Legal hurdles in oil, mining sectors

In March 2012, Kenya’s economic prospects seemed to brighten in just a single day as President Mwai Kibaki announced that the country had finally hit the oil jackpot.

Cautiously optimistic that it would be some time before commercial viability was proven; Mr Kibaki said that it would take in excess of three years to become an oil producer in such a case.

Tullow Oil which holds interest in multiple oil fields in the Lokichar basin where the discovery was made has since made other discoveries in the area with most feeling that the magical commercial viability threshold will soon be surpassed.

But as the original excitement began to wane, hard questions over the country’s preparedness have continued to emerge with neighbouring Uganda’s experience providing for sobering thought.

The country discovered commercial quantities in 2006 but production is only expected to begin 2017, more than a decade later.

Most of the problems facing Kenya are almost similar to those in Uganda with updating of relevant laws being first in line.

MORE MONEY FOR TREASURY

The operations, revenue sharing, government-oil company relations, relevant regulatory bodies, taxation among many other issues are all dependent on the laws.

Currently, the sector is guided by the Petroleum Act of 1986 which has been described as woefully inadequate for the current exploration and future production processes.

It is expected that infrastructure cooperation with Uganda and possibly South Sudan could deliver more economic benefits by reducing capital expenditure needs which will translate to more money for Treasury.

The country still hopes to catch some of the action along the coast where neighbouring Tanzania and Mozambique continue to discover huge amounts of natural gas.

According to the US Geological Survey, East Africa’s offshore holds more than 440 trillion cubic feet of recoverable gas resources but Kenya is yet to hit significant amounts.

Excitement about a discovery by Pancontinental at its Mbawa-1 offshore well in late 2012 turned out to be premature with the company saying that there was need for further tests.

Oil and gas would have a ready market in the country helping it avoid costly imports as well as earn it much-needed foreign cash to boost economic growth.

PETROL-DOLLARS

With 17 years to go, most of the Vision 2030 targets have not been met and an injection of petrol-dollars could provide the needed push.

But oil and gas are just a facet of the emerging mining environment in the country with the sector seeing growth across multiple areas.

Although the nascent industry still faces teething problems, indicators point to a robust economic contribution if the country adopts best practices and updates its laws.

Like the oil sector, mining is guided by an ancient 1940 Mining Act although attempts to review it have been initiated.

This has however led to legal skirmishes with investors questioning some of the decisions that affect their operations.

Mining Cabinet Secretary Najib Balala and his predecessor Chirau Ali Mwakwere have had frosty relations with investors who have questioned some gazetted regulations on the industry.

In August, Mr Balala gazetted new royalty fees of 10 per cent from the previous three per cent for rare earth, niobium and titanium even as the country awaits passing of the Mining Bill 2013.

MASSIVE ROYALTIES

The fees are contained in the Bill with coal attracting an eight per cent royalty fee and gold five per cent.

Debate however continues on the most competitive rates even as authorities agree that the previous rates are too low.

Investors say that these need to be benchmarked against international and regional rates to avoid scaring away investments.

Base Resources is one of the biggest mining operations in the country and expects to start titanium shipments by December.

The company represents recent heavy investments into the mining industry in the country which translates to massive royalties.

Over its 13-year life, the company expects to remit Sh19 billion in royalties and tax highlighting the revenue potential of the mining industry.

Cortec Mining has also indicated its intention to build a Sh12.8 billion factory to process niobium and rare earths in Mrima Hills; following in the footsteps of Base Resources.

Gold mining continues to record mixed results with Goldplat that ran the Kilimapesa mine in western Kenya suspending operations on profitability concerns.

CHEAPER ELECTRICITY

However, the verdict on the mineral’s potential is still out with other reputable operators like Africa Barrick Gold moving into the country this year.

The country’s gold earnings rose to Sh13.9 billion in 2012 up from Sh5.6 billion in 2011 on increased production.

But perhaps one of the most eagerly awaited mineral is coal with its electricity production potential as well as powering industries especially in the cement sector.

As much as 400 million metric tonnes of coal will be mined from blocks C and D of the Mui basin, Kitui County by Chinese firm Fenxi Mining Industry Company.

The process has however been hampered by over 30,000 residents’ compensation while the company also needs to conduct environmental and social impact assessments.

Of more importance is the Mui Coal Power Plant that is expected will produce 960MW.

Also in the cards is a 1000MW coal power plant in Lamu as the country races to produce more electricity to power economic growth.

AFFECT MINING

This represents a growing need to provide cheaper electricity which industries have been arguing is necessary for the country to produce internationally competitive goods which in turn would boost exports.

When then minister in charge of mining Chirau Mwakwere directed that all mining industries should have a 35 per cent local shareholding, shares of Base Resources’ parent company listed in Australia fell.

This is a trend that is slowly occurring where shares in international bourses fall or rise with fortunes or declarations affecting mining operations in Kenya.

Tullow, Pancontinental; all have been affected, a pointer of the growing importance of the sector, not just locally but in international circles as well.

As the country steps up to the big boys, the share of the mining sector in the local economy is expected to trend towards 10 per cent.

Already, the Jubilee government has indicated the importance attached to the sector by allocating it a ministry.