Opportunities for Local Businesses in Kenya’s Evolving Oil and Gas Industry
By Samantha Luseno, Resource Mobilization and Partnerships Engagement Officer
Oil and gas was discovered in South Lokichar, Turkana-Kenya in 2012, with the immediate promise of contribution to the national economy. Estimates in 2019 put projected revenue for the sector at Kshs 150 billion annually once commercial production begins (initially in 2022). Kenya Civil Society Platform on Oil and Gas in its Setting the Agenda Report pointed to the need for oil and gas industry in Kenya to contribute to the economy through job creation and fostering the development of local businesses as well. In Kenya, Medium Small and Micro Enterprise (MSMEs) account for 81.1 per cent of overall employment. This points to the need to recognize the place of MSMEs within budding industries, such as oil and gas in Kenya, as offering a pathway to poverty reduction.
What opportunities are there for local businesses in the short run?
Kenya is currently at exploration phase in all its oil blocks including the Tullow Oil, Africa Oil, and Total Kenya Turkana Project. Following initial protests in Turkana region around local content requirements, a Memorandum of Understanding was signed between the joint venture partners and the government of Kenya requiring them to provide the government with a breakdown of their: employee composition; and utilization of local goods and services. Since then, proportionate supplier spend has increased with a recent increment from 37 per cent in 2018 to 41 per cent in 2019.
The direct opportunities available to Kenyan enterprises at the exploration phase involve those related to drilling and well services, drilling equipment hiring, and seismic services. These services where locally outsourced, albeit rarely, tend to be issued to larger companies as they are highly specialized. The question therefore remains to be, whether there is a place for MSMEs at this stage.
The Petroleum Act, 2019 requires that a contractor shall before engaging in petroleum operations, including exploration, prepare and submit long term and annual local content plans. These plans are expected to encompass a broad array of services including construction, transport, security, cleaning and forwarding services, among others. At national level, based on the current profile of MSMEs, majority lie within the service sector which have relatively lower barriers to access. The service industry therefore serves as a direct entry point into the sector for MSMEs. However, the idea would be for businesses to tap into existing opportunities for improvement within the sector, like capacity building initiatives by oil companies, to enhance profitability and hence sustainability.
Force Majeure: A Window of Opportunity in the Long Run?
Major opportunities exist for MSMEs in the long run once the Turkana Project reaches its production phase. The direct business opportunities include: provision of production and maintenance services; provision of industrial heavy machinery, among others.It is for this reason that concessions provided to Tullow Oil and its Joint Venture Partners pose concerns. Particularly, the 15-month extension on the exploration phase means that Kenya will have to wait until at least December 2021 for a Final Investment Decision and project sanction. This means that in the best-case scenario Kenya would be waiting until at least 2025 for First Oil.
In a recent episode of Energy Talks, a podcast hosted by KCSPOG, featured one of East Africa’s pioneer Petroleum Engineers, Ms. Michelle Boit, who urged Kenyan’s to steer away from mainstream services and provide more technical support to the sector. “In preliminary stages, a lot of learning is going on, trial and error. Production phase takes between 20-50 years and at this stage we are aware of particular pumps that need to be used for extraction; and wells that need to be maintained. We would definitely benefit from having these available locally. And this is just one of the opportunities available.”, Ms. Boit said.
With oil and gas industry in Uganda, Ethiopia, Tanzania either nearing or at their production phases, this also provides an opportunity for Kenya to position itself as a regional supplier for equipment in the sector. Therefore, as much as this extension means delayed gratification for Kenyans, it provides a window of opportunity for MSMEs to equip themselves to plug in to the sector in later years.
Barriers to Access
There are clear provisions on providing access to opportunities for local businesses incorporated within the Petroleum Act, 2019 and supporting legislationsuch as Public Procurement and Asset Disposal Act, 2015; and The Buy Kenya Build Kenya Strategy, 2017, among others. These opportunities are only to be provided subject to particular requirements being met. In order to participate in the industry some of these existing barriers to access must be addressed:
Investor Readiness & The Place of Informality in Oil and Gas
A major constraint to sustainability of MSME’s and contributor to their mortality is access to finance. This is a factor that has also been linked to limited production capacity within MSMEs. As the oil and gas industry evolves into its production phase there is the likelihood of increased investment in businesses in the space. The question remains whether our MSMEs have positioned themselves to access these opportunities. Informality remains a major challenge among MSMEs across economic activities ranging from those in manufacturing to those directly involved in mining and quarrying, as well as those in the service industry. Having the relevant documentation is critical not only for accessing opportunities but also attracting investment.
Local Content Bill, 2018
Major oil producing countries in Africa such as Nigeria and Ghana have passed laws and/or regulations to implement local content. These laws detail minimum requirements to the use of local expertise, goods and services, and company ownership. One of the major challenges associated with the enactment of local content laws in some of these countries was the lack of synergy between technical capacity related laws, such as Education and Labour Laws, and provisions put in place within the laws. Kenya is still in formative stages of enacting the Local Content Bill, 2018 and must take cognizance of these experiences.
Corruption
Corruption is a widespread epidemic in most extractives sectors and oil and gas is no exception. It extends beyond just revenue management to the equal and equitable provision of opportunities. There is a likelihood that even with the right legislation and existence of opportunities, they may only be allocated to a section of the population, in a manner suggestive of nepotism.
As we discuss inclusion of MSMEs in the sector there is need to strike a balance in the coming years on the inclusion of both formally and informally established enterprises. In addition, Civil Society Organizations, and governments alike should undertake to monitor not only the commitment of private oil companies to invest in training of local companies but also the impact of said trainings. Training curricula further need to be adapted, through a multi-stakeholder approach, to suit the requirements of the sector. Finally, as we advocate for increased access to opportunities there is need to do the same for proactive disclosure of public procurement records to ensure that opportunities are equitably distributed.