15 April 2017

Kenya: Oil Revenue to Go Directly to Treasury

Photo: Joseph Kariuki/The Star
The Ngamia 1 oil rig in Turkana where Tullow Oil is prospecting for oil with initial signs of huge deposits.

Kenya's oil dollars from its pilot scheme, which starts in the next two months, will go directly to the Treasury accounts, government officials have said.This comes even as the Treasury plans to establish and operationalise a sovereign wealth fund.

Starting June, Kenya is expected to join 44 other countries across the world as a net exporter of crude oil, with Tullow Oil initially expected to produce 2,000 barrels of crude oil per day for export, peaking at 80,000 barrels once a pipeline is up and running.

The country is banking on a possible $1.55 billion annual income from oil.

Kenya's total oil reserves are estimated at 750 million barrels, commercially viable at the current price of $53.11 a barrel.

Petroleum Principal Secretary Andrew Kamau told The EastAfrican that they expect the resultant funds to go directly to the exchequer for disbursement.

"As it is, we will only receive the funds from our agent Tullow after they deduct their operational expenses. This means that it will be Treasury, through the Central Bank, that will receive this money and decide how to spend them," said Mr Kamau, adding that when the country starts full production, then the funds could go to the proposed sovereign wealth fund.

Kenya has for the past three years been considering setting up a sovereign wealth fund to invest revenues from future output of oil that Tullow Oil and Africa Oil expect to start pumping in June.

The fund was proposed in the report of the Presidential Taskforce on Parastatal Reforms that was submitted to President Uhuru Kenyatta in October 2013.

However, Treasury, which is the key sponsor of the Bill, has not pushed ahead with it, as it requires an Act of parliament to operationalise it.

It has been argued that the fund would shield the economy from cyclical changes in commodity prices, be used to invest in infrastructure and also act as a savings platform for the country.

"It's only Treasury that can give us the way forward with the Bill as they are the key sponsor," Mr Kamau told The EastAfrican, while responding to queries about what stage the formulation of the Bill is currently at. "If by the time we start the full field development the Bill isn't operational, then we will have to receive the funds through CBK."

In December, the country shipped samples of the crude from the Turkana oil wells to Europe and a number of potential buyers have expressed interest based on its quality, as it was low in sulphur, easier to refine and had passed the environmental test.

Analysts have constantly lobbied the government against actualising the wealth fund, instead arguing that it would be easier to track the oil money spending through the consolidated fund.

It has also been marked as a conduit for global investment banks, consultants and lawyers to make money from it at the expense of the countries it is supposed to help.

Deepak Dave, chief executive officer of Riverside Capital, an Africa-focused debt and commodity advisory firm, said it would not be advisable for the country to have the sovereign wealth fund as they have a very poor record of investment returns and management across the continent, a pitfall the country should avoid at all costs.

"Some countries deliberately use the parliamentary controlled consolidated fund to track what's going on. Other countries share the wealth through public dividends, tax rebates, while others only use the fund for operational purposes instead of on investments," said Mr Dave.

When the country starts its full field oil development stage, it will have several options to sell its oil, including setting up a parastatal and the government decreeing a minimum dividend to be paid to it in return for the parastatal owning the trading rights to all extracted oil.

The country could also allow the extractor, Tullow, to simply remit a fixed payment per barrel that is sold to traders.

"In this case, the payment is often held offshore and only slowly remitted home to prevent currency disruption. However, all these options are fraught with risks of mismanagement, fraud or corruption," said Mr Dave, adding that the only barrier to these vices is a robust institutional framework for managing public assets, strong judicial rights and a powerful political will to prevent problems.

The third option that Kenya could consider is having Tullow pay a lumpsum based on remaining reserves certified by experienced specialists and set at intervals of about seven years.

However, Mr Kamau said that with the early stage development in June, Tullow will get a letter of credit from Kenya, sell the oil to traders and then channel the funds, less costs, to the exchequer.

Traditionally, it is expected that the traders will pay Tullow through an offshore special purpose vehicle, from where funds will be remitted in local currency to Kenya.

This drip-feed is done to prevent sudden currency fluctuations, saving the country from foreign-exchange losses.

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