Overview of Kenyan Regulatory Framework

Key legislation

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The distribution of rules under contracts and legislation in Kenya

The Petroleum (Exploration and Production) Act of 1986 is the fundamental law governing upstream activities in Kenya. It vests ownership of hydrocarbons in the hands of the Kenyan government and grants significant powers over the sector to the Minister of Energy.

Other important legislation defining the regulatory framwork of Kenya's oil and gas industry are:

• the Kenyan Constitution of 2010
• the Income Tax Act
• the Environmental Management and Coordination Act (EMCA) 1999 and
• the Energy Bill of which a new draft was to be sent to Parliament in November 2013.

Although this legislation is fundamental to the regulation of Kenya's oil and gas sector, most rules governing the sector are currently established within individual contracts (see table).

Key institutions

As of March 2013, key institutions regulating the oil and gas sector are the Ministry of Energy and Petroleum, the National Oil Corporation of Kenya (NOCK) and the National Fossil Fuels Advisory Committee (NAFFAC).

The Petroleum Act gives the Minister of Energy the authority to sign petroleum agreements on behalf of the government and requires him to make a model contract available to potential contractors.

Change of institutions and regulations

After the March 2013 general election, the new government reduced the number of ministries from 44 to 18 in accordance with the 2010 Constitution. According to a study by Sustainable Integrity, this may lead to an overhaul of the responsibilities of the key institutions regulating the sector.

As of November 2013, the government plans to ratify and implement a new energy policy which will also overhaul the Petroleum Act of 1986. A set of draft regulations were prepared and handed over to the government in the summer of 2013 by two consultants (US-based Hunton & Williams and British firm Challenge Energy) hired by the government and World Bank. The proposal would change the profit-sharing formula and introduce a capital gains tax. It would also propose tougher rules on transfer-pricing and introduce a witholding tax.

According to the government the review also covers licensing procedures, revenue sharing agreements between oil companies, central and county governments, and the local communities.

Other provisions that will be reviewed include:

• local content (developing local capacity to take up jobs in the oil companies and prioritizing tender awards to local communities in line with their capacity to deliver)
• environmental protection, and human rights issues
• the formulation of new legislation to provide for gas sharing terms, corporate social responsibility, terms of assignment and change of control and transfer of Production Sharing Contracts, and charge of royalties on revenues earned as a result of assignment or transfer of PSCs to third parties by licensees