OIL AND GAS SECTOR IN KENYA; THE LEGAL STATUS ON EXPLORATION AND EXTRACTION

JUSTUS OMOLLO†

2013

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1.1. Contextual Background

The discovery of oil in Kenya in the year 20121 has so far been a welcomed development

in the country. This has been followed by continued activities for the exploration of oil in

a bid to make further discoveries to realize the full prospectivity of the rift basins.2

Consequently, the extraction of oil has also kicked off. As the activities aimed at tapping

into Kenya’s oil potential are ongoing, there is need to look into the relevant laws and

policies that govern the oil extraction sector in the country. It includes appraising these

laws and policies to establish their effectiveness in meeting the desired objective of

governing the sector.

It has been vouched that the discovery and subsequent extraction of oil and gas in Kenya

will be a boost to the energy sector in the country. The Kenya Vision 2030 Blueprint

recognizes that petroleum forms a large part of commercial energy in the economy.

Besides, it offers a potential boost to the national income which would be ploughed into

projects for improving the socio-economic welfare of the citizenry, a key pillar in the

Vision 2030. This underscores the position that petroleum holds in the country’s vision of

achieving and retaining the double-digit economic growth.

Notwithstanding the plausible potential gains expected with the discovery of oil in Kenya,

the government must remain cognizant of the need to establish an effective governance

†Legal Assistant, Prof. Albert Mumma & Company Advocates.

1 On 26th March 2012, Tullow Oil announced successful discovery of oil deposits at Ngamia-1 well located in Turkana County. There has been a series of discovery of oil in the area, the latest being the Agete-1 Wildcat well, the fifth in the chain of oil discovery in the area. See http://www.tullowoil.com/index.asp?pageid=137&year=Latest&month=&filtertags=84&selected= [Accessed: 24 November, 2013]. 2 Tullow Oil has embarked on an intensive campaign for appraisal and exploration of wells within their rift basin acreage in the year 2014.

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framework for this sector. This would go a long way in averting the perennial “resource

curse” that has bedeviled many countries across the globe. This discourse seeks to

illuminate the current legal and policy framework on oil extraction in Kenya. It does so by

exploring the policy foundations for oil extraction in Kenya. Furthermore, the discourse

points out the relevant domestic as well as binding international laws relating to oil and

gas extraction. The paper also takes a bird’s eye view of the oil sector in the larger

extractives, and delves into the current trends and developments in the sector. It

concludes by pointing out the lacuna in the legal and policy framework on oil extraction

in Kenya.

1.2. Overview of the oil sector within the larger extractives

The top oil producing countries in the world, according to the 2012 statistics of the

International Energy Agency3 are Saudi Arabia, Russian, United States of America, China,

Iran, Canada, United Arab Emirates, Venezuela, Kuwait, Iraq. In Africa, some of the top oil

producing countries are: Nigeria, Algeria, Angola, Libya and Egypt. The top oil producing

countries also rank among the top oil exporting countries. It therefore means that oil is a

major foreign exchange earner for such countries.

The larger extractives boast of existence of large amounts of proven oil reserves. For

instance, according to Oil & Gas Journal (OGJ), Canada had 173.6 billion barrels of

proven oil reserves as of the beginning of 2012. This is majorly contributed to by the

existence of unconventional oil sands. In Canada, the oil extraction sector has been

3 See International Energy Agency, Key World Energy Statistics 2013. Available at: http://www.iea.org/publications/freepublications/publication/KeyWorld2013.pdf. [Accessed: 1 December 2013].

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privatized, attracting the participation of both domestic and international oil companies.

The oil companies have invested in use of sophisticated technology in the exploitation of

the unconventional resources. The coordination of policy and regulation of oil sector in

Canada is exercised by federal and provincial bodies. The Alberta Energy Resources

Conservation Board (ERCB) is the largest and most influential among the provincial

authorities. Sector oversight is exercised by the provincial bodies. The national regulatory

body is the National Energy Board (NEB).

