Kenya discovered oil six years after Uganda, its partner in the East African Community (EAC), found oil. However, Kenya may become the community’s first oil producer in 2016-2017 as envisaged by Tullow Oil, the British oil company that struck oil onshore in Kenya’s South Lockichar Basin.

Tullow and its partner Australia’s African Oil Corp. (AOC) have discovered an estimated 600 MMbbl of oil in the Kenyan basin since announcing the country’s first crude oil find in March 2012. Uganda first discovered oil in 2006.

The group has “continued to make progress with its exploration and appraisal (E&A) campaign in northern Kenya with discoveries on nine out of 11 wells in the South Lockichar Basin,” Tullow said in a half yearly report for 2014 on its website. “As a result Tullow has estimated Pmean gross discovered resources in this one Northern Kenya basin to be over 600 million barrels of oil, with currently identified potential to increase that to one billion barrels of oil.”

The journey to first oil production also includes setting up of a new fiscal and regulatory regime for the industry and constructing a pipeline to export the oil.

While the petroleum bill that will govern the oil and gas sector is still being debated, Kenya’s Parliament has passed Finance Bill 2014, which has been assented by President Uhuru Kenyatta, according to a report by Kenya-Oil & Gas. The report said the bill offers a mixed outlook for the oil and gas industry, stating “Despite the comparatively favorable taxation structure currently offered, we see room for a tightening of fiscal terms in the coming years.”

Most of the legislation in the finance bill, approved by the Parliament in late August 2014, applicable to the oil and gas industry will be effective Jan. 1, 2015.

For the oil and gas industry, three amendments in the bill are particularly significant:

  • Capital gains tax. The capital gains tax, set at 5% for most capital transactions, has been raised to 30% and 37.5% for oil- and gas-related transactions. The tax was dropped by Kenya in the mid-1980s to attract foreign and local investments;
  • Withholding tax. Withholding taxes, previously at 5% to 20%, have been abolished and
  • Farm-out transactions. The procedure for farming out interests has been abolished, both to facilitate the process and to make it more effective, according to the report.

“The amendments in regard of the oil and gas industry are relatively minor, but offer a somewhat mixed picture,” said Kenya-Oil & Gas. But it says the capital gains tax is less positive, adding that targeting the industry for a substantially higher level of taxation may be a cause for concern.

Africa Oil in a statement said the new finance bill would impact on the oil and gas sector both positively and negatively. The reintroduction of the capital gains tax for the first time since 1985 has a potential negative tax impact, the company added.

“Africa Oil, alongside the industry representative body [the Kenyan Oil & Gas Association], are working closely with all levels of the Kenyan government to discuss the potential negative impact such a tax policy will have on the development of the still early stage oil exploration industry,” Africa Oil President and CEO Keith C. Hill said in a Sept. 25, 2014, statement. “This will include the potential barriers to entry for new investors, erosion of present investor confidence and potential delays it will cause to exploration and development activity.”

Tullow, Africa Oil’s partner, said earlier this year that Kenya considered the start of oil production and exports a “national priority.”

Kenya’s Petroleum Commissioner Martin Heya said initial data from northern Kenya show that more oil will be found with additional drilling. For example, Tullow said three new sub-basins will be tested in the second half of 2014. Kodos-1 will test in the Central Kerio basin; Epir-1 will test the North Kerio Basin; and Engomo-1 will test the North Turkana Basin while five further sub-basins will be tested by year-end 2015.

Kenya has licensed 41 out of its 46 oil and gas blocks to 21 companies including Total, BG Group, ENI, Anadarko Petroleum and Tullow, Heya said. These companies and others are working in four exploration basins in Kenya—Lamu, Mandera, Anza and Tertiary Rift. But Tullow has declared commercial viability in respect of its oil finds and anticipates exports by early as 2016 or 2017.

Tullow and Africa Oil estimate that their blocks possess between 600 million and 1 billion barrels of oil and could produce between 100,000 and 120,000 barrels per day of crude oil starting 2017 if the government approves their field development plan by fourth-quarter 2015, Ecobank said.

A recent oil discovery offshore Kenya is also likely to encourage international oil companies to explore Kenya’s offshore potential. The Sunbird-1 well in area L10A, discovered by U.K.’s BG Group and Australian independent Pan Continental Oil & Gas, is the first column to be discovered offshore East Africa.

Oil Exports

Before Kenya can begin oil exports, further development is needed. The most obvious is that there is no means of exporting oil from the inland basin. Crude oil must be exported through an export pipeline linking the oil fields in the northwestern part of the country to the Lamu port, already under construction, on Kenya’s coast.

Currently the most promising export route runs about 850 km (528 miles) from South Lockichar to Lamu. It is estimated to cost $4 billion.

Kenya’s Ministry of Energy and Petroleum predicts that the Turkana-Lamu oil pipeline will be completed by November 2016. The project was fast-tracked at the request of the cabinet, Kenya’s Daily Nation reported.

Tullow has said production could start as early as 2016, but the oil would have to be trucked out by road or rail at that stage.

“We are expecting to submit our field development plans to the government in the fourth quarter of 2015,” Robin Sutherland, Tullow’s exploration manager for sub-Saharan Africa, said during an oil and gas conference in Nairobi, Kenya.

Petroleum Bill

However, establishing the new regulatory and legislative framework for the petroleum sector has delayed the startup of oil projects. The main law currently governing the country’s upstream sector is the Petroleum (Exploration & Production) Act, last revised in 2012. The Kenyan government expects Parliament to pass the petroleum bill by November 2014.

The bill will provide for the creation of a detailed national energy policy (NEP). The NEP seeks to improve the state’s flexibility regarding revenue terms in the PSCs and to widen the tax net over the sector. It further provides for an open tendering process for new license areas to encourage greater transparency and accountability.

The bill also proposes that petroleum production be managed under the Energy Regulatory Authority; it stipulates how the revenues from future oil and gas extraction should be equitably shared. According to the draft law, the revenues shall be shared: national government, 75%; county government, 20%; and local community where the oil is explored, 5%.

There is a proposal in the bill to establish the Kenya National Sovereign Wealth Fund. The fund would build a portfolio of investment in Kenya and abroad, and it will consist of a stabilization fund, a future generation fund and an infrastructure and development fund.

The new petroleum bill is expected to have new rules that will state a clear delineation of roles in policymaking for the upstream, midstream and downstream sectors to avert any overlaps and to reduce inefficiency.

The bill also covers local content to avail opportunities for provision of services and goods by locals in the exploitation of natural resources and infrastructure development and a National Energy Institute to undertake training, research, development and enhance capacity building among other clauses.