Kenya seeks to make the most of its resources

Energy, petroleum and mining are key sectors in Kenya’s economy, with significant prospects for growth. According to the Ministry of Energy and Natural Resources, as of 2014, electricity provided 9% of overall energy requirements in Kenya, with petroleum and renewable energy providing 22% and 69%, respectively. Only one in five households in East Africa are connected to the electricity grid in the region. With about 65% of Kenya’s installed capacity of 2150 MW made up of renewable energy sources, Kenya is reportedly the second-largest renewable energy investor in Africa, after South Africa, having spent some $1.3bn on multiple power projects in 2014.

Exploration Effort

Petroleum exploration is currently ongoing both on-shore and off-shore in the country’s four major sedimentary basins. As of January 2015, Kenya had a total of 46 gazetted exploration blocks, of which 41 are licensed to oil exploration and production companies. There is also the possibility that indigenous natural gas may be discovered in commercial quantities.

Kenya’s existing mining legislation dates back to 1940. Recent discoveries and updated geological data point to potentially significant reserves of gold (estimated at 1.65m tonnes in Western Kenya, Turkana and upper Eastern regions), coal (estimated 400m tonnes in Eastern Kenya) and rare earths (niobium deposits have an estimated value of $62.4bn along the Kenya coast), which represent substantial opportunities for investors.

Unfortunately, despite the appeal of these resources, potential investors in energy, petroleum and mining sectors must overcome the hurdles presented by overlapping jurisdictions of national and county governments, contradictory policy frameworks, outdated legislation, and uncoordinated, cross-cutting legislation and regulations. However, recent proposed changes provide hope for a much improved investment climate as Kenya takes strides to re-evaluate sector policies and legislative frameworks to promote sustainable investment and development.

Energy

Kenya’s government has set ambitious targets for growing the country’s energy output from its current 2150 MW to 25,000 MW by 2030, through a mix of coal, natural gas, nuclear, and geothermal energy resources. The national government is responsible for public investment, developing a National Energy Policy, and protection of the environment and national resources, while county governments have oversight of planning, development, regulation, electricity and gas reticulation in each of Kenya’s 47 counties.

In January 2015 the Ministry of Energy and Petroleum released an updated National Energy and Petroleum Policy featuring a proposed new regulatory agency and coordination structure for upstream petroleum production, coal, renewable energy and framework legislation on natural resources revenue management, which will include the creation of a sovereign wealth fund.

In the short term a National Upstream Petroleum Advisory Committee, a National Coal Advisory Committee and an inter-ministerial Renewable Energy Resources Advisory Committee will be established to regulate upstream petroleum exploration and development, coal exploration and development, and renewable energy resources, respectively. In addition, the Rural Electrification Authority is to be transformed into a new Rural Electrification and Renewable Energy Corporation as the lead agency for developing renewable energy resources excluding geothermal and large hydro-electric plants.

The Draft National Energy and Petroleum Policy notes the need to review Kenya’s existing feed-in-tariff policy and adjust them upwards to enable sustainable returns from various projects and emerging technologies.

New Bills

Alongside the 2015 draft policy, the Energy Bill 2015 and the Petroleum (Exploration and Production) Bill 2015 were published. Both bills are intended to align the current regulatory framework in the energy sector to the devolved structure of government outlined in the constitution, and implement the recommendations contained in the 2015 draft policy. If enacted, the Energy Bill will repeal the Energy Act and the Geothermal Resources Act and will consolidate the regulation of electricity and renewable energy under one framework, while the Petroleum (Exploration and Production) Bill 2015 will update the regulatory framework established under the Petroleum (Exploration and Production) Act, establishing a new Upstream Petroleum Regulatory Authority and providing the terms of a new production-sharing contract (PSC) model.

Currently, state-owned corporations dominate generation, transmission and distribution of electricity, with modest participation in power generation activities by independent power producers. State owned-corporations also oversee exploitation, appraisal, development and management of geothermal resources. The Energy Bill 2015 intends to unbundle electricity transmission and distribution while liberalising licensing of electricity generation, transmission and distribution.

Liberalised Licensing

National and county governments shall have distinct licensing functions, with the national government responsible for licensing petroleum and its derivatives ( including in the areas of importation, refining, exportation, transportation, storage and bulk sales); coal (exploration, production, importation, refining, exportation, transportation, storage and bulk sales); renewable energy (production, conversion, distribution, supply, marketing and use); electrical energy (generation, importation, exportation, transmission, distribution, retail and use). County governments will be responsible for regulating and licensing retail petroleum service stations; gas reticulation systems; coal products for domestic use; biomass and charcoal production, transportation and distribution; as well as biogas systems.

Both levels of government have distinct roles concerning operation and development of energy resources. National and county governments have overlapping roles with regard to providing land and rights of way for energy infrastructure. County governments are responsible for physical planning related to energy resource areas such as dams, solar and wind farms, and municipal waste dumpsites. The national government maintains responsibility for exploration, production, importation, exportation and refining or processing of coal, geothermal and petroleum resources.

