EQUITY OR EQUALITY: A CRITIQUE OF RESOURCE NATIONALISM IN KENYA’S OIL AND GAS SECTOR

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By Fernados Ombaso

Introduction

Resource nationalism equates to increased national control of extractive resources with the more equitable distribution of their benefits. It emanates from the general duty of the government to improve social services and enhance economic development. This duty of the government can only be realized through collection of as much revenue as possible from existing sources. The extractive sector is a major source of revenue to the government. The benefits that are realized from dealings in natural resources including oil and gas go a long way in elevating the economy of the host country. However, current debates surround the area of the delicate balance between drawing as much revenues from the sector for national development and encouraging the concept of local content which in this context will be defined as promoting the wellbeing of the affected local communities (communities on whose land petroleum operations are undertaken). In Kenya for example, the existing and anticipated framework leans towards resource nationalism, an aspect which I criticize in this work for failing to uphold constitutional guidelines as regards sharing of benefits proceeding from natural resources.

Concept of Local Content

The Petroleum (Exploration, development and Production) Bill, 2015 defines local content as, ‘the added value brought to the Kenyan economy from petroleum related activities through systematic development of national capacity and capabilities and investment in developing and procuring locally available work force, services and supplies for the sharing of accruing benefits.’ The concept has been developing steadily in African countries and to date, countries like Angola, Nigeria and South Africa have been identified as countries that score high on the level of requirements for employment, procurement, ownership and reporting. Countries with a smaller financial muscle like Kenya and Tanzania have had a number of encumbrances in developing the concept since they for a long time relied solely on International Oil Companies (IOCs) in matters oil extraction. The IOCs complained of extreme local content requirements and some of them closed operations if they felt that the requirements were too adverse.

Kenya’s petroleum sector is currently governed by the Petroleum (Exploration and Production) Act, 1984. The Act has scanty provisions relating to local content in Kenya. At the time of its enactment, Kenya did not have any specific reliable oil or gas producing site. Most of the wells drilled since 1960s were disappointingly empty and with no signs of oil. A majority of the foreign companies dealing in petroleum operations in Kenya left in search of countries with a more stable oil base like Mozambique and Tanzania. Therefore, in order to attract the investors back into the country, Kenya passed the investor-friendly legislation which is currently still in operation albeit awaiting a repeal by the Petroleum Bill which is yet to be assented to.

The Act does not have any express mention of local content and therefore it does not even attempt a definition of the same. However, borrowing from the definition enshrined under the Bill and also looking at the definitions in petroleum legislations of other countries, it is easy to imply instances where local content is a requirement under the Act.

The Minister is given the mandate to negotiate petroleum operations on behalf of the government. The fact that the Act vests all petroleum in the government implies that the minister in negotiating the agreement has the best interest of the government. Section 9 of the Act provides on the terms and conditions of the agreement. The provision requires;

  1. Notwithstanding any other written law and subject to this Act, there shall be implied in every petroleum agreement an obligation on the contractor to—

(g) give preference to the employment of and training of Kenyan nationals in petroleum operations;

(h) give preference to the use of products, equipment and services locally available;

(i) indemnify the Government against all claims made by third parties, in respect of any injury, damage or loss caused by, or resulting from, the conduct of any operations carried out by the contractor or subcontractors pursuant to the provisions of any petroleum agreement

I interpret this provision as enshrining the requirement on local content. The Petroleum Bill in defining local content uses the words ‘developing and procuring locally available work force, services and supplies for the sharing of accruing benefits.’ The Tanzanian Petroleum Act of 2015 defines local content as, ‘the quantum of composite value added to, or created in, the economy of Tanzania through deliberate utilization of Tanzanian human and material resources.’ On the other hand, the Nigerian National Petroleum Corporation defines local content as, ‘the quantum composite value added or created in Nigerian economy through the utilization of Nigerian human and material resources for the provision of goods and services to the petroleum industry.’ All of these definitions contain the aspect of ‘utilization of human or material resources’ which is provided for under the current Petroleum Act.

Further to the provisions of section 9 above, section 11 of the Act establishes the training fund which is mandated to finance the training of Kenyans in petroleum operations. This is another direct way in which local content is promoted. The two provisions are my major areas of concern as regards local content in the Act.

Impending Nationalistic Approach

There lies in the parliament a Petroleum (Exploration, Development and Production) Bill which awaits the assent of the president. The Bill is intended to repeal the current Act. I applaud the parliament for having included in the Bill elaborate substantive provisions which presently miss in the Petroleum Act. This being as it may, I take issue with the extent to which the Act enshrines a ‘nationalistic’ approach to local content. Local content is originally understood to allude to a promotion of the economy of the host country through other mechanisms other than direct injection of royalties that accrue from the activities undertaken. It is a way in which the affected citizens (those directly and adversely affected by the activities) get a direct share of the pie. The question that begs however is, should there be any specialized treatment to the citizens of the communities on whose land petroleum operations occur?