Angola is the second largest producer of oil in the Sub-Saharan Africa and it has been

suggested that its oil reserves could be larger than previously estimated. According to Oil

& Gas Journal estimates for the end of 2011, Angola had proved reserves of 9.5 billion

barrels of crude oil. The country’s economy is largely dependent on oil production. The

CIA World Fact Book records that oil production and its supporting activities

contribute about 85% of Angola’s GDP. This underscores the significance of the oil

sector in Angola’s economy. The country is still grappling with the challenge of ensuring

that the oil wealth in the country finds its way to the average citizens. Corruption in the

extractives still poses a major challenge. Notwithstanding the challenges, the country has

embarked on an ambitious programme under the policy of “Angolanization” to help the

Angolan population become more integrated into the country's energy sector, and to

obtain a greater share of the wealth being generated by the country's oil exports.4 Angola

established her national oil company known as Sociedade Nacional de Combustiveis de

Angola (Sonangol). It is the majority shareholder in all oil and gas exploration in Angola,

4 See United States Energy Information Administration (EIA) analysis of Angola available at http://www.eia.gov/countries/cab.cfm?fips=AO. [Accessed: 1 December 2013].

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and is in charge of all petroleum industry activities. Sonangol and foreign companies

involved in Angola operate under joint venture operations and production-sharing

agreements (PSAs). Under the “Angolanization” policy foreign companies are required to

draw 70% of the labor from the Angolan people. This has however not been achieved

although it is expected that it will be realized through the training programs financed by

the international oil companies in Angola.

According to the US Energy Information Administration (EIA)5, Saudi Arabia has almost

one-fifth of the world's proven oil reserves, is the largest producer and exporter of total

petroleum liquids in the world, and maintains the world's largest oil production. The

country produced on average 9.8 million barrels of crude oil per day and 1.8 million

barrels of natural gas per day in 2012.6 According to the Oil and Gas Journal, Saudi Arabia

contains approximately 265 billion barrels of proven oil reserves in addition to 2.5 billion

barrels in the Saudi-Kuwaiti shared Neutral Zone as of January 1, 2013. The state-owned

oil company, Saudi Aramco, dominates the oil and gas operations in Saudi Arabia. The

governance of the oil sector in Saudi Arabia is exercised by the Ministry of Petroleum and

Mineral Resources and the Supreme Council for Petroleum and Minerals. The Supreme

Council is composed of members of the royal family, industry leaders and government

ministers.7 It is tasked with petroleum and natural gas policy-making, including contract

review, and is also in charge of Saudi Aramco's strategic planning. They also have

oversight over Saudi Aramco. The Ministry is responsible for national planning in the area

of energy and minerals, including petrochemicals.

5 See http://www.eia.gov/countries/cab.cfm?fips=SA [Accessed: 1 December, 2013]. 6 Ibid. 7 Ibid.

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In Nigeria, the proven oil reserve has been estimated to be 37.2 billion barrels at the end

of 2011 as reported by Oil and Gas Journal (OGJ). It is the largest producer of oil in Africa.

Oil accounts for more than 90% of export earnings in Nigeria, making it a major foreign

exchange earner. However, the development in this sector is marred by a series of civil

wars in the Niger Delta since 2005 as well as oil theft and production losses. Production

subsequently reduced as oil companies withdrew their staff and closed production due to

insecurity fears. The upshot was that there were reduced export receipts and government

revenues.8 The regulation of the oil sector in Nigeria is carried out by the Nigerian

National Petroleum Company (NNPC) created in 1977. It was subsequently subdivided

into various subsidiary companies for better management of the country's oil industry.

Foreign companies also operate in the extraction either in joint ventures (JVs) or

production sharing contracts (PSCs) with the Nigerian National Petroleum Company. The

country is currently undertaking a reform process for the energy sector under the auspices

of the Petroleum Industry Bill that is yet to be passed into law.

1.3. Recent Trends and developments

The oil and gas industry is an industry under continuous change marked by various

innovations and ways to improve its efficiency. Here are some of the current trends and

developments in the sector.

1.3.1. Discovery of new Oil and Gas reserves

Various countries have made new discoveries of oil and/or gas in their territories in the

recent past, setting them to join the ranks of economies reaping heavily from petroleum

8 According to International Monetary Fund, the oil sector generated more than 75 percent of federal government revenue in 2011.

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production and exportation. In December 2013, the Oil and Gas Journal9 reported the

discovery of natural gas by Statoil offshore Tanzania. It has also been reported that Noble

Energy Inc. made discovery of natural gas offshore Israel. New oil discoveries have also

been reported in the Gulf of Mexico, Kenya’s North Rift, Nigeria, Canada, Brazil, Norway,

among others. This is good news to the oil and gas sector as it points to a potential source

of revenue for the countries.

