Published On: Tue, Aug 25th, 2015

Petroleum contracts and taxation: Is East Africa prepared? – OPED

By:  Thuo Njoroge Daniel

Introduction

Gas and oil exploration and production companies in Africa face enormous challenges, ranging from gang extortion in local communities to government regulation and taxation.1 However, the major challenges faced by gas and oil companies that are linked to regulation and taxation include delay in passing important laws and legislation and having segmented and uncoordinated tax regimes.2 With the recent developments in the discovery of oil and gas deposits, East African countries need to be preparing for changing manpower requirements, fiscal policies and new regulations to exploit the benefits brought about by oil and gas production.

Petroleum Contracts in East Africa

Governments in East Africa have been at the forefront in awards of contracts for the commercial exploitation of the discovered oil and gas deposits. The government of Uganda successfully completed the production sharing agreement (PSA) in 2012. Further, the government oversaw the receipt of 14 pipeline bids for the 352 kilometres reversible flow heated oil product pipeline between Kampala and Eldoret in Kenya

In Kenya, the first commercial oil was found in 2013. This followed acceptance of bids to build the 352 km pipeline.5 The government of Kenya gazetted 8 new deep water oil blocks in 2012. The notable developments include the spudding of the first offshore well by Apache in 2012 with 52 million cubic feet of gas discovered.

In Tanzania, the exploration of oil and gas started in 2010. The government of Tanzania has issued various contracts on exploration and scoping of LNG and a crude oil export terminal. Tanzanian Petroleum Development Corporation (TPDC) has entered into agreements with various exploration and production companies through competitive bidding. The latest round of competitive licensing was in May 2014 which resulted in the government licensing  offshore and onshore blocks.

Taxation and Regulation in the Petroleum Sector

Commercial production of oil and gas is yet to start in the three East African countries, though it is slated in the near future. Moreover, there has been marked improvements in the oil and gas policy making and legislation.7 Laws and fiscal policy governing the oil and gas sector in the region are at infancy. The biggest challenges have been regulatory compliance, corruption and tax disputes. In Uganda, the various contractual agreements in the oil and gas sector have been marred with allegations of corruption, disputes on taxation, delays in infrastructure development and delays in passing laws to guide the oil and gas sector.

In Kenya, the National Oil Company of Kenya (NOCK) is the negotiating arm of the government in oil and gas contracts. The regulations in place require the oil and gas exploration and production companies to surrender 25% of their offshore and onshore blocks to the government after three years. Taxation issues (income tax, Value Added Tax (VAT), royalties, and administrative requirements) in the oil and gas sector are governed by the Ninth Schedule of the Income Tax Act.9 Taxation and regulation of the oil and gas sector faces challenges due to the fragmented rules contained in the various tax legislations and the production sharing contracts (PSCs).

There is also uncertainty in the regulatory and fiscal policies of Tanzania relating to the oil and gas sector. The country is in the process of drafting new regulations that will govern administration and revenue sharing issues in the sector. However, the drafting of the new regulatory framework is muted due to the immense negotiations required by the government. The government has indicated that massive changes in the energy policy are expected in 2015 and 2016. This has brought uncertainty to the future of regulation and taxation in the petroleum sector.

Lessons that can be learnt from Other Oil Producing Economies

One country that the East African nations can learn from is Indonesia. Indonesia had a model PSC system in the 1970s where the role of government was only in formulation of fiscal policy and regulation. This model emphasizes energies and skills of extracting profits through managing politics and bureaucratic control over oil extraction on ideological grounds, such as sovereignty and nationalism.

Trinidad and Tobago can also provide East Africa with lessons on managing oil and gas resources. PSCs introduced in 1974 had the government playing the role of not just a regulator but also a partner.11 However, the government was passive in contrast with the more active involvement in the marketing functions adopted by the governments in the East African region. Moreover, Fiscal Incentives Act enacted in 1979 also helped in attracting additional capital investment to the oil and gas sector by providing total or partial relief from corporate tax and customs duty on imported plant, equipment and raw materials from countries outside of the Caribbean.

Norway is a near-perfect model the east African countries can use to assist in developing their oil and gas fiscal and regulation policies. Underscoring Norway’s success with natural resource development is the presence of quality institutions and effective fiscal policies.13 Norway reinforces the assertion that natural resources are transformed into assets by high-quality institutions to promote growth. The Norwegian policy calls for strong governmental participation and control. This contrasts with what prevails in many other oil producing countries. The East African Countries have systems where the government is deeply involved through the PSCs. But what the East African region may lack now are strong institutions devoid of partisan politics.

Implications

To reap the benefits of the opportunities arising from the extraction of oil and gas, countries in East Africa need to have strong institutions to lead regulation and fiscal issues. The presence of natural resources in a dysfunctional institutional environment precipitates predation, rent-seeking, destructive and unproductive activities that result in externalities

that impact negatively on the entire economy.15 Further, partisan politics in the oil and gas sector should be categorically rejected. Additionally, authorities in the East African region should regularly reassess their relationships with contractors and partners to identify ways in which relationships can be improved within the context of the original understandings and agreements.

The Author Profile 

Mr Thuo Njoroge Daniel is an Economic and Policy Analysis lecturer at the School of Business, Karatina University. He holds a Masters in Economic Policy and Management from Makerere University, Uganda. Thuo Njoroge has been into private practice which has seen him teach and consult in public sector management, advice on issues of Public policy, His Research interest Include Economics around oil and Gas, as well as policy issues affecting Oil and Gas industry in Emerging and Developing Economies.

Acknowledgement- Previously published as part of the OGEL 4 (2015) International Taxation in the Energy Sector special – “Petroleum Contracts and Taxation: is East Africa Prepared?” www.ogel.org/article.asp?key=3559 

source- Oil, Gas & Energy Law (OGEL, ISSN 1875-418X) is a peer-reviewed academic journal covering all aspects of law pertaining to oil, gas, and energy in general. Website: www.ogel.org.

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