Oil revenue sharing tough challenge

Monday March 27 2017

Ngamia 1 in Turkana County

A worker at Ngamia 1 oil wells in Turkana County on April 5, 2012. The government has the potential to earn $94,000 a day or $34.3 million a year from the mineral. PHOTO | NATION MEDIA GROUP 

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The controversy about oil revenue sharing is blowing cold wind over the excitement about new discoveries in the South Lokichar Basin in Turkana County.

The differences between the national government and the county escalated when President Uhuru Kenyatta declined to assent to the Petroleum Exploration and Development and Production Bill 2016 after it was passed by Parliament.

Mr Kenyatta affirmed the formula that the government has all along preferred, proposing a share of 20 per cent for the county and another five per cent for the host community, leaving 75 per cent of the revenue to the national government.

The logic behind this arrangement is that oil, like any other natural resource, including minerals, is a national asset that should benefit all Kenyans through revenues and taxes transmitted through the Budget.

But Turkana Governor Josephat Nanok and lobbyists have been pushing for a 10 per cent share of the revenue to local communities, giving a composite 30 per cent share of the revenue to the county and community, and reducing the government’s stake to 70 per cent.

The debate on revenue sharing is fixated on the formula rather than on the wider dialogue of what constitutes a prudent, fair and realistic mode of sharing the benefits from oil.

The greatest news about Kenya’s oil since Tullow Oil announced the first discovery in the Ngamia-1 wells in 2012 has revolved around the resource potential, which was revised from 750 million to a billion barrels, when Tullow announced a new discovery in the Erut-1 block in January.

What is much less discussed is the cost of exploration and drilling and how much oil will be produced and exported.

When oil starts flowing, the government plans to deliver 2,000 barrels of crude a day to the Kenya Petroleum Oil Refinery in Mombasa.

The initial plan is to use road tankers, as the government firms up plans for the construction of an 865-km crude oil pipeline from Lokichar to Lamu.

Based on the current international market crude oil price of $47, the government has the potential to earn $94,000 a day or $34.3 million a year.

The target production in the medium term, according to Mr Andrew Kamau, the principal secretary for Petroleum, is 200,000 barrels to 250,000 barrels a day.

The revenue yield would then be in the range of $9.4 million to $11.75 million a day or $3.4 billion to $4.3 billion a year.

Tullow classifies Kenya as a low-cost producer, with a break-even point estimated at $25 a barrel, though the real cost may be closer to $35, given the cost of upstream and downstream infrastructure that needs to be developed.

The production cost estimate puts Kenya at the same level as Nigeria, China, Mexico and Colombia, whose costs range from $29 to $35 a barrel.

The lowest production cost is below $10 a barrel in the large producers in the Middle East, including Kuwait, Saudi Arabia and Iraq.

In the high cost producers, including United Kingdom, producing a barrel of crude oil costs over $50, Brazil, at $48, Canada $41 and the United States $36.

The real revenue that Kenya will earn from oil in Turkana and other basins will be the difference between the gross revenue from crude oil sales less production costs, which include amortisation of the capital cost that Tullow and other oil firms have already incurred in exploration and drilling.


They have invested Sh150 billion or $1.5 billion. The government could earn over $1 billion a year from exporting some 250,000 barrels a day.

Turkana County would get $200 million and the local communities $50 million, while the government would retain $750 million for distribution to the rest of the country.

The management and governance of the petroleum sector will determine whether oil becomes a fortune or a curse.

When the money is shared out, the government and the counties will need to invest their share of the revenue in programmes that increase opportunities for growth, poverty reduction and equity.

Building the capacity of the government to manage the petroleum sector and wealth is the key aspect of the Kenya Petroleum Technical Assistance Project (KEPTAP), which is funded by the World Bank with a credit of $50 million.

The initiative is supporting the government, the host counties and institutions engaged in the sector to effectively participate in its development.

The IMF has produced a handbook, which emphasises the importance of effective administration of revenues from extractive industries, including petroleum, natural gas and minerals.

Mr Warutere is the principal associate at MA Consulting Group. [email protected]