1.3.2. Improvement in oil and gas technology

The consumption of oil and gas is here to stay according to the projections made by IEA

and OPEC10. The industry has thus been characterized by improvement in the technology

employed in oil and gas sector all the way from the upstream, middlestream to the

downstream sector. It has been vouched that if technology makes oil and gas easier, safer,

cleaner, and cheaper to extract, energy prices and quality of life could improve for

everybody. Some of the technologies in the oil and gas industry today include:

a) The “Digital Oil Field” which is basically a web-based visualization platform from

which companies can manage, measure, and track all of the data coming from all

over the oilfield. This technology has the potential to increase the net present value

of oil and gas assets by 25% according to Booz & Co.11 It can also increase safety

and reduce workload, to the management and executive levels, where staffs benefit

9 See generally http://www.ogj.com/oil-exploration-and-development/discoveries.html. [Accessed: 7 December, 2013]. 10 Oil, gas and coal are expected to continue to be the most widely used fuels making about 80% of total future primary energy consumption. 11 See generally Booz & Co, Unleashing Productivity: The Digital Oil Field Advantage. Available at: http://www.booz.com/media/uploads/UnleashingProductivity.pdf. [Accessed: 6 December 2013].

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from increased transparency of information and direct daily production12. It is also

suggested that this technology can ease the competition for human resources

among national oil companies, International Oil Companies, and oil field suppliers.

b) The use of Cleantech aimed at reducing the harmful effects of hydrocarbons. There

is increased interest in making production and consumption of hydrocarbon fuel

less harmful, rather than making alternative fuels commercial. Some companies

focus on decreasing demand rather than trying to increase supply. For instance

Cerion Energy produces a nanotechnology-based diesel fuel that decreases

consumption by a minimum of 8%, while reducing emissions.13

1.3.3. Increasing Calls for Global Transparency in the Industry

Calls for transparency in the sector have culminated into various countries enacting laws

to address the need. In April 2013, the European Union adopted new laws aimed at

increasing the transparency of government income from the oil and gas industry. European

companies will be required to report payments of more than €100,000 made to the

government in the country they are operating in, including taxes levied on their income,

production or profits, royalties, and license fees. The EU executive will oblige companies

to disclose the payments they make at project level as opposed to government level only,

revealing the sources of taxable income from the extraction or logging industries.

In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act

was enacted in 2010 and later adopted in the year 2012. Section 1504 imposes disclosure

12 Ibid. 13 See http://www.cerionenergy.com/articles/34. [Accessed: 6 December 2013].

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standards on US-registered companies engaged in overseas mining and petroleum

operations. This is aimed at fostering transparency in the sector. Various countries are

following the trend set by the USA on transparency.

1.3.4. Consolidation among Multinational Oil companies

According to the Oil and Gas Journal14 consolidation or merging provides lasting solution

to companies faced by difficulties in the oil sector. The Journal expresses that

consolidation is pivotal in reducing redundant operations and eliminating excessive

workforces.

1.3.5. Growing Concerns over Emission of CO2

The emission of CO2 is reported to have reached unprecedented levels and currently there

are efforts being made towards reducing these levels. These emissions have reached

unprecedented levels and will grow further before leveling off around 2030. In the United

States and Europe, where a shift from coal to less carbon-intensive fuels such as natural

gas is already under way, emissions will gradually decline from the current level.

1.4. International Outlook

The Organization of the Petroleum Exporting Countries (OPEC) spearheaded the

publication of the 2013 World Oil Outlook.15 The 2013 World Oil Outlook (WOO 2013)

has reported an increase in the upstream capital costs which has significantly been

reflected in the prices of oil. WOO 2013 further reports that seasonal supply and demand

14 Oil and Gas Journal, Vol 98, Issue 11. 15 OPEC, 2013 World Oil Outlook. Available at: http://www.opec.org/opec_web/static_files_project/media/downloads/publications/WOO_2013.pdf. [Accessed: 2 December, 2013]

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fluctuations influence both crude oil spot prices and oil futures prices. Varied reasons

have been attributed to such fluctuations and they have been pointed out to include the

beginning (or end) of the driving season, the refinery maintenance season or the shipping

season.

Several countries have embarked on improving the strategies for the governance of their

oil and gas sector. This is being carried out through legislative and policy reforms. In

Angola, the Angolanization Policy is illustrative. It seeks to ensure that the Angolan people

share the benefits of the oil production in the country. Legislative reforms such as

Nigeria’s Petroleum Industry Bill seeking to streamline the country’s petroleum industry by

revising, updating and consolidating existing petroleum legislation in Nigeria including

existing legislation on the taxation of upstream petroleum operations is indicative of some

of the reform processes being undertaken.