The national government will also be responsible for protecting energy infrastructure, including pipelines, storage depots, refineries, power plants, electricity supply lines and sub-stations. Investors will therefore need to engage both levels of government when pursuing public-private partnerships in the energy sector.

Petroleum

Property in the underlying petroleum resources existing in Kenya is vested in the government of Kenya in trust for the people of Kenya. The Petroleum (Exploration and Production) Bill 2015 proposes a new PSC model to be forwarded by the Cabinet secretary in charge of energy to Parliament for ratification. The new PSC has not yet been published for stakeholder comment. The Upstream Petroleum Regulatory Authority shall, among other activities, coordinate development of upstream petroleum infrastructure and capacity building, advise the Cabinet secretary on regulations pertaining to the sector, verify petroleum production to determine estimated royalty and profit amounts due to the national government, and verify recoverable costs of oil and gas due under petroleum agreements.

The Energy Bill 2015 and the Petroleum ( Exploration and Production) Bill 2015 contain identical provisions mandating that participants in the energy sector to comply with local content requirements in all operations, including a provision for participants to submit annual and long-term local content plans with information on employment and training, research and development, legal services, financial services and insurance services to the Energy Regulatory Authority and the Upstream Petroleum Regulatory Authority, respectively. First consideration should be given to services provided in the county and to goods manufactured in Kenya that meet specifications outlined by the Kenya Bureau of Standards.

Mining

Kenya was ranked as one of the least attractive jurisdictions for mining investment in 2014 by the 2014 Fraser Institute Survey, which highlighted several investor concerns. These include an outdated legislative framework, a lack of transparency surrounding the transition from the existing regime to the proposed one, and uncertainty regarding the stability of licence tenures and the ability to convert prospecting licences into mining licences, should the need arise.

Overlaps

The national government’s regulatory authority extends to licensing, setting of royalties, taxation and development of mining policy. County government authority includes setting property taxes and rates, and enforcement of environmental policies and standards. The 2015 Draft Mining Policy has not been harmonised with the 2015 Draft Energy Policy or the existing National Land Policy 2007, leading to overlapping provisions with regard to licensing and approvals. County governments have periodically attempted to impose special levies on mining operations in their territories as part of their mandate on setting land rates.

Investors under the current regime suffer from a lack of coordination between national government regulators and local authorities and a bewildering array of existing and proposed legislation governing access, enforcement of standards, and permits, including the Environmental Management and Coordination Act, the Water Act, the Forests Act, the Wildlife Conservation and Management Act, the Community Land Bill 2014 and the Natural Resources Benefit Sharing Bill 2014.

New Bill

The Mining Bill 2015 has streamlined a number of the above issues through the creation of new institutional bodies and streamlining of licensing and compliance requirements. The bill creates a number of new institutions: the Mineral Rights Board, whose mandate includes reviewing licence applications and recommending them for approval to the Cabinet secretary; Directorates of Mining and Geology, with mandates for monitoring compliance and enforcement of mining regulations, and managing geological surveys and cadastres, respectively, and the National Mining Corporation, which will undertake government investments in mining operations.

The bill also creates separate licensing regimes for small-scale and large-scale mining operations with streamlined application processes and approval timeframes. Small-scale operations are defined as those covering less than 25,000 cu metres and are subject to relatively simple application procedures with regard to granting reconnaissance, prospecting or mining permits. Large-scale operations cover areas over 25,000 cu metres and are subject to more stringent licence application requirements for reconnaissance, prospecting, retention and mining licences.

Reconnaissance licences are to be issued for two-year, non-renewable terms, while prospecting licences are for three-year renewable terms, each within 90 days of submission. Mining licences are to be issued for 25 years, renewable for a further 15 years and are to be approved within 120 days of submission. All types of licence applications require submission of a local employment plan and a plan for local procurement of goods and services. In addition, the bill make it mandatory for companies granted a mining licence to list 20% of their equity on a local stock exchange within four years of commencing production.

Problematic Provisions

While a substantial improvement on the existing outdated regime governing the mining sector, the new mining regime proposed in the 2015 draft policy and the Mining Bill 2015 has a number of onerous provisions that could hamper Kenya’s attractiveness as an investor destination. In particular, the proposed royalty rates for 5% for gold, 8% for copper and iron ore, 10% for rutile (titanium) and 8% for coal are higher than those charged in comparable jurisdictions.

The proposed royalties are to be split 70:20:10 between the national and county governments and the local communities. In addition, the Mining Bill 2015 proposes a 10% free carried interest for the government and mandatory community development agreements, which would require investors to commit funds to development activities in the counties where minerals are located. The local listing requirements also present a challenge since, in practice, low liquidity on local stock exchanges would make it difficult for firms holding a mining licence to satisfy the mandatory listing requirement. Holders of reconnaissance and prospecting licences will also be required to forfeit amounts budgeted for, but not spent, in carrying out reconnaissance or prospecting works, whichever the case may be, to the Ministry of Mines.

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The Report: Kenya 2016

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Legal Framework chapter from The Report: Kenya 2016

Legal Framework chapter from The Guide

Legal Framework chapter from Table of Content

The Report: Kenya 2016

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