Kenya: Oil exploration costs to go up effective September 1 on fuel tax

The cost of discovering each new barrel of oil in Kenya’s Lokichar oil fields is expected to go up in the third quarter of the year.

This is after Treasury Cabinet Secretary Henry Rotich failed Thursday to give a clear indication on whether the government would push on with plans to introduce tax on petroleum products after the two-year grace period it extended from 2016 to allow time for its implementation comes to an end this September.

The 16 per cent Value Added Tax (VAT) on fuel products including petrol, diesel, kerosene and jet fuel was introduced in the VAT Act of 2013, with a three-year grace period that would have seen VAT slapped on such products come into force in September 2016.

However, the government following clamor from stakeholders in the petroleum sector, extended that immunity for a further two years beginning September 1, 2016. The two-year allowance period which is now set to elapse beginning September 2, 2018, could see such products become taxable at the standard rate of 16 per cent.

If left unchanged, industry observers believe that the potential ushering of the taxation regime could have detrimental effects on companies involved in oil explorations in the country.

“Oil exploration companies’ activities require significant investments in services especially at the exploration stage. As such, taxing services supplied to companies engaged in oil exploration or oil prospecting will lead to increased exploration costs for the companies and by extension to the Government of Kenya,” said consultancy firm and tax experts PricewaterhouseCoopers (PwC), while reacting Friday to Rotich’s 3trillion budget read a day earlier.

Oil companies such as Tullow Oil continue to drill wells is some of the most inhospitable regions like Turkana County, where geological, political, geographical, technical as well as contractual risks are high with such activities requiring significant investments in services especially at the exploration stage.

So far, none of the oil exploration companies has formally commented on Rotich’s omission of the matter in his budget read.

Treasury as it stands is one of the few institutions keen to benefit from such a move as it seeks to raise in excess of Sh34billion in VAT on petroleum products.

It could also weaken gains made thus far in the country’s oil industry barely after President Uhuru Kenyatta flagged off Kenya’s crude oil from Turkana to Mombasa in the Early Oil Pilot Scheme (EOPS) last month which will soon be followed by the Full Field Development phase, to establish the country as a crude oil exporter in the region.

Last week, the government said it was working with private sector partners to develop the necessary infrastructure to evacuate and achieve early monetization of our crude oil resources presently on-going for the development of the Upstream facilities which include drilling of over 200 production wells and the installation of the necessary oil drilling facilities to allow the flow of 60,000– 80,000 barrels of oil per day.