Dr. Hussain Al-Shahristani, the Deputy Prime Minister of Iraq observed that there is a

trend of an increase in people’s dependence on energy across the globe.16 He added that

the increase of the world population to 8.5 billion by 2030 (about 20% higher than the

current world population) will provide a high demand for energy. Dr. Hussain however

laid emphasis on demographics of a country's working-age population (people between

15-64 years old) because this group is the engine for economic growth and energy

demand.

16 Hussain Al-Shahristani, Recent Trends in the Global Energy Economy, IISS Oberoi Lecture, Mumbai 14 Aug 2013. Available at: http://www.iiss.org/en/events/events/archive/2013-5126/august-1e98/recent-trends-in-global-energy-1218. [Accessed: 25 November, 2013].

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The International Energy Agency (IEA) concurs that the demand for energy is expected to

grow up to the year 2035.17 There would then be a steady decrease in the demand for high

carbon fuels such as coal and oil.18 The world will use energy more efficiently and shift

toward lower carbon fuels.19 This is driven by population and economic growth which

will drive demand higher. He further observed that a number of factors will significantly

play a role in determining the future of the energy sector which by and large is currently

dependent on oil and gas.

The emission of Carbon (IV) oxide into the atmosphere by the oil industry will remain a

concern. IEA observed that being a source of two-thirds of global greenhouse-gas

emissions, the energy sector will be significant in determining whether or not the goals of

climate change are met. A shift towards lower carbon sources of energy such as

renewable sources is expected to be taken into consideration because of increasing

concern for global warming and emerging policies to curb emissions by imposing a cost

on higher carbon fuels.20 It is therefore expected that the use of renewable energies will

grow significantly, particularly solar and wind power.21

The new oil and natural gas, which will constitute an increasing share of global supply,

will come from unconventional sources, such as those produced from shale formations.22

17 See International Energy Agency, World Energy Outlook Factsheet 2013. Available at: http://www.iea.org/media/files/WEO2013_factsheets.pdf. [Accessed: 4 December, 2013]. 18 Ibid. 19 Supra Note 16. 20 Ibid. 21 Ibid. 22 Ibid.

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The emerging economies provide a wide base for global energy demand. According to IEA

World Energy Outlook 2013, they account for more than 90% of net energy demand

growth up to the year 2035. IEA further pits China as the leader of the energy demand

growth in Asia but predicts a shift towards India and, to a lesser extent, Southeast Asia

after 2025.

Further, the IEA projects a potential shift of the global energy trade from the Atlantic basin

to the Asia-Pacific region.23 This is substantiated by the statistics showing China as an

emerging largest oil-importing country; and India as the largest importer of coal by the

early 2020s.24 IEA suggests that improved energy efficiency and a boom in unconventional

oil and gas production would help the United States to move steadily towards meeting

almost all of its energy needs (in energy equivalent terms) from domestic resources by

2035.

23 Supra Note 17. 24 Ibid.

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1.5. Overview of Kenya’s Legal and Policy Framework on Oil Extraction

The upstream oil and gas sector is governed by laws such as the Constitution of Kenya, the

Petroleum (Exploration and Production) Act25, regulations made under the Petroleum Act

and the Ninth Schedule to the Income Tax Act.26

The objective of the Petroleum Act has been to regulate the negotiation and conclusion of

petroleum agreements by the Government relating to the petroleum operations.27 The

concern of this discourse would be extraction of oil and gas which is an operation in the

upstream sector. The Act stipulates that petroleum operations can only be carried out after

obtaining permission from the Minister in a prescribed manner under the Act.28 In the

current cabinet portfolio this mandate falls within the province of the Cabinet Secretary for

Energy and Petroleum. The Act further underscores that all such operations must be

carried out within the confines of the Act, the rules therein and the terms and conditions

spelt out in the petroleum agreement.29 Notably, the government has been permitted to

engage in petroleum operations. There are three ways in which the government can

engage in petroleum operations namely: through an oil company established by the

Government to conduct those operations30; or through contractors in accordance with

petroleum agreements; or in such other manner as may be necessary or appropriate.31 For

25 Chapter 308 of the laws of Kenya. Hereinafter referred to as the Petroleum Act. 26 Chapter 470 of the Laws of Kenya. 27 Section 1 of the Petroleum Act enumerates such operations to include exploration for, development, extraction, production, separation and treatment, storage, transportation and sale or disposal of, petroleum up to the point of export, or the agreed delivery point in Kenya or the point of entry into a refinery. 28 Petroleum Act, section 4(1). 29 Ibid, Section 4(2). 30 The government established the National Oil Corporation of Kenya (NOCK) for this purpose. 31 Ibid, section 4(3).

