Kenya Sets Framework to Manage New Petroleum Wealth

Kenya is abuzz with talk of boosted economic prospects following recent oil and natural gas discoveries. The million dollar question—how to avoid the oil curse that has crippled many natural resource-rich countries?

The country’s government, with the support of the World Bank, is reviewing petroleum sector laws and engaging stakeholders at national and local levels discussing, among others, how to share revenues between the central government and resource-rich county authorities.

Kenya’s Ministry of Energy and Petroleum convened a high level stakeholders’ workshop to discuss a review of the legal, regulatory and fiscal framework of Kenya’s oil and gas sector development. Its goal was to align recent developments in Kenya’s petroleum sector with global best practices.

“We will put together an all-inclusive framework owned by Kenyans and endorsed by parliament to ensure that contracting is done properly and that the local communities are fully on board,” said Davis Chirchir, Kenya’s Cabinet Secretary in the Ministry of Energy and Petroleum.

A final report presented to a stakeholders’ workshop in Nairobi on July 11, 2013, gave participants an opportunity to make critical inputs on the management of the institutions and structures of the future oil and gas business.

Technical support from the World Bank is supporting Kenya as it seeks to develop the right governance and accountability systems to manage its future wealth and avoid the curse that has befallen some oil and gas producers in Africa, and elsewhere.

“The potentially substantial revenues from the oil and gas sector will come with significant challenges, that require careful management,” says Diarietou Gaye, World Bank Country Director for Kenya. “Kenya has a window of opportunity of a few years to take the right steps that will determine the shape of the oil and gas sector for decades to come.”

The Bank is working with the government to develop the country’s petroleum resources to support growth in public and private sectors, while proactively forestalling adverse macro-economic, social and environmental impacts. An effort is under way to channel anticipated resources to support growth in domestic businesses, increase employment across the country, develop infrastructure to support expanded economic activities, and expand access to training/education opportunities.

The consultative process is geared to avoid potential conflicts by creating awareness among local communities, who are demanding greater transparency in contracting arrangements between the government and oil prospectors.

The largest oil find is in Turkana County in semi-arid Northern Kenya.  Here, Britain’s Tullow Oil has discovered significant oil reserves, prompting the company to raise its resource estimate for Kenya by 20%, to over 300 million barrels of oil equivalent. This find has transformative potential to reduce poverty, and expand health and education services in Turkana, currently among the country’s poorest counties. To realize this potential, however, mechanisms are needed to channel resource revenues for projects that fight poverty and improve people’s lives.

Turkana Governor Josphat Nanok seeks a transparent framework for monitoring oil exploration and production costs, and a clearly defined arrangement of sharing benefits between the authorities and the communities. “I want our people to be well advised on the costs and benefits of oil business,” Nanok said.

With Turkana’s majority being nomadic pastoralists and peasant farmers, county leaders are championing land issues, culture and values of the local communities. “We want a transparent revenue sharing mechanism and a defined corporate social responsibility program which will ensure transfer of technical skills to our youth,” said Benjamin Cheboi, Governor of the Baringo County.

Local and international NGOs are active on the ground, advising local communities on how to negotiate the best deals when the revenue starts flowing, and lobbying for respect of human rights of the local communities and for the environment.

A critical issue is whether the local counties will have the capacity to manage their share of the oil and gas revenue.

“Depending on how much oil will be discovered, even a small percentage of revenue transfer to the local counties could be quite significant,” says Alexander Huurdeman, the Bank’s Senior Expert on Oil, Gas and Mining. “That’s why it is crucial to support the government on effective policy making and capacity building of local authorities and communities.”

For a country that has been prospecting for oil since 1937 without a discovery until last year, excitement is high with hopes that an  oil boom could propel Kenya through the middle-income threshold much earlier than its Vision 2030 anticipated.