A cautionary tale for Guyana…Kenya’s AG finds country wholly unprepared for audit of oil companies’ cost recovery bills

Sep 14, 2022 News

– says at least 171 specialists needed for thorough job

By Kiana Wilburg

Kaieteur News – Since the 1950s, Kenya has been exploring for oil. But it was only in 2012 that the African state struck commercial quantities in Blocks 10BB and 13T which border each other in the South Lokichar Basin.

The UK’s ‘Tullow Oil’ led those activities and continues to be operator with a 50 percent stake in both concessions. The two blocks are expected to deliver an expected gross oil recovery of 585 million barrels of oil (“MMbbl”) over the life of the field.

While the discovery of oil has rekindled the hopes and dreams of increased prosperity for Kenya, authorities there are of the firm conviction that the potential for success is only possible if rigid oversight is in place.

Motivated by the desire to ensure the country is getting its rightful share and it is not being robbed through inflated costs by oil companies, Kenya’s Audit Office, in a report that was tabled in its Parliament this year, said an audit was conducted on the country’s State Department for Petroleum (SDP). This was done to ascertain how prepared the agency was to do checks and verifications of the bills it receives from ‘Tullow’ in respect to the two commercial blocks. Kaieteur News understands that the audit covered the period March 2012 to July 2020.

The audit found that the State Department for Petroleum was developing systems to enhance monitoring of costs in the petroleum sector. However, the SDP was still not well prepared to monitor costs and operations in the petroleum sector.

One of the key findings stated that the Department was without adequate technical staff to do timely interrogations and monitoring of costs in the petroleum sector. According to the entity’s July 2020 authorised staff establishment, the department was supposed to have at least 171 staff. Checks revealed that it only had 34 technical staff that had a vast area to cover.

For the Department to carry out effective cost recovery audits, Kenya’s Audit Office stressed that it has to equip itself with sufficient technical staff. In the absence of this, the Audit Office said the State Department has not been able to effectively monitor costs in the petroleum sector. It said, “This therefore exposes the country to international companies recovering non-allowable costs that would have otherwise not been recovered had monitoring been carried out. Ultimately, this will reduce the amount of Government share from revenues generated from the oil resources.”

Importantly, the Audit Office outlined that it was not instructed by anyone to do the foregoing checks which led to several troubling findings. It emphatically stated that there were some key factors that inspired its call to action to protect the citizenry.

The first point of reason listed was that petroleum exploration, development and production are capital-intensive ventures; as such, investors invest their capital with hope of high returns in the future. The AG’s Office said most of the costs incurred during these stages are recoverable on discovery of commercially viable deposits. It said there is therefore a need for the government to carry out “prompt and timely monitoring” to ensure that only approved recoverable costs are claimed by international oil companies. The AG’s office said an audit of the State’s capacities was necessary to find out whether it was serving the interest of the people.

Additionally, the AG’s office was keen to point out that the process of recovering expenses is a technical area that requires specialised skills. In light of this, an audit was necessary to find out whether the State Department had staff with relevant skills and knowledge to monitor costs.

Importantly, the AG told Parliamentarians, and Kenyans by extension, that the Government had entered into a contract with ‘Tullow Oil’ for blocks 10BB and 13T, in 2007 and 2008, respectively. As at the time of the audit, it was noted that the State Department did not even have a record of audited recoverable costs, 12 years later, since exploration began on the two blocks.

This was despite the company having had a successful exploration phase that led to discovery of commercially viable oil in 2012 and subsequently, the launch of Early Oil Pilot Scheme in June 2019. Approximately 200,000 barrels of early oil was exported in August 2019. The AG’s office said this further underscored the need to determine the extent to which one of Government’s designated gatekeepers was monitoring costs. The AG’s office said, “This is an important exercise because recoverable costs determine the amount of revenue that will accrue to the Government from profit oil, once production begins.”

It added, “Revenue generated from the petroleum sector has the potential to substantially transform Kenya’s economy as well as the livelihoods of its people. The transformation can only be achieved if agencies charged with the responsibility of managing the petroleum sector are well prepared to monitor costs incurred by companies…”

Importantly, Kenya and Guyana are members of the ‘New Producers Group’, an international platform coordinated by Chatham House, the Natural Resource Governance Institute and the Commonwealth Secretariat to bring countries together to share their experiences in the oil industry.

The Group also creates a space for information sharing and an honest appraisal of governance challenges among producers. The discussion group, which has 30 member states, has since built a strong network and community of practice among emerging producers.