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instance, in the ongoing oil exploration in the Tertiary Rift Basin, the government has

entered into contract with Tullow Oil and its partners.32

The Petroleum Act also enshrines provisions on powers of the Minister (Cabinet Secretary)

in relation to petroleum operations. The Cabinet Secretary is mandated to negotiate, enter

into and sign petroleum agreements with the contractors on behalf of the Government.33

The Cabinet Secretary in the negotiations is required to secure the most favourable

conditions for the government.34 It is notable that in the negotiation for petroleum

agreements, the best interest of the government is given primary regard. The Cabinet

Secretary is also clothed with supervisory powers over the operations carried out under

the petroleum agreement.35 Extensive discretionary powers are conferred to the Cabinet

Secretary in the enforcement of the Act. According to section 5(3)d the Cabinet Secretary

may take any action, decision, or give any permission or consent or exercise any other

control as may be necessary or desirable for the purposes of the Act or the regulations

made thereunder. These discretionary powers are susceptible to abuse by the Cabinet

Secretary since the Act has no entrenched mechanisms for checks and balances on the

actions of the Cabinet Secretary. It is also entrenched that the Cabinet Secretary’s power of

signing or revoking a petroleum agreement can be exercised either by him or a person

specially authorized by the Cabinet Secretary in writing.36 The Act also empowers the

32 See “Tullow acquires a 50% interest of the East African Rift Basins of Kenya and Ethiopia”. Available at

http://www.tullowoil.com/index.asp?pageid=137&category=&year=Latest&month=&tags=84&newsid=67

5. [Accessed: 24 November 2013]. 33 Supra Note 3, section 5(1). 34 Ibid, section 5(3)b. 35 Ibid, section 5(3)c. 36 Ibid, section 5(4).

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Cabinet Secretary to make regulations on petroleum operations.37 The eligibility of

contractors with whom the Government can enter into petroleum agreement is also

entrenched in the Act. They are required to possess financial ability, technical

competence and professional skills necessary to fulfill the obligations under the petroleum

agreement38. Under section 9, the Act enumerates the general terms and conditions which

shall be implied in every petroleum agreement. The Act also enshrines provisions relating

to access to private land. A notice to the occupier and if practicable to owner is owner is

required, within a period of not less than forty-eight hours, where a contractor intends to

enter upon any private land for the purposes of conducting petroleum operations.39

Additionally, in the event that any disturbance of the rights of the owner or occupier of

private land, or damage to anything therein or thereon is caused in the course of carrying

out petroleum operations, the contractor shall be liable on demand to compensate the

owner or occupier40. There would be regard to the extent of the disturbance or damage

and to the interest of the owner or occupier in the land.41 A period of six months is

stipulated for recovery of compensation in case the compensation demanded in not paid

or where the person is dissatisfied with the amount of compensation offered.42

The gains and profits of petroleum companies are subject to tax in Kenya. The Ninth

Schedule of the Income Tax Act enshrines provisions on taxation of petroleum companies.

For instance, under paragraph two, the taxable income is equated to the value of the

37 Ibid, section 6. 38 Ibid, section 8. Besides, under paragraph 2(2) of the Petroleum (Exploration and Production) Regulations, 1984, it is entrenched that an entity cannot enter into a petroleum agreement with the Government unless it is incorporated or registered in Kenya under the Companies Act (Cap. 486). 39 Ibid, section 10(1). 40 Ibid, section 10(2). 41 Ibid. 42 Ibid, section 10(3).

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production43 to which a petroleum company is entitled under a petroleum agreement in a

given year of income.

The Constitution of Kenya 2010 has also endeavored to address certain issues surrounding

the exploitation of natural resources.44 To begin with, it has been enshrined that all

minerals and mineral oils form part of public land45 which is vested in and held by the

government in trust for the people46. It is instructive to note that the Constitution confers

the authority of administration of minerals and mineral oils in the National Land

Commission.47 It is the contention of this paper that there would be potential conflict

between the powers granted to the Cabinet Secretary in charge of Energy and Petroleum

by the Petroleum Act and the power conferred to the National Land Commission on the

administration of mineral oils.

