9 October 2018

Kenya: What Kenya Can Do to Ensure Local People Benefit From Its Oil Industry

analysis

Six years ago, Kenya discovered commercially viable oil deposits in the Turkana region. The find is expected to boost economic growth as about 560 million barrels of oil are expected to be recovered from the South Lokichar Basin. Commercial oil production is expected in about three to four years.

But not all Kenyans are happy. Earlier this year, as road transfers of oil to Mombasa started under the 'early oil pilot scheme', the operations faced opposition from local communities in Turkana. As a historically underdeveloped part of Kenya, the find was expected to bring great benefits to the Turkana people. But they have largely been excluded and are demanding jobs, business opportunities, security and a share of oil proceeds.

Some Kenyans and businesses have gained employment or business contracts, but it's not enough. British oil exploration company, Tullow Oil, the first to discover oil in Kenya, has a history of discovering significant oil resources in East Africa. By the end of 2017, 30% of the company's supplier spend was with Kenyan businesses, down from 33% in 2016. The bulk goes to foreign companies. Though Tullow Oil does work with some Kenyan firms - like Kapese Transporters and Lopii Contractors - the company has slowed down on contracting local suppliers.

It is crucial that Kenya figures out how to encourage the participation of Kenyans in the oil sector through the use of local labour, goods and services. This was the topic at a recent forum hosted by the Extractives Baraza - an information centre for the extractives sector based at Strathmore University - in Nairobi.

Major constraints that prevent Kenyans - particularly communities around the oilfields - from benefiting from the oil sector include: a lack of specialised training or technical skills, a lack of access to credit which would increase the competitiveness of small-to-medium businesses, low quality of local goods and services and a lack of modern roads and highways to link the Turkana region with other parts of the country.

The challenges

In terms of human capital, Kenya ranks poorly in the development of future skills (101 out of 130 countries according to the World Economic Forum) and in the use of specialised skills at work (74 of 130).

Tullow Oil cited this burgeoning skills gap as the main reason for not including more locals in its workforce. This challenge is most severe for technical and vocational skills like welding, drilling, repair of heavy equipment and pipeline design- all in demand in the oil sector.

But human capital isn't the only problem. The low quality of locally manufactured or available goods and services, compared to their high costs, has allowed imported products to take over a large market share in Kenya. This could be attributed to a lack of understanding as to what the oil sector needs in comparison to what is locally available. Local manufacturers also use obsolete technology and there's a low level of innovation.

A final, big challenge is the lack of a robust legal framework to promote local participation. For instance, the Petroleum (Exploration and Production) Act 1986 includes an obligation for contractors to give preference to locally available goods and services, and that Kenyan nationals be prioritised in employment and training. But the Act doesn't provide for targets, outlining how much local representation is needed. It also doesn't provide for monitoring or reporting.

The way forward

There needs to be a clear strategy to ensure local participation in the oil sector.

To start with, the entire oil value chain must be assessed to identify which areas need to be focused on. This will reveal the size and capacity of local businesses, the capabilities of the local workforce, level of participation, and supplier landscape.

Skills need to be developed and there must be a requirement for investors to publicly certify that a local expert is not available before importing skills.

Local manufacturers must adopt modern technology and innovative solutions to produce products that align with the quality of goods and services needed in the sector.

Partnerships between the private sector, government (national and county) and academia are critical to bridge the knowledge gap. This will create awareness, ensure that training curricula and facilities are fit-for-purpose, and pool available skills and expertise.

Joint ventures between international companies and local companies are also critical for building links and transferring technology and skills.

Finally, the government must offer legal protection against unfair contractual arrangements, and guarantee recovery of delayed payments for local businesses. It should create a level playing field for local businesses to participate, for instance; by simplifying and fast-tracking business registration processes and ensuring equal access to project information for local businesses. Norway, for example, included a requirement for oil companies to split up supply contracts into smaller parts suitable for local companies.

James Ombaki Kirwa, a Legal Researcher at Strathmore Extractives Industry Centre, contributed to this article

Melba K. Wasunna, Strathmore University

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