London/Nairobi, July 8, 2014 Kenya’s oil and gas regulatory framework is proving a major obstacle to investment in the sector, and is in urgent need of a complete overhaul, say global risk and security management consultancy Edinburgh International in their latest East Africa Briefing. It is also preventing the development of the country’s five vacant blocks,with the Ministry of Energy unlikely to award new exploration rights until after the new Petroleum Bill is debated and approved by parliament.
The ongoing uncertainty follows recent fresh discoveries of high quality oil in the country’s Ngamia-2 well. Kenya’s lawmakers reacted by introducing new financial curbs on the petroleum sector, in a dramatic expansion of the existing 9th Schedule of the income tax law.
Considerable growth in the scale of farm-outs in the oil and gas sector,as new firms are lured by the announcement of substantial oil and gas discoveries, have prompted the new measures.It means that proceeds acquired through the sale or purchase of interests in the country’s petroleum blocks will now be included in the wider calculation of income taxes (the basic rate of which is 30 percent), if the net gains exceed 20 per cent of the total transaction value.
The amendment is yet to be implemented, but will almost certainly be regarded by many in the sector as a backwards lurch to double taxation standards. Major industry players directly opposed similar measures (to enact a 10percent levy on the sale of shares or assignments by foreign firms) by the Nairobi government in 2010. The perceived damage to investor relations meant these went largely unimplemented.
What remains a sticking point for investors is that levies on the sale of block interests – while regarded by the authorities as a tax on profits -fail to take into account the funds already invested in such ventures,with some in the industry talking of a reimbursement of past costs in such circumstances, rather than the proceeds of capital gains.
A modern and flexible regulatory system for the oil and gas industry would serve to clarify the roles and responsibilities of the industry players,and the fiscal regime within which they are to operate, Edinburgh International say.
Until this occurs, however, energy firms will have to contend with yet more uncertainty, and with it the prospect of further punitive amendments to Kenya’s petroleum tax regime.
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