HOW WILL THE REVENUE BE SPLIT AND WHAT DOES THIS MEAN?
Turkana is Kenya’s first oilfield. It was discovered in 2012 by the Anglo-Irish firm Tullow Oil which has aroused great interest in Kenya. Kenya introduced new rules to share revenues from natural resources as part of a broader move to strengthen the county governments.
The fiscal regime is challenging since the contracts for the two areas in the Turkana project, 10BB and 13T, have not been published. We modelled the fiscal regime on the contract for 10BA, which was licensed in the same round and for which headline terms are available and, where appropriate, public comments by officials.
The President of Kenya, Uhuru Kenyatta on August 1st 2019 said the following:
“We (Kenya) are now an oil exporter. Our first deal was concluded this afternoon with 200,000 barrels at a price of USD 12 million.”
The USD 12 million is good income for the economy for various reasons including forex flows, jobs, GDP contributions etc but it would be good to understand how much would actually flow to the country and the split among various parties. It would be good to know how much would flow to the National Government, Counties and to the Community.
To answer these questions, one needs to have a view on assumptions around the project’s economics and on the fiscal regime. Below we highlight the assumptions we used to come up with approximate values of how the revenue generated would be shared.
So how would the USD 12 Million be distributed?
- Cost recovery: Tullow oil has incurred development costs, exploration costs and recurrently incurring operating costs. Before sharing, the company is allowed to use 60% of the oil revenue to recover the costs incurred until full recovery. In our case, since it’s the initial sale the company is required to use 60% of the USD 12 Million to recover the costs, that is, USD 7,200,000. This results to a profit oil of USD 4,800,000.
- Government and the company profit oil sharing:
- The government receives 60% of the profit oil, that is, USD 2,880,000
- The company receives 40% of the profit oil, that is, USD 1,920,000
- National Government, County Government and Community Share
- National government receives 75% of total government share (USD 2,880,000), that is, USD 2,160,000
- Turkana county receives 20% of total government share (USD 2,880,000), that is, USD 576,000
- Turkana community receives 5% of total government share (USD 2,880,000), that is, USD 144,000
Summary of the Oil Export Proceeds
What does this mean?
The sale of oil does not mean actual income to the Government. One has to look at the production sharing contracts to arrive at how much the Country would make from a sale and how much the company ends up making. Unfortunately, in Kenya we do not have the details of the production sharing contracts and as such cannot tell how much cash SHOULD go to the National Government, the Counties or the Community. This is quite unfortunate because it then means numbers cannot be verified!
However, based on publicly available data one can see that there’s a long way to go before Oil can become a key contributor to the economy. To put the numbers in perspective, the just announced 2019/2020 budget is at USD 28 Billion. The amount earned from the initial oil sale contributes to just 0.043% of this. Further if you look at the Turkana County Allocation for the budget 2019/2020 of USD 111,778,110, the Turkana County earnings from this sale would only contribute to 0.515%. Lastly if you look at the community in Turkana (in this case understood to mean the inhabitants of the county), there is a population of 1,341,972 as at 2016 as per County Allocation of Revenue Bill 2019. If the amount was to be shared among each of them, the per head amount would be USD 0.107.
Early oil is definitely a good start in proving viability of the Kenya’s Oil, however a lot still needs to be done to ensure Kenya’s Oil play the role it should in the Country’s growth!