Maximise local content in oil and gas sector

By Kiraitu Murungi

There is a growing body of literature, under the broad theory of ‘Africa’s oil curse’ that associates oil with poverty. Andy Stere, in his book, Who Won the Oil Wars, points out that oil has been the cause of some of the World’s bloodiest conflicts. He says oil wealth doesn’t bring any tangible benefits to the population as a whole and that it creates a stark divide between the rich and the poor, which could lead to revolution or civil war.

He points that the richest country in Africa, Democratic Republic of Congo has been plagued by a tragic history of abject poverty, brutal exploitation, political conflicts and civil wars despite its vast mineral resources.

International Oil Companies (IOCs) have been singled out as the guilty party in this curse. They have been targeted by human rights groups, environmentalists, activists  as the modern global robber barons and agents of imperialism and exploitation, who are perpetuating Africa’s historical legacy of looting dating from the slave trade, colonial land grabs and forced labour. 

We need a deeper analysis of the nexus between oil and poverty, which goes beyond simplistic oil curse slogans, and theories of primitive colonial accumulation.

Our political leaders have to make deliberate policies, laws and strategic decisions in the upstream oil and gas industry which will compel IOCs to open space for Kenyan entrepreneurs to invest, provide services, create wealth thereby uplift ordinary Kenyans from poverty. This process is what is now commonly known as Local Content Policy (LCP) in the upstream Petroleum sector.

Through LCPs, host governments make policies and laws, which require IOCs to maximize the share of local participation in ownership, and in the supply of goods and services across the entire oil and gas chain. In so doing, the government develops a competitive base for local business community to invest, supply goods, generate income and create employment opportunities.

Exclusive rights

Kenya’s upstream oil and gas sector is currently governed under the Petroleum (Exploration and Production) Act (Cap 308) and the regulations made there-under. This 1986 Act, provides the framework under which the ministry of Energy negotiates Production Sharing Contracts (PSCs) with oil exploration companies. The legislation is hopelessly dated and grossly inadequate to deal with current challenges in the global oil and gas economy.

It does not adequately deal with such critical issues as revenue sharing chain, transparency and local content programs.

Fortunately for Kenyans, the ministry of Energy is reviewing this Act to bring it into conformity with the values and norms of the Constitution promulgated in 2010.

Experiences from oil producing countries such as Angola, Nigeria and Brazil among others, shows that there is an urgent need for Kenya to enact a bold, detailed and comprehensive local content legislation, so as to open up Kenya’s upstream oil sector.  

The World Bank has published an excellent report on Local Content Policies in several countries including Angola, Nigeria and Brazil entitled, ‘Local Content in the Oil and Gas Sector; Case Studies’.

In Angola, Local Content objectives are achieved both through legislation and the PSCs.  Decree No. 20 of 1982 requires any company operating in Angolan Petroleum sector to employ Angolans and to provide them with necessary technical and professional training and it requires them to contribute 15 cents for every dollar per barrel produced to a training fund administered by the Ministry of Petroleum.

Order 127/2003 gives Angolan private companies (Companies in which Angola citizens own 51 per cent of the capital) exclusive rights in sourcing for goods and services that requires limited capital and know-how. All contractors and sub-contractors in the oil sector are required to publicly tender for provision of goods and services.

For many years, Nigerian upstream oil industry remained the exclusive territory of International Oil Companies (IOCs) in absence of a statutory framework on local content. However, since April 2010, the Nigerian Oil and Gas Content Development Act, guarantees Nigerians participation in all aspects of the oil and gas industry.

Concession contracts

The Act requires operators to have a program of incentives to promote transfer of technology and encourages formation of joint ventures between Nigerian and foreign companies.

Brazil has the most successful Local Content program in the emerging oil producing economies. Local Content Policy is not expressly established in Brazil’s Petroleum Law (1997).

It is contained in concession contracts and rules for reporting and monitoring local content made by Brazil’s National Agency for Oil, Gas and Bio-fuels (ANP), which has established a local content certification system that applies to all concession agreements.

In 2003, the Government of Brazil launched a massive multi-stakeholder program, Mobilization Programme for Oil and Gas National Industry, (PROMINP) to maximise local content in the implementation of oil and gas projects.

The oil poverty paradox in Kenya will not be fully resolved by the government redistribution of oil revenues from royalties, concession fees and the share of profit oil, or the local community projects sponsored by the IOCs Corporate Social Responsibility Programs.

The Government has to embark on an ambitious local content program as we embark on the Oil and Gas production phase; develop local capacity and empower Kenyan business community to create forward and backward linkages between the upstream petroleum sector and other sectors of the economy.

For instance, Tullow Oil Kenya Ltd and other Oil exploration companies should be required by law to sell some of their shares to Kenyans through the Nairobi Securities Exchange.

Issues of retroactivity and sanctity of contracts will be raised but Article 7 of schedule 6 of the constitution expressly provides that all laws in force before the effective date continues in force and shall be construed with the alterations, adaptations, qualifications and exceptions necessary to bring it into conformity with the constitution.

The writer is  an advocate of the High Court of Kenya and a former minister for Energy in Kenya. He is currently the Senator for Meru County and Director of Humphreys Ltd, an Energy, oil and Gas Consulting firm.