Components of Production Sharing Contract in Kenya

Licensing of petroleum exploration blocks, is governed by the Petroleum (Exploration and Production) Act Chapter 308 of the Laws of Kenya. All contracts are based on a Model Production Sharing Contract (PSC) issued as a schedule to the Regulations issued under Section 6 of the Act.

The signed Production Sharing Contracts have the following key component:

a) Signature Bonus: This is a one-off fee payable to the Government by the Company upon signing of an oil exploration contract. It depends on the area of the Block and previous data acquired on the Block. Signature Bonus negotiation came into effect in 2009. In block 12B for example the signature bonus paid was $300,000 according to JV partner Australian Swala Energy. In block L27 operated by CAMAC Energy the signature bonus paid was $310,000 according to the PSC available on this website.

A surface fee is also payable and is calculated on the basis of the surface area of the Contract Area on the date those payments are due. In Block L27 the amount set is $5 per square kilometre per annum during the Initial Exploration Period, $10 per square kilometre per annum during the first Exploration Period, $15 per square kilometre per annum during the second Exploration Period and $100.00 per square kilometre per annum during the Development and Production Periods

b) Work programme and expenditure: The contractor guarantees the agreed work programme and minimum expenditure. Initially this was pegged at 15% bank guarantee and 85% parent company guarantee. However, the Ministry has improved this and now the newly licensed companies are required to provide a 50% bank guarantee and 50% parent company guarantee.

This is to make sure that the companies proceed with their work progamme expeditiously as agreed with the Government and that incase of non-performance, the Government can liquidate the guarantees more easily. For small companies (based on their annual turnover criteria), they are required to post 100% bank guarantee. It is important to note that upstream petroleum operations are capital intensive and the Government entirely relies on the oil companies to invest their risk capital in the operations.

In addition, this risk capital is raised through equity. This is contrary to investment in mid stream and downstream petroleum segments which can be funded by debt

c) Cost oil: This is usually the negotiated percentage of total crude produced for recouping of investment costs incurred by the contractor in exploration and production of oil in a given field. It is normally up to 60% of all the oil produced in a field for about five years.

d) Profit oil: This is the remaining oil after deducting cost oil and is shared between the Government and the contractor. For example, when a field is small the Government take is 50%. As the production increases, the Government take can increase up to 78% of the total profit oil.

e) Windfall profit: Where oil prices are higher than the negotiated threshold, the Government creams off contractors take above the threshold crude oil prices by 26%.

f) Exploration phases – there are three exploration phases of two years each, the initial period, first additional period and second additional period. For ultra deep offshore blocks, the initial period is extended to three years due to extra logistical challenges in the deep water acreage.

g) Relinquishment – is 25% of the area of the block for each period

The PSC also has the license rental fee and training fee included. In Block 12B for example the license rental fee is set at $40,000 during the first year (2012-2013) and $80,000 during the second year, training fee is $100,000 per annum. During the first production phase the training fee is set at a minimum of $200,000 in Block 1 PSC with Lion Petroleum.

Check out PSC’s for the various East African countries namely Kenya, Uganda, Tanzania, Mozambique available on our website.

Additional Source: Ministry of Energy & Petroleum Website

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