It is also noteworthy that the parliament has a key role to play in granting the permit for

the exploitation of natural resources in Kenya. The parliament must ratify any transaction

which involves the granting of a right or concession for the exploitation of any natural

resource.48 The foregoing position only applies to those transactions entered into on or

43 “Production” has been defined under paragraph 1 as the quantity of petroleum produced, saved and not used in the operations to which a petroleum company is entitled under a petroleum agreement. 44 The Constitution defines natural resources to include rocks, minerals, fossil fuels and other sources of energy. See article 260. 45 Ibid, article 62(1)f. 46 Ibid, article 62(2). This is mirrored in section 3 of the Petroleum Act which provides that all petroleum existing in its natural condition in Kenya is vested in the government. 47 Ibid, article 62(3). 48 Ibid, article 71(1).

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after the effective date.49 It is further tasked with enacting a legislation which outlines

classes of transactions that are subject to parliamentary ratification.50

1.6. Policy Foundations for Oil Extraction

In Kenya, the policy foundations for oil extraction are entrenched in the Draft National

Energy Policy.51 The Policy is yet to be adopted. It is notable that it seeks to ensure

affordable, sustainable and reliable supply to meet national and county development

needs, while protecting and conserving the environment.52 More specific to the sector of

oil extraction, the Policy aims to utilize energy as a tool to accelerate economic

empowerment for the National and County Governments as well as urban and rural

development. It also endeavours to achieve improvement of access to quality, reliable and

affordable energy services; creation of a conducive environment for the provision of

energy services; development of indigenous energy resources; inculcating of prudent

environmental, social, health and safety considerations in energy sector developments;

promotion of healthy competition in the sector; establishment of a comprehensive,

integrated and well informed energy sector plan for effective development; fostering of

international co-operation in energy trade, investments and development; promotion of

energy research, development, training and local manufacture of energy plant, equipment,

appliances and materials; promotion of appropriate standards, codes of practice and

49 27th August, 2010. 50 Ibid. The duration within which the legislation should be enacted is stipulated as five years under the Fifth Schedule of the Constitution. This may however be extended by one year according to article 261(2). Thus, the parliament has a maximum of six years (up to 27th August, 2016) to enact legislation spelling out the classes of transactions which it must ratify before exploitation of natural resources is commenced. 51 The Draft National Energy Policy, Available at: http://www.kengen.co.ke/documents/National%20Energy%20Policy%20-%20Third%20Draft%20-%20May%2011%202012.pdf. [Accessed: 6 December, 2013] 52 Ibid at p20.

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specifications for equipment, systems and processes in the energy sector; promotion of

diversification of energy supply sources to ensure supply security53.

1.7. Relevant Laws on Oil Extraction in Kenya

The Constitution of Kenya has a number of provisions applicable to oil extraction in the

country. Other than the Constitution, the main set of laws include applicable to oil

extraction in Kenya include:

a) the Petroleum (Exploration and Production) Act, Chapter 308 of the Laws of Kenya

which was enacted to regulate the negotiation and conclusion by the Government

of petroleum agreements relating to the exploration for, development, production

and transportation of, petroleum.

b) the Petroleum Development Fund Act, Chapter 426C of the Laws of Kenya, which

was enacted in 1991 for the establishment of a Petroleum Development Fund54 and

the imposition of a Petroleum Development Levy.55

The Draft National Energy Policy56 also points out the following laws to be applicable to

the oil sector:

1. The Standards Act, Chapter 496 of the Laws of Kenya that provides for

establishment of minimum quality specifications, mode, materials and apparatus

for energy used in the country.

53 Ibid at p20 – p21. 54 See Petroleum Development Fund Act, section 4. 55 Ibid, section 3. 56 Supra Note 51, p22 – p23.

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2. The Environmental Management and Co-ordination Act, 1999, which regulates the

environmental aspect of the energy sector.

3. The Local Government Act, Chapter 265 of the Laws of Kenya which grants

authority for approval by local authorities of sites for construction and installation

of fuel storage and dispensing facilities; business licensing and levies for electric

power poles and wayleaves charges.

4. The Physical Planning Act, Chapter 286 of the Laws of Kenya that provides for

zoning of areas for storage, distribution and retailing of petroleum fuels and

construction of electric power sub-stations and other infrastructure.

5. The Weights and Measures Act, Chapter 513 of the Laws of Kenya under which

storage tanks and dispensing equipment for sale of petroleum products are

calibrated and regulated for accuracy.

6. The Public Procurement and Disposal Act No. 3 of 2005 that establishes

procedures for efficient public procurement and for the disposal of unserviceable,

obsolete or surplus, stores, assets and equipment by public entities.

