The Petroleum Act, 2019 came into effect on 28 March this year, repealing the Petroleum (Exploration and Production) Act, Chapter 308 Laws of Kenya which entered into force in 1984. This is a pivotal development in the upstream petroleum industry in Kenya. We summarise below the importance of this development and the key features of the new Act.
Background and motivation
The Petroleum Act was enacted to consolidate into one statute the laws relating to petroleum operations. Previously, the upstream petroleum industry was regulated by the repealed Petroleum (Exploration and Production) Act, while midstream and downstream operations were regulated by the now repealed Energy Act (2006).
From our previous alert you may recall that the Energy Act (2006) was recently replaced by the Energy Act (2019), which was drafted in concert with the Petroleum Act. Amongst other changes, the new Energy Act established the Energy and Petroleum Regulatory Authority ("EPRA") (to replace the defunct Energy Regulatory Commission).
Together, these two Acts bring Kenya’s legislative framework on the energy sector in line with current industry standards and practices. These developments should give international investors, contractors and suppliers the comfort they need to confidently invest in the sector within Kenya.
Regulatory Authority and National Upstream Petroleum Advisory Committee
The Petroleum Act provides that petroleum operations in Kenya will be regulated by the Cabinet Secretary - Ministry of Petroleum and Mining ("CS") and the EPRA. It expressly states that this change will not affect any right, privilege, obligation or liability acquired by any licensee under the repealed Petroleum (Exploration and Production) Act.
The Act also establishes the National Upstream Petroleum Advisory Committee ("Advisory Committee") whose principal role includes advising the CS on upstream petroleum operations and on petroleum agreements to be entered into between contractors and the CS. The Advisory Committee will consist of representatives from the relevant Government Ministries and Departments, as well as a representative from each of the Upstream Petroleum Regulatory Authority and the Council of Governors.
Negotiation, award and execution of petroleum agreements
The Act grants the CS power to negotiate, award and execute a petroleum agreement on behalf of the National Government, in the form prescribed in the Schedule to the Act.
Section 18 of the Act also prescribes the processes which must be used when negotiating with a contractor in relation to a petroleum agreement. There appear to be two main approaches:
- The CS is permitted to enter into a petroleum agreement after the conclusion of bidding rounds carried out in accordance with the Act; and
- Direct negotiations with a sole contractor are permitted on the recommendation of the Advisory Committee only if certain conditions are met (including no bids having been received during the bidding round, bids received not satisfying minimum criteria or where there is insufficient data in relation to a block).
The Model Production Sharing Contract
As mentioned above, the Petroleum Act includes a Model Production Sharing Contract ("Model PSC") to be used by the CS when entering into a petroleum agreement.
The Model PSC includes extensive obligations with respect to the relevant block, and accurately reflects its international character by applying ‘investor friendly’ dispute resolution mechanisms such as UNCITRAL arbitration. The Model PSC contains a profit sharing mechanism between the Government and the Contractors and provides for taxation of profits under the petroleum agreement.
Annexed to the Model PSC are three appendices, which:
- define the area to which the PSC relates (Appendix A);
- establish the methods and rules of accounting for the upstream petroleum operations under the PSC (Appendix B); and
- contain a sample Participation Agreement outlining the general terms and conditions under which the Government would participate in the upstream petroleum operations (Appendix C).
Local content requirements
In line with the new Energy Act, the Petroleum Act imposes local content requirements on petroleum operations (at Section 50). This provision is aimed at ensuring petroleum operations carried out in Kenya add value to the economy by creating jobs and requiring the procurement of locally available goods and services.
It is important to note that there is a proviso to this provision which requires that the cost of such local content shall be at the prevailing market rate. This is aimed at encouraging the procurement of local content, while ensuring that projects remain fiscally viable.
Revenue sharing between the National Government, County Government and local community
The Act provides for sharing of revenue from upstream petroleum operations to ensure that the County Governments and local communities benefit directly from exploitation of petroleum resources located in their counties and sub-counties.
In effect, the National Government’s share of the profits will be apportioned as follows: (i) 75% to National Government; (ii) 20% to the County Government; and (iii) 5% to the local community, payable to a trust fund managed by a board of trustees established by the County Government in consultation with the local community. The Act also mandates Parliament to review these percentages within ten years.
Impact on existing projects
As previously highlighted, the Act effectively preserves any and all contractual rights, privileges, liabilities and obligations existing pursuant to the repealed Petroleum (Exploration and Production) Act. This creates a favorable investment climate as this preservation offers consistency and reliability to investors who have already committed to the market.
Looking forward – what to expect
The upstream petroleum sector in Kenya is expected to undergo significant growth in the coming years and the impact the Act has on the sector should not be understated. It provides a sound framework for the country to govern its petroleum transactions, and the requisite comfort to entice international companies to commit to investing in the sector.
In addition to the now enacted Petroleum Act and Energy Act, the sector can also look forward to the enactment of regulations under these Acts, which will provide further guidance and comfort to corporations working within the sector. We will publish further alerts as and when these regulations are made available.
Finally, and more practically, we anticipate an increased demand for expertise and manpower within this field. In particular, due to the advisory obligations and local content requirements, there is a real need for Kenya to develop its capacity and expertise in this space. It will be important to meet the growing needs of the industry to ensure that Kenyans are able to make use of the advantages available under the Act.
If you would like advice or guidance in respect of the above, please do not hesitate to contact us.