Jitters as State plans to raid mining firms
By Jevans Nyabiage
The Government is coming up with a raft of measures to position itself to reap from the lucrative natural resources industry, in the wake of increased interest from exploration firms.
Kenya is hotly tipped to succeed its neighbours as the next big oil and gas exploration target. Much of its revenue is from tourism and agriculture, and is now eyeing the recent oil and gas discoveries, to wax lyrical about the emerging potential of the energy sector.
But the amendments to the 2012 Finance Bill that has tax implications, besides claiming a stake in the exploration project has brought uneasiness among multinational mining firms. Although the Government has made no secret of its intentions to acquire greater control of the mining sector, mining companies are seeing the move as changing goalpost that could discourage new investment.
Skeptic, however, reckon that the Government’s latest move came as a kneejerk reaction to mounting local pressure for greater control of its natural resources, which also follows similar moves in other African nations such as Tanzania and Uganda which have are reviewing their mining laws.
First casualty to the changing environment is the Australian miner Base Resources whose shares slumped 31 per cent on Monday on worries that Kenya may take over part of its key project under a new law requiring the state to own at least a 35 per cent stake in mining licenses.
The company said late last week that it was trying to line up talks with the Government to understand whether the rule would apply to its $275 million Kwale mineral sands project, which would be the country’s first large-scale mine.
Clarification
It said the new regulation did not spell out whether it applied to existing mining leases, but it had legal advice the rule did not apply to the Kwale project, and if it did, it would be unconstitutional.
“Further, the Investment Agreement also provides that in the event of the Government taking action tantamount to expropriation or nationalization, Base is entitled to compensation for the full market value of all property thus taken,” the company said.
But what is not clear is whether the legislation review would impact on the renewed growing interest shown by top miners in Kenya’s undeveloped natural resource sector.
Tullow Oil, one of the industry’s most successful explorers, has already made substantial headway in the country as it looks to steal a march on its rivals. The FTSE 100 group first struck oil back in March, while further oil was discovered in early May at the half-owned Ngamia-1 well in the Lokichar Basin, in Turkana County. And what has followed since then is heightened interest from both local and multinationals seeking a piece of the sector, while those that hold licences for prospecting have used the opportunity to make a kill.
The news of the oil discovery resulted in companies listed in the New York and London stock exchanges such as Premier Oil and Apache Oil staking a claim in Kenya’s exploration business such as Cove Origin Oil, and Pan-Continental heightened their exploration work.
Negotiation
Total of France is reported to be negotiating with the Government for Production Sharing Contract for one of the new blocks 1.22 Apache Corporation. Exxon Mobil and Anadarko Petroleum Corporation of the United States, Royal Dutch Shell, Statoil of Norway and Petronas of Brazil are among firms interested in exploring the new sites.
Tullow Oil and Ophir Energy have raised billions of shillings for exploration in the region. Ophir raised about Sh20 billion mid this year, which it said would be invested in the eastern Africa region.
Anadarko Petroleum Corporation, listed on the New York Stock Exchange (NYSE), revealed in regulatory filings that it plans to spend $120 million prospecting for oil and natural gas in the Lamu basin, where it operates offshore deep-water blocks. Australian firm Base Resources launched a share offer in order to raise Sh3.41 billion to finance operations at its titanium mine in Kwale.
Simba Energy continues to evaluate its earlier-stage asset and has already uncovered two potential targets for further exploration.
New policies
With the raised profile of the country’s natural resource, the Government is worried that it might not be getting its rightful share of the bounty. It is coming up with new policies and tax measures.
It is introducing Capital Gains Tax (CGT) on the profit from the sale of property or shares of oil firms mining or mineral prospecting firms.
It also wants to increase license fees, change to bidding in the award of licenses, and also impose a requirement for firms to have a 35 per cent local ownership.
On October 4, while proposing amendments to the 2012 Finance Bill, Finance minister Njeru Githae inserted a new clause that seeks to introduce CGT to the sector.
“In my amendment, I am seeking to only restrict the Capital Gains Tax (for now) to mining companies and mineral prospecting companies because these firms recently got prospective licences on payment of a minimum of Sh3,000 or Sh10,000,” Githae said.
“When they discover oil, they sell their shares to other companies. When they do so, the Government does not get any revenue. We are also working on how we can extend the Capital Gains Tax but that study is not yet over.”
Oil findings
Energy ministry permanent Secretary Patrick Nyoike also added his voice, “Take the Turkana case where Tullow found oil, same as Uganda, if one of the partners in the consortium decides to exit, we would not have an arrangement of getting anything.”
In the past, Kenya has witnessed some licence holders exit having made millions of shillings selling the licences to third parties.
