An Evaluation of Kenya’s profit petroleum fiscal regime under the Petroleum Act 2019 and the contractual implication of migrating from DROP to R-Factor

Ogutu, Castro Kevin
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Strathmore University
Abstract Countries with developing oil and gas sectors have in the past years centered on the volumes of crude oil produced as a basis of their profit petroleum share with International Oil Companies (IoC). However, there exist other profit petroleum sharing fiscal regimes which focus mainly on profitability arising from the production rather than the volumes produced in light of current global prices and cost recoverable allowed. As a result, Host Governments (HG) are in the process of relooking at their petroleum contracts with IoCs in light of this development. Kenya has not been left behind either and it has proceeded to change its petroleum laws to reflect this new development, which may trigger the need for renegotiating its Production Sharing Contracts (PSCs) with the International Oil Companies (IOCs) in accordance with the terms of the PSC. The current PSCs are based on a profit petroleum sharing mechanism known as Daily Rate of Production (DROP) where the government and IOC share profit petroleum based on volumes produced. Amongst the changes made in Kenya’s petroleum legal sector is the introduction of the R-factor fiscal regime to replace DROP as a basis of profit petroleum sharing between the IoC and the Government of Kenya. This research attempts to qualitatively evaluate the two profit petroleum fiscal regimes namely Daily Rate of Production and the R-factor mechanism with a focus on the contractual implication of the migration from DROP to R-factor mechanism. As a yardstick, the research analyzes the legal framework governing Mozambique’s profit petroleum fiscal regime in order to draw key lessons for implementation by Kenya. This study finds that Mozambique had changed its petroleum laws and successfully implemented the R-factor profit petroleum sharing in its concessions with IoC’s which in turn has increased the Government’s profit petroleum share. This study was conducted through analysis of primary and secondary data such statutes, journals, scholarly books and reports of various international organizations. The study aims at informing the Government of Kenya and other countries on the need to develop and implement sound petroleum sharing fiscal regimes for their countries so that they can maximize on the profitability of the oil and gas sector.
Submitted to the Faculty of Law in partial fulfillment of the requirements for the award of the Master of Laws (LLM)
Oil and gas sectors, Petroleum Act 2019, R-Factor