests in Project Oil Kenya, with a 50 per cent stake. Africa Oil and Total control 25 per cent stake each.

Technically, the HoTs provide “commercial certainty” for Tullow and its partners, making it possible for them to mobilise $3 billion required to develop the oilfields in the South Lokichar basin in Turkana County and build an export pipeline to Lamu.

The HoTs also act as a framework for Kenya to begin oil exportation albeit on a small scale.

“Head of terms define our project by drawing out the resources that will be developed within the agreement, the obligation of each party and also define physical incentives such as the development of the crude oil pipeline from Lokichar to Lamu,” said John Munyes, Petroleum Cabinet Secretary.

Mr Munyes declined to divulge details of the HoTs, entrenching the culture of secrecy that continues to engulf oil contracts in Kenya.

“You don’t have to worry about the details of the HoTs because it has taken good care of Kenyans’ interests,” he said.

As per the deal, the shareholding of the oil operation varies for each of the three oil sites — Amosing, Ngamia and Twiga — between the Kenya government and foreign companies.

Kenya will have a 15 per cent shareholding in one of the sites and 10 per cent each in the other two.

The revenue-sharing deal is tied to the movement of crude prices on the international market and aims to safeguard the interests of both the government and foreign firms.

In an environment of stable crude oil prices averaging about $65 per barrel, Tullow Oil and its partners will pocket 60 per cent of the revenues in the initial stages of exports.

In the event oil prices collapse as they did in 2015 when they hit a low of $30 per barrel, the agreement entails that Tullow gets as much as 80 per cent of the revenues but if the prices soar to levels of $100 the Kenyan government takes a large chunk of the revenues.

“The revenue sharing formula is designed in such a way that if oil prices fall below a certain price, priority will be to protect Tullow. If they rise the government can recover more revenue,” said the source.

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