In April, media reports indicated that a firm linked to a Cabinet minister sold oil block for $10 million (Sh850 million). In 2010, Turkana Drilling Company sold Block 10BB for $10 million to Africa Oil. Acquiring blocks has been invaded by the well-connected. This opens up the debate on the manner and transparency of the system of granting exploration licences.
The Toronto Exchange-listed Centric Corporation of Canada was given a licence for Block 10BA, adjacent to Ngamia-1, where Tullow struck oil, in January 2010 and paid the Government $615,000. A year later, Centric Corporation sold its shares to another Toronto Stock Exchange company, Africa Oil Corporation, for a $60 million.
And two years ago, Platform Resources, another Toronto Stock Exchange listed company sold two licences in circumstances not too dissimilar to the case of Centric and Africa Oil. The company owned the licences for Block 12A and 13T in the Lake Turkana basin, having signed production-sharing agreements in September 2008. Despite having done no substantial work, the company sold the licence at an estimated $6 million.
Irish firm Cove Energy announced earlier this year that Thai state oil company PTT Exploration would buy it. Cove has a licence for an exploration block offshore Kenya.
The ministry has started cracking the whip on small-time explorers it blames for hoarding exploration acreages for speculative purposes.
By introducing the CGT on the sale of property or shares by oil and mineral companies, Kenya may be borrowing a leaf from Uganda where the Revenue Authority collected Sh34.5 billion following Tullow’s acquisition of Heritage’s stake in various petroleum blocks in that country.
“I guess it was inevitable that some form of CGT would be reintroduced. The fact that they have picked the natural resource industry is perhaps a learning from what has happened in Uganda,” said Nikhil Hira, Tax partner at Deloitte & Touche.
Hira says what the State is introducing is a tax that will charge gains on changes in ownership, assignment of rights, which are common in the sector.
It will also catch transactions that happen effectively outside Kenya but cover Kenyan assets.
“On the face of it, this is a good way to raise revenues but I feel the rates may be very high and could hinder development,” he added.
If the Finance Bill 2012 is passed, foreign and local investors who make gains on the sale of property or shares in respect of oil companies, mining or mineral prospecting companies will pay a final tax at the rate of 20 per cent and 10 per cent, respectively, on the gains.
But there is confusion, the minister did not define an‘oil company’ on whether he targets upstream or the requirement also includes downstream activities. The Income Tax Act only defines a “petroleum company” as corporate body that carries out, in addition to any other activities, operations under a petroleum agreement entered into under the Petroleum Act.
Eric Musau, Research Analyst at Standard Investment Bank says the decision is probably a fair one for non-listed companies, but details of implementation have not been disclosed.
“We do not know whether such a decision will also affect mid-stream to down-stream companies as the wording of the rules is a bit vague,” Musau said, “We are particularly concerned on the transfer of shares at the stock exchange which has thousands of shareholders in KenolKobil and Total Kenya. We think the intention is on upstream and prospecting companies rather than on trading entities, this should be made clear.”
Analysts and players believe the move is likely to strangle companies still in their infancy and discourage new investments.
Support
Aly Khan Satchu, Nairobi-based Investment analyst says the sector is nascent which has only recently popped its head over the radar. “We need to encourage this sector and not strangle it at birth,” said Satchu, “My sense is that policy makers are making policy on the hoof and the now rapid fire announcements are increasingly giving the impression of shifting goal posts.”
He says it is this lack of uniformity and inconsistency of announcements, which is sending alarm bells the world over.
“Regulatory risk is now flashing Red. It behoves our policy makers to consider the consequences of their announcements otherwise what has been in the ground for nearly 50 years since Independence will remain in the ground for another 50 years,” Satchu added.
“There needs to be structure and discipline. I appreciate the Government has every right to seek to impose a tax regime in this important space. I think policy makers need to appreciate that there will be nothing to tax and just a Tsunami of Law suits if they continue in this irregular and on the hoof fashion.”
The Energy ministry has also introduced a requirement that forces all mining firms to have 35 percent local shareholding.
Kenya’s mining sector is currently operating on the Mining Act of 1940 that has been revised only twice, in 1972 and in 1987 but without the inclusion of contemporary practices such as fair sharing of revenue.
The absence of comprehensive mining policy has left the country open to gross exploitation by foreign fortune hunters most of who have paid royalties at their own discretion.
The law will affect firms such as UK-listed GoldPlat, which was granted the first gold mining license in the country last year; China’s Fenxi Mining (coal); and Australia’s Base Resources, which will start extracting rutile, zircon, and ilmenite at Kenya’s first large-scale mine in Kwale next year.
Canada’s Pacific Wildcat is involved in rare earth and niobium prospecting, while London-listed African Barrick Gold is prospecting for gold in western Kenya.
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