Gbegi D. and Adebisi J.F. assert that ‘delivering local benefits in the communities where extractive industries operate is no longer a choice but a commercial necessity and one that is increasingly mandated by law.’ Most times, extractive activities have been slowed down and even halted due to rampages by local communities. Where the companies do not do enough to acquire the social licence to operate, they face insecurity hurdles along the way which poses a threat to the stuff of the companies. Gbegi et al state further that, ‘in the new competitive landscape of waning supply and increased demand for energy and mineral resources, companies in the extractive sector face rising expectations to do more than just mitigate negative impacts, serve as sources of tax/royalty and act as good neighbours.’

Equity vis-à-vis the Nationalistic approach

It has been argued that the proceeds of the extractive sector are often misused by a few persons in the government. Most countries that have been engaged in petroleum operations still struggle with their economies due to poor management of the resources. This has led to a situation called, ‘resource curse’ or ‘Dutch disease.’ In Nigeria for example, despite the country being a major oil producing country, and accruing huge revenues from oil, it is ranked as one of the poorest countries in the world. This is because in Nigeria, the benefits that accrue from the extractive sector are highly mismanaged due to poor leadership.

Equity demands that in allocation of public resources, there ought to be a specialized consideration of factors that would realize the satisfaction of the marginalized and vulnerable. Equity surpasses equality in scope. While equality requires that every person be treated in the same way, equity on the other hand allows for positive discrimination on the grounds that, if a similar ratio of sharing is allowed then a particular section of the participants stand to be unfairly treated.

I argue in this work that adopting and maintaining a nationalistic approach to local content is not only unfavorable and unjust to local communities and private individuals on whose land petroleum operations take place but also a direct contravention of the Constitution. When oil and/or gas (of commercial quantity) is discovered on a particular piece of land being either private or community land, what follows is that the owner of that land loses it to the government which enters into a petroleum agreement with a contractor, allowing that contractor to undertake petroleum operations on the said land. The individual or community affected then agrees with the government on a scheme of compensation.

Other than loss of land, a number of economic, environmental, social and cultural effects come with the discovery of petroleum on one’s land. Put in simpler terms, the discovery of these resources alters negatively the way of life of the community in question albeit with some benefits accruing. Under the Bill, there are several instances where the contractor is required to compensate the owner of land that is subject to petroleum operations and any other such negative impacts such as environmental degradation. However, the question that arises is, given the nature of these compensations (monetary), and further having in mind the reality that some of the money paid out by the extractive companies as compensation never really gets to the hands of the victims, should we stop at the monetary compensation in realizing justice for the victims? I argue that the monetary compensation to owners of land and the communities is not sufficient to the communities and there ought to be more elaborate provisions which take into consideration the severity of the damage caused to them. Be this as it may, compensation is only to the immediately affected persons, that is, the owner(s) of the land in question. Salience remains in the fact that the people who are affected by extractive activities are not only the immediate owners, who receive compensation, but broadly it is the communities that surround the area.

The Bill proposes a mechanism of sharing the benefits from the sector requiring that the national government receives 80% of the total benefits while the contractor receiving the rest 20%. From the national government’s share, the county governments receive 20% while the local communities receiving 5%. While this provision is transformative and it may ameliorate some of the challenges faced by communities in the extractive sector, management of money in Kenya has been a challenge and therefore the funds even though raised and given out to the communities in good faith, might as the saying goes in Kenya, ‘fall in the wrong hands’ and fail to realize the purpose they are meant for.

Given these reasons, I advocate strongly for affirmative action provisions in the Act as far as local content requirements are concerned. In this era money is not always the best way of handling all situations. As was noted by Gbegi et al that ‘today business success depends upon the ability of companies to develop local talent, build a competitive local suppliers base and deliver long-lasting socio-economic benefits to the areas they operate in.’ We need to prioritize development in communities and areas in which any fundamental source of revenue like oil and gas lies. The government needs to proceed with great caution or risk going the Nigerian way in which all the resources emanating from oil and gas develop only a few central areas and worse still, they are highly mismanaged. Tanzanians have done it. In Tanzania the local content requirement mandates an investor to incorporate personnel, goods and services from both regional and local communities. This way, even though Kenyans at large stand to gain from the general requirement of employment and procurement of locally produced goods and services, the Petroleum Act needs to include a minimum percentage of goods and services to be procured and people to be employed from the host community from which the company operates. In instances where an area does not have the required minimum goods and services or the people are not skilled enough to be employed by the company, then such affirmative action measures such as that introduced in Tanzania which requires that a company (from outside the region) should enter a joint venture business arrangement to support a young company from the region provide the goods and services. In case of shortage of employees, the Bill, just like the current Act contains provisions relating to training of individuals. Kenyan nationals from other regions could be tentatively employed with the condition that as soon as the residents of that area are trained and able to offer the services, those from other regions will be retrenched and a number commensurate to that required by the Act employed.