7. The Anti-Corruption and Economic Crimes Act No. 3 of 2003.

8. The Ethics and Anti-Corruption Commission Act No. 22 of 2011 that established

the Ethics and Anti Corruption Commission pursuant to Article 79 of The

Constitution.

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9. The Public Officer Ethics Act No. 4 of 2003 that seeks to advance the ethics of a

public officer by providing for a code of conduct and ethics for public officers.

10. The Land Act 2012.

11. The Land Registration Act, 2012.

12. The Commission of Revenue Allocation Act.

13. The National Land Commission Act that established the National Land Commission

pursuant to Article 67 of The Constitution.

14. The Environment and Land Court Act No. 19 of 2011 that established the

Environment and Land Court pursuant to Article 162(2)(b) of The Constitution.

15. The Urban Areas and Cities Act No. 13 of 2011 that gives effect to Article 184 of

the Constitution.

16. The National Government Loans Guarantee Act No. 18 of 2011 that ensures the

transparent, prudent and equitable management of the authority to guarantee loans

conferred on the National Government under Article 213 of The Constitution.

17. The Consumer Protection Act that establishes the regime of consumer protection

law and to prevent unfair trade practices in consumer transactions and connected

matters.

18. The National Construction Authority Act that provides the establishment, powers

and functions of the National Construction Authority for connected purposes.

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19. The County Government Act that provides for the regulation required to implement

the provisions relating to devolved government and to give effect to chapter 11 of

the Constitution, to provide for county government powers, functions and

responsibilities to deliver services and for connected purposes.

1.8. Relevant Environmental Conventions and issues

The major environmental issues in oil and gas sector include emission of CO2 into the

atmosphere, pollution from oil spills, and breakout of fires57. The Draft Policy identifies

that the adoption of international best practices in handling safety concerns in the sub-

sector and ensuring strict compliance and enforcement of the regulations will help in

addressing these issues. The United Nations Framework Convention on Climate Change

addresses issues related to emission of CO2.58

Kenya is party to the Convention and the

subsequent Kyoto Protocol. Kenya therefore has a responsibility to lower anthropogenic

emissions of Carbon Dioxide (CO2). Although Kenya has not been enlisted among the

countries with emission reduction targets under the protocol, there are opportunities to

benefit by selling Certified Emission Reductions (CERs) through the Clean Development

Mechanism (CDM). According to the Draft Nation Energy Policy, Kenya is yet to reap the

benefit of the CDM because the CDM projects have not been effectively developed or

fully operationalised. In 2009 the National Climate Change Response Strategy (NCCRS)

was launched. It provides a guide on appropriate actions in response to effects of climate

change across various sectors. The Strategy also provides estimated budgetary

requirements for implementation. In addition, the Ministry of Environment and Natural

57 Supra Note 51 at p98. 58 Its objective is to stabilize greenhouse gas concentrations and to tackle impacts of Climate Change.

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Resources has developed the Kenya Climate Change Action Plan to operationalise the

NCCRS. The newly developed climate change strategies will inform other existing central

government policies and plans such as, National Development Plans, and Economic

Survey in an Endeavour to integrate environmental issues in planning. They are also

expected to come through in the achievement of Vision 2030 and further enhance

community participation in environmental management activities while making

appropriate adjustments to their livelihood approaches.

1.9. Gaps in Legal and Policy Framework

From the outset it is instructive to point out that the Constitution of Kenya 2010 has

thrown the country into uncertainty over a plethora of laws that it requires to be enacted

by the parliament over periods of time that have been specified. With the discovery in the

oil and gas sector, laws should be in place to clearly spell out the governance of the

resources. Some of these laws are not yet drafted. Moreover, the existing legal and

regulatory framework has not been aligned to the Constitution. The public is pregnant

with expectations of poverty alleviation owing to the potential for increased government

revenue from commercial discoveries.

The laws must address the concerns over the Kenyans affected by the discoveries for

instance those living in places where the discoveries are made. Our laws should address

how they can directly benefit from local ownership of the assets.

It is notable that Kenya’s mining sector has operated without a clearly defined policy

framework. It is therefore a welcomed move that a draft policy is now in place to govern

23

the sector. Nevertheless, it still points certain unfulfilled obligations which are yet to be

met.

The confidence of the investors has been recently shaken by Kenya’s move of arbitrarily

altering the law for instance by introducing a 35% local requirement for mining licenses.

This will adversely affect the exploration for minerals in the country. Moreover, the

informal introduction of taxation prior to ministerial consent to an assignment of a PSC59

will also adversely affect the sector.

