Key features of the current Kenyan model of production sharing contract

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Source: Deloitteblog

  • Negotiation of an initial exploration period with the possibility to extend this twice.
  • An agreed percentage of the contract area is to be surrendered at the end of each exploration period.
  • In the event of a commercial development the total contract duration is negotiable.
  • Surface fees are provided for but are negotiable.
  • Annual contributions to the Ministry of Energy training fund.
  • The PSC does not provide for bonus payments or royalties.
  • A cost recovery cap per period is envisaged but the amount of this is also negotiable.
  • Capital costs are subject to recovery at a rate of 20% per annum (straight-line).
  • The sharing of profit oil is based solely on production volumes with the maximum state share achieved when production exceeds 100,000 barrels per day. The state share may be taken in cash or in kind.
  • Separate rules for sharing gas production are not provided.
  • The state’s share of profit oil is inclusive of income tax (see below for more detail).
  • The model provides for an additional allocation of profit oil to the state, triggered when the oil price exceeds a specified threshold.
  • In the event of a development, the government has a right to participate directly or via its designee (presumably this would be NOCK). The percentage share to be transferred is subject for negotiation. The PSC envisages that this will not entail reimbursement of costs up to the adoption of the development plan, but the government or its designee will be obliged to fund the respective share of costs thereafter, no carry arrangement being envisaged.
  • The contractor is obliged to supply the domestic market out of its share of production in accordance with instructions from the Minister. This will be at market price.
  • The contractor and its subcontractors will be entitled to import goods and equipment for petroleum operations free from customs duties.
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Author: Samuel Kamau Mbote

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