PETROLEUM ACT, 2019 IS NOW IN FORCE

By Njau Mukuha,Paras Shah,Rainbow Field Thursday, May 02, 2019
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A new era of greater transparency and accountability in petroleum agreements and contracts is one of the anticipated effects of Kenya’s Petroleum Act, 2019. The Act also addresses important issues such as revenue sharing, local content and licensing of petroleum operations.

The President assented to the Petroleum Act on 12 March 2019 and it is now in force, providing a framework for contracting, exploration, development and production of petroleum. In addition to providing a new model petroleum agreement, the Act addresses the regulation of midstream and downstream petroleum operations previously covered in the repealed Energy Act, 2006.

The new Act repeals the Petroleum (Exploration and Production) Act, chapter 386, of the Laws of Kenya, which was passed in 1984 and only focused on upstream petroleum operations. The modernised legislative framework is a welcome development that introduces a number of key changes.

Ratification of petroleum agreements and field development plans

Petroleum agreements, together with field development plans, must be reviewed and ratified in conformity with Article 71 of the Constitution, according to the new Act. The country’s parliament will ensure public participation in the ratification process before approval.

In our view, parliamentary ratification will not be required where the petroleum agreement was entered into prior to the commencement of the Petroleum Act and the Natural Resources (Classes of Transactions subject to Ratification) Act 2016.   

Revenue sharing: Who gets what?

The emotive issue of revenue sharing is addressed in the Act.  It is now settled that the county government will receive 20% and the local communities 5% of the national government’s share of the profit oil. Parliament will review the allocations between the national government, county government and the local community 10 years after the commencement of the Act.

Notably, the Act provides a narrow definition of the local community as a people living in a sub-county within which a petroleum resource under the Act is situated and who is affected by the exploitation of that petroleum resource. 

Local content: Economic value add to Kenyans

When it comes to contractors, the Act introduces a mandatory local content compliance requirement.

This requires that priority be given to services provided and goods manufactured in Kenya, provided that these meet the specifications of the petroleum industry. A further priority is the employment or engagement of qualified and skilled Kenyans at all levels of the value chain. 

Contractors are required to submit local content plans to the Energy and Petroleum Regulatory Authority (EPRA) before commencing any petroleum operations.  Each year thereafter, contractors must submit annual local content plans corresponding with the work programmes. 

As a result of the enactment of this Act, contractors will be required to evaluate their existing contractual and procurement arrangements to ensure compliance with the local content requirement. Further, since local content requirements are inherently aspirational, there is a need to have proper implementation and monitoring systems in place to achieve realistic targets in the growth of the petroleum sector.

A development to watch in the area of local content promotion is the progress of the Local Content Bill, 2018, which has been introduced in the Senate. The Bill also seeks to regulate the extractives sector and, if passed, could create legal and regulatory duplication. Before passing this Bill, Parliament will need to consider harmonising the regulatory framework for systematic implementation of local content.

Transparency and accountability

Unlike the repealed Petroleum (Exploration and Production) Act, the new Act creates a framework for accountability and transparency in entering into petroleum contracts.

The cabinet secretary for petroleum is required to establish a framework for publishing all petroleum agreements, records, annual accounts and reports of revenues, fees, taxes, royalties and other charges.  This also applies to any other relevant data and information that support payments made by the contractor and payments received by the national government, county governments and local communities.

The intention is to enhance the right of access to information provided in the Constitution. It will be critical for both the national government and contractors to disseminate complete, accurate information as such matters may trigger keen political, community and other stakeholder interest at both national and county levels.

Licensing and permitting requirements

The Act introduces a variety of licences and permits for contractors under the petroleum agreement. These include operational permits for drilling, operating underground injection wells, building crude oil facilities and plugging or abandoning a well, among others.

Operational permits will be issued in respect of each well. This may be a major concern for contractors, especially as regards the costs and possible delays in the issuance of permits. 

The licensing authorities shall have discretionary power under the Act to determine the duration of licences for midstream and downstream operations. Previously, the Energy Act, 2006 provided for a standard licence validity period. Unless there is consistency in the licensing periods granted, this change has the potential to undermine the predictability and stability of the sector.

The Act further widens the scope for the exercising of discretionary powers. Where a licensing authority intends to revoke or suspend a permit, it may notify the holder of the permit of its intention, specifying the reasons for this. Previously, this was a hard-line obligation to specify reasons for revocation or suspension of a permit in the Energy Act, 2006.

Another important change is that applications for construction permits under the Act must now be accompanied by the registration documents of the proposed beneficial owner. This amendment is in line with recent developments where companies are required to reveal and keep a register of the beneficial owners of the company. The technical capacity of an applicant has also become a key consideration in granting a construction permit.

Regulatory bodies

The Act establishes the National Upstream Petroleum Advisory Committee which generally advises the cabinet secretary on upstream petroleum operations. The EPRA (re-established under the Energy Act, 2019, is mandated to generally regulate, monitor and supervise upstream, midstream and downstream petroleum operations in Kenya.

Depending on the matter at hand, the EPRA will report to different ministries; hence capacity building will be critical for effective service delivery.

Penalties

Non-compliance with the provisions of the Act attracts heavy penalties, including fines and jail terms for those responsible.

Particularly stringent penalties apply in the event of vandalism of upstream petroleum infrastructure and installations. Here, the Act imposes fines of not less than KES 100 million or a term of imprisonment of not less than 15 years, or both, upon conviction. The same applies if malicious public information is spread with the intention of causing economic sabotage or illegal dealing in or acquisition of land set aside for upstream activities.

If no fine or penalty is expressly stated for a specific contravention, the Act provides for a minimum general penalty of KES 5 million.

Setting the scene for growth

Given the rising interest in the petroleum sector, the Petroleum Act sets the stage for transformative growth, especially for the upstream sector.  From a preliminary analysis, it seems likely that the implementation of this legislation will streamline the functions of various agencies and facilitate sustainable use and management of the petroleum resources in Kenya.