Doubts cast on region’s ability to collect taxes from oil sector

Analysts have questioned East African governments’ ability to evaluate and collect tax revenue from companies exploring and producing oil and gas.

At a conference on the oil and gas boom in East Africa held at the Oxfam America and Brookings Institution last week, the experts said the region lacks institutional ability to administer such taxes.

The concerns come at a time when Tanzania and Uganda have discovered commercially viable deposits of natural gas and oil respectively while Kenya’s oil discovery so far has reached what industry players term “the minimum threshold for development”.

“Kenya must have strong institutions that will enforce the production sharing contracts. That will be really essential,” said John Omiti of the Kenya Institute for Public Policy Research and Analysis (Kippra).

Last week, while addressing the participants of the third International Association of Prosecutors regional conference in Zambia, director of public prosecutions Keriako Tobiko called for tough action to deal with tax evasion among multinationals operating in the country.

British oil explorer Tullow Plc estimates that there are about one billion barrels of oil in the Lokichar basin where the company is licensed to conduct exploration.

Another company, Taipan Resources, that is also licensed to explore oil in Kenya estimates that the Mandera basin contains 1.6 billion barrels of oil.

These estimates have positioned the country as a potential oil producer, creating the need to review the production sharing contracts to ensure the government collects maximum revenue from the natural resource.

The discovery of oil in Kenya in March 2012 has generated increased interest for the local exploration blocks from international companies.

A report released by Evaluate Energy of Britain in January this year indicated that Kenya’s oil exploration blocks will be among the most attractive to exploration companies during this year’s round of licensing.

This situation puts the Kenya Revenue Authority in the spotlight over handling of contractual arrangements in the oil and gas sector.

“Kenya’s oil find will change the face of development in Kenya. The Kenya Revenue Authority is one of the more outstanding institutions but will certainly be challenged by the more than 40 contractual arrangements in the oil sector in Kenya,” said Charles Wanguhu of the Kenya Civil Society Platform on Oil and Gas.

The Ministry of Energy and Petroleum has embarked on the process of reviewing the current revenue sharing model that is based on profits made on a daily rate of oil production in favour of a more progressive model.

According to Energy cabinet secretary Davis Chirchir, the new model will see the government claim revenue based on the ratio of cumulative revenues and expenditures.

The shift, Mr Chirchir says, will ensure that revenue sharing takes into account the cost of production and fluctuating prices of petroleum so that the share of government increases with that of the contractor.

A visiting team of experts from the International Monetary Fund that was in the country last year to provide technical advice on the current production sharing contracts said the deals meet international standards with room for improvement to earn more revenue to enable the government to earn more.