The Fourth Schedule of the Constitution provides for the various roles of the two levels of

the government in the energy sector. However, there is a possibility of operational

uncertainty as to the extent of responsibility between the two levels of governments. The

draft National Energy Policy has recognized this gap. The draft Policy also points out that

there is no framework for devolution of functions within the energy sector to ensure

service continuity and standards to guide County governments on devolved responsibility.

The framework is yet to be developed.

In the wake of the devolved system of government under the Constitution, minimum

standards should be developed at national level to guide County governments on

devolved responsibilities in the energy sector. This will help to avoid the scenarios where

County governments make laws with glaring disparities over the same subject matter.

There is need for a codified law governing the energy sector as a whole. We currently

have outdated and fragmented sectoral laws governing the energy sector. These laws

59 This was not a requirement in law.

24

establish institutions whose roles and functions in the energy sector overlap. It calls for

review of the institutional mandates of the various public institutions under the energy

sector to streamline their respective mandates, businesses and operations.

There is also need for clearly defined policies for revenue sharing and management of

resources in the oil and gas sector. This will cushion the country from the adverse effects

of the global market system. James Shikwati60 observed that most African countries have

fallen victim to skewed market order in which African countries exported raw materials

and imported finished products.

60 James Shikwati, Key Challenges Kenya is Likely to Face from Oil, Gas Discoveries, Standard Newspaper, Friday, August 2, 2013.

25

RECOMMENDATIONS

From the discourse the following recommendations are made:

The Draft National Energy Policy should be adopted so as to act as the governing policy

framework for the energy industry. However, in order to be cognizant of the system of

governance in Kenya namely the national and county governments, a policy framework

should be adopted to cater for devolution of functions within the energy sector to ensure

service continuity and standards to guide County governments on devolved responsibility.

Currently, the Energy Act of 2006 is also being reviewed under the auspices of the Energy

Bill. The Act should be realigned with the Constitution. This also holds for other laws that

have been in place for a long time without being realigned with the supreme law of the

land – the Constitution.

The fragmented sectoral laws governing the energy sector should be codified. The existing

laws which establish a number of different institutions should be reviewed to streamline

their respective mandates, businesses and operations.

26

CONCLUSION

It has been highlighted in this discourse that Kenya has began a process to take off in her

exploitation of oil resources. The expectations over this development are immense. The

local communities must be assured of reaping the benefits from the petroleum operations

going on. Additionally, Kenya must move swiftly to avert “resource curse” by sealing the

loopholes that still exist in the laws. It calls for careful enactment of laws governing this

sector as well as reviewing the existing laws to be in tandem with the Constitution. The

National Energy Policy should be adopted and all arms of the government should work

effectively to ensure that their obligations under the auspices of petroleum operations are

fulfilled. Similarly, both levels of government must also work closely to ensure that

devolved system is not misused to the detriment of the citizenry.

27

REFERENCES

Constitution of Kenya (2010).

Income Tax Act Chapter 470 of the Laws of Kenya.

The Draft National Energy Policy, 2012.

Petroleum (Exploration and Production) Act, Chapter 308 of the Laws of Kenya.

Petroleum Development Fund Act, Chapter 426C of the Laws of Kenya.

Shikwati, James, Key Challenges Kenya is Likely to Face from Oil, Gas Discoveries,

Standard Newspaper, Friday, August 2, 2013.

http://www.tullowoil.com/index.asp?pageid=137&category=&year=Latest&month=&ta

gs=84&newsid=675. [Accessed: 24 November 2013].

http://www.iea.org/media/files/WEO2013_factsheets.pdf. [Accessed: 4 December,

2013].

Al-Shahristani, Hussain, Recent Trends in the Global Energy Economy, IISS Oberoi

Lecture, Mumbai 14 Aug 2013.

OPEC, 2013 World Oil Outlook.

Oil and Gas Journal, Vol 98, Issue 11.

http://www.cerionenergy.com/articles/34. [Accessed: 6 December 2013].

Oil and Gas Journal, Vol 98, Issue 11.

http://www.ogj.com/oil-exploration-and-development/discoveries.html. [Accessed: 7

December, 2013]

28

http://www.booz.com/media/uploads/UnleashingProductivity.pdf. [Accessed: 6

December 2013].

http://www.iea.org/publications/freepublications/publication/KeyWorld2013.pdf.

[Accessed: 1 December 2013].

http://www.tullowoil.com/index.asp?pageid=137&year=Latest&month=&filtertags=84

&selected= [Accessed: 24 November, 2013].