Developing Capacity: OBG talks to Donald Mahaga, Chairman, Kenya Oil and Gas Association from The Report: Kenya 2016

Interview: Donald Mahaga 

What are the largest challenges faced by producers in commercialising onshore finds in Kenya?

Donald MahagaDONALD MAHAGA: Although we are still quite a few years away from commercialisation in Kenya, in terms of further development we do face the challenge of coordinating the roles of various project stakeholders, including private companies, various levels of government and local communities.

The government is still building experience at regulating the oil and gas sector. At the national level, we want to see an increase in capacity, more cooperation with the private sector and greater support in the field more generally. Moreover, we need to see greater consistency in the regulation of industry. The oil and gas sector is constitutionally a central government prerogative; we get our licences from them, and we sign contracts with them. However, since devolution, the role that county governments have in relation to oil and gas projects is unclear, with some counties imposing additional requirements on projects, or requiring additional licences. The roles that both the national and the county governments play need to be delineated in order to prevent problems from arising down the line. This issue is illustrated by current environmental regulations: while the National Environment Management Authority is authorised to grant permission for a project, the county-level environmental agency’s requirements may differ. Finally, communities themselves often have unrealistic expectations about the immediate benefits of oil and gas exploration, making it difficult to negotiate job opportunities and access to land. As there is no organised mechanism through which to handle negotiations, communication can be very slow.

How will the energy bill currently under consideration affect the industry as a whole?

MAHAGA: The capital gains tax can only slow down investment in the industry. What usually happens in frontier markets such as Kenya is that junior companies arrive first, discover where the reserves are, and are then bought out by bigger industry players. The juniors naturally have fewer resources at their disposal than the larger companies. As a result, the proposed 30-37.5% capital gains tax – much higher than in other industries – makes investment in exploration less attractive. This is especially true given that the capital gains tax was suspended when many of these companies made their initial investments.

Kwale Base Titanium Mine

With regard to rules for local content, industry is very supportive of developing local capacity, not only because it will increase domestic support for projects, but because sourcing employees within the country can bring down costs over the long term. Given that Kenya’s oil and gas industry is in its nascent stages, capacity will have to be developed very gradually over time. Although the industry agrees with the local content regulations, it has taken issue with the speed at which these requirements are increased over a relatively short period of time.

Moreover, at least three companies have introduced educational initiatives and courses that are aimed at building local capacity, involving the participation of both public and private players. A major focal point has been to provide skills that are relevant to industries beyond oil and gas, so that workers are not dependent on one industry alone.

To what extent does scope exist for future onshore and offshore discoveries?

MAHAGA: There is an excellent chance of additional commercial discoveries in both onshore and offshore areas, especially when the geology of surrounding countries is taken into account. There have already been several non-commercial discoveries. Given the success that has already been experienced off Tanzania’s coast, similar geology could apply to the Kenyan coast, and we think that this area is gas-prone.

This information was originally published by Oxford Business Group (OBG), the global publishing, research and consultancy firm, in The Report: Kenya 2016.  Copyright Oxford Business Group 2016. Published under permission by OBG.   For economic news about Kenya and other countries covered by OBG, please visit: http://www.oxfordbusinessgroup.com/economic-news-updates