Oil companies caught in middle of governments’ tug of war

The growing rifts between central and regional governments over oil wealth pose a dilemma for international energy companies. It is not always clear which authority has the right to issue contracts, especially during a time of constitutional or legislative flux.

“If the laws are there it’s possible to estimate and make investment decisions … you need institutions,” says Gerald Banaga-Baingi, head of the Ugandan ministry of energy and mineral development’s midstream petroleum unit.

Uganda’s petroleum discoveries were made before those in Kenya and Tanzania, so it has more experience in dealing with such matters.

One lesson is that without clarity on which bodies have the authority to award contracts, private companies are left in a bind.

By engaging regional authorities, they risk being blacklisted for central government contracts.

But if they fail to act right away in securing contracts for exploration blocks, they run the risk of being left behind by their peers. In some instances, decisions by local governments will take precedence and engagement with local communities is often cited as one of the most important tasks to ensure that oil and gas exploration and production activities are successful.

The experiences of Tullow Oil and Africa Oil in Kenya’s Turkana region show how quickly issues between local communities and energy companies can escalate.

The partners were forced to suspend operations in October. While the disruption lasted less than two weeks, it cost the companies time and money.

In a statement announcing the end of the suspension, Tullow said that it had signed a memorandum of understanding with Kenya’s energy ministry that “clearly lays out a plan for the Government of Kenya, county government, local communities in Northern Kenya and Tullow to work together inclusively over the long-term and to ensure that operations can continue without disruption in the future.” Tullow also repeated its commitment to local hiring.

If there is one thing that central and regional governments can agree on in this matter, it is that the onus falls on international investors to appease local communities.

In Kenya, local governments are allowed to levy taxes on oil and gas companies.

More informally, companies are often required to make payments to allow personnel to travel within a region and conduct other basic activities.

According to Davis Chirchir, Kenya’s minister for energy and petroleum, this should not be a problem as the companies stand to reap big rewards from their involvement, which can cover the informal payments.

“Fees spent on levies to the community can be recovered,” Mr Chirchir said. “The block owner has to quickly understand the needs of the local community.”

On the other hand, the size of these payments is uncertain and they tend to be demanded in the early exploration stages, before a company has made any profit from production.

Yet for all of the concerns, east Africa remains by and large stable. Other than Somalia, its countries tend to have the necessary infrastructure ito manage the public purse and robust economies that can absorb the additional income from oil and gas discoveries. That was not the case in some other African countries where oil was previously found, such as Chad.

The region’s governments are aware that their relationships with the private sector are symbiotic. They need private investment from abroad to fund the initial stages of development and bring in specialist expertise.

This balance, between creating an attractive environment for the private sector and benefiting the general population, is still being refined.

“There’s a temptation for governments to control it all and be the oil and gas company of note, not the companies that are doing all of the exploration, all of the production and trying to maximise on that,” says Russell Maynard, Ernst & Young’s specialist for East African oil and gas. “It’s out of the scope of most governments across the world to do that. The investment alone – just in exploration wells, the costs are massive and governments don’t have the resources to do that.”

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