KENYA: An Introduction to Projects & Energy

Background into Kenya’s Projects and Energy Sector

Kenya has recently made massive investments towards the growth of the projects and energy sectors in line with Kenya’s developmental agenda under Kenya’s Vision 2030 Blueprint. Since 2015, Kenya has invested approximately USD55.6 billion into infrastructural development. In its 2019/2020 budget, the Government of Kenya allocated USD0.7 billion for energy projects, USD0.75 billion for rail and ports and USD1.8 billion for roads.

The Government has used different forms of financing to support its highly ambitious and cost-intensive projects largely through debt financing and public-private partnership (PPP) initiatives with the aim of enhancing country investments.

Kenya has introduced a raft of legislative reforms to enhance development in these sectors. The main statutory instruments guiding the oil and gas, power and renewable sectors have been overhauled for consolidation and alignment with current industry standards and practices. The legislative framework is now mainly anchored within the Energy Act 2019, Petroleum Act 2019 and the Public-Private Partnerships Act, 2013.

Legal Framework of Projects and Energy in Kenya

1. Oil and Gas

The sector is mainly governed by the Constitution of Kenya, 2010 and the Petroleum Act. The Constitution recognizes natural resources as part of public land and the government as a trustee thereby requiring natural resources to be utilized for the benefit of the country. The Petroleum Act governs the entire oil and gas value chain. Its key provisions include:

a) Institutions –It establishes the Energy and Petroleum Regulatory Authority as the petroleum and energy sector’s regulator. It also establishes the National Upstream Petroleum Advisory Committee whose role is to advise the Cabinet Secretary on upstream activities such as negotiation, suspension, revocation and termination of petroleum agreements.

b) Licensing Regime – It provides the licensing regime for the petroleum value chain. It guides the issuance of permits and licenses for oil and gas activities.

c) Award of Petroleum Agreements– Kenya operates a production sharing contract regime. The Act outlines a transparent process for the award of petroleum agreements that includes competitive bidding processes and direct negotiations. To promote competition and ensure transparency, the Act requires that all blocks be awarded through a competitive bidding process. Direct negotiations are only permissible where there are no bids, none of the bidders have met the qualifications required or where there is insufficient data in relation to a block.

d) Ratification of Petroleum Agreements by Parliament– The Act requires ratification of all petroleum agreements by parliament.

e) Segmentation – It segments the petroleum industry, requiring all companies conducting upstream petroleum operations not to have any controlling interests in downstream activities.

f) Profit-Sharing Mechanisms – It introduces the R-Factor mechanism which is a profitability-based sharing mechanism. The old regime utilized a volume-based profit-sharing mechanism. The R-Factor mechanism determines the government’s share by calculating the ratio of cumulative revenue over cumulative cost. The government’s profit share rate enhances with an increase in production as the profit share rate of the contractor reduces. The share received by the state is distributed between the national government, county government and the local community.

g) Local Content – It introduces local content obligations on oil and gas contractors, which includes local sourcing of goods and services, local employment measures, training of local workforce and technology transfer.

2. Power and Renewables

Power and renewables are regulated under the Energy Act, 2019. The Act governs electrical energy, renewable energy, and downstream coal. It provides the guideline for the formulation of Kenya’s Energy Policy, the Integrated National Energy Plan and the licensing framework. Key provisions include:

a) Institutional Framework– It establishes a number of entities for the regulation of the energy sector including the industry regulator, Energy, and Petroleum Regulatory Authority, the Nuclear Power and Energy Agency, the Energy and Petroleum Tribunal, the Rural Electrification and Renewable Energy Corporation and the Renewable Energy Resource and Advisory Committee.

b) Universal Access to Energy– It obligates the national and county governments to facilitate universal access to energy and facilitates the acquisition of land for energy infrastructural development.

c) Renewable Energy Feed-in Tariff System– It seeks to promote the development of renewable energy resources allowing power producers to sell renewable energy generated electricity to an off-taker at a predetermined tariff for a given period of time.

d) Net metering system– It provides for net metering which allows small-scale power producers, producing less than 1 MW to feed excess electricity into the grid and get credits in return as a mechanism of promoting renewable energy.

3. Public-Private Partnerships

The Private-Public Partnerships Act, 2013 governs PPP arrangements. Key provisions include:

a) Institutional Framework– It establishes the PPP Committee whose role is to manage the PPP agreements. It also establishes the PPP unit under the National Treasury to act as a secretariat to the Committee.

b) PPP Process– PPPs are initiated by a public entity and the private partners are sourced competitively. Investment proposals can be single-sourced albeit, in limited circumstances where only one entity can undertake the project, the intellectual property cost is substantial, the project is urgent or in case of a specific circumstance prescribed by the Cabinet Secretary for National Treasury.

Key Projects

Oil and Gas

1. The Early Oil Pilot Scheme produces 2000 barrels of crude oil per day and seeks to grow to 60,000 to 80,000 barrels. 240,000 barrels have already been sold off. The Final Investment Decision is expected to complete this year.

2. National Petroleum Depots is a project of the National Oil Corporation of Kenya costing USD1.2 billion and implemented through a PPP.

3. Mombasa Petroleum Trading Hub is an 800,000 metric ton greenfield petroleum tank farm project expected to cost USD500 million.

4. Product Oil Pipeline for LAPSSET Corridor – is under PPP and expected to cost USD900 million.

Power and Renewables

1. 100 MW Baringo Silali-Paka Geothermal Project.

2. 140 MW Olkaria VI geothermal plant.

3. 612 km Eastern Electricity Highway Project – the transmission 2000 MW transportation capacity.

4. Raising the Masinga Dam Hydropower Project.

5. Seven Forks 40 MW Solar PV Project implemented through a PPP and estimated to cost USD57 million.

6. Karura 90 MW Hydropower Plant – a joint venture PPP project costing USD30 million.

7. Samburu 300 MW Photovoltaic Solar Power Generation costing USD506 million and implemented through a PPP.

Infrastructure

1. LAPSSET Corridor Project constituting road, railway, port infrastructure and estimated at USD5.5 billion implemented through PPP.

2. Nairobi Expressway is a PPP project with an estimated cost of USD600 million.

3. Dual Mombasa–Nairobi Highway estimated to cost USD2.35 billion and earmarked for implementation through a PPP.

Market Perception

The projects and energy sectors have been positioned for great developments as Kenya seeks to maintain its position as the preferred entry point to East and Central Africa with significant infrastructural plans towards railways, roads, and ports. Energy developments are also likely to grow as the country seeks to connect more Kenyans to the national grid.

Future insights of legal developments

About 40 new regulations will be formulated under the Petroleum Act for the upstream petroleum sector. The regulations will govern diverse aspects including terms and conditions for petroleum agreements, local content, drilling permits, abandonment and registration of contractors. Similarly, new regulations are expected for the rest of the value chain as well as for power and renewables.