Heads of Terms Agreements: Transparency in Oil and Gas Contracts in Kenya

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Heads of Terms Agreements: Transparency in Oil and Gas Contracts in Kenya
23 September
2019

Heads Of Terms Agreements: Transparency In Oil And Gas Contracts In Kenya

Summary

This article looks at contracting issues in oil and gas agreements with specific focus on Heads of Terms Agreements. We seek to share insights from a transparency and accountability perspective on the Heads of Terms Agreement that was recently signed between the Ministry of Petroleum and Mining on behalf of the Government of Kenya and joint venture partners Tullow Oil Plc, Total S.A and Africa Oil. It is our contention that disclosure of information about the Heads of Terms Agreement to the public is necessary to ensure better natural resource management.

Background

The discovery of oil often brings about dreams of wealth and prosperity for developing countries. Kenya is not an exception. On 26th August, 2019, H.E President Uhuru Kenyatta flagged off Kenya’s first crude oil export from the Port of Mombasa. This came against the backdrop of news of the signing of a Heads of Terms Agreement (HOT) on 25th June, 2019 between the Ministry of Petroleum and Mining on behalf of the Government and joint venture partners Tullow Oil Plc, Total S.A and Africa Oil for the exploration of Block 10BB and 13T in the South Lokichar Basin. Like most oil and gas contracts, the details of the terms of the HOT have not been disclosed to the public.

What is a Heads of Terms Agreement?

A Heads of Terms Agreement (HOT) is an agreement entered between two or more parties to set out the main principles and terms before signing a detailed final agreement. Just like a Memorandum of Understanding, a Term Sheet or a Letter of Intent, a HOT will create moral commitments to ensure that parties do not renegotiate the terms of the final agreement.


In typical oil and gas projects, HOT are used to set out the terms of engagement to be used in drafting the final agreement by parties to the project and thus allowing parties to focus on the more detailed provisions of the final agreement.


The key problem with HOT in the energy sector, lies in private-sector parties’ interests in maximizing their revenues and to minimize those accruing to the country. Full disclosure of oil and gas contracts is one effective way of remedying this problem.

Transparency and Accountability

The project by the development partners titled Project Oil Kenya at the South Lokichar Basin is expected to operate under a Final Investment decision (FID) Framework to be concluded by the end of 2020 with the First oil expected to be drawn three years after signing the FID.


During the flagging off of the first shipment of crude oil at the port of Mombasa, President Kenyatta warned all stakeholders against the vice of corruption and emphasized that principles of equity and sustainability were essential in effective resource use. The concern by the President is quite legitimate. Many of the problems in mega projects in Kenya are associated with corruption. However, in some cases the problems stem from misunderstanding and lack of transparency in the course of negotiating and implementing contracts.


There are lessons to learn from countries like Venezuela, Papua New Guinea and South Sudan, which witnessed the “resource curse” theory and suffered under the operation of International Oil Companies with greater financial resources, superior knowledge and more experience in negotiating oil and gas contracts.

Recommendation

According to Chatham House Royal Institute of International Affairs Guidelines for good governance in Emerging Oil and Gas producers 2016 report, government and the industry must engage and share information with affected communities to manage local expectations regarding the petroleum sector and build trust. The government should apply a series of benchmarks in order to promote transparency and good governance in the petroleum sector generally. These include ensuring that a simple and comprehensive guide to the petroleum sector governance structure is available publicly and that the project affected communities, County Governments and other stakeholders like the Civil Society groups receive timely and accurate financial and operational information from project developers. Where information about the sector is not publicly- available, the rationale for that confidentiality should be explained and justified.


In keeping with Constitutional dictates on the right of access to information together with international best practices on governance in the extractive industry, it is absolutely necessary for the government of Kenya to ensure transparency and accountability during negotiation and implementation of all agreements regarding government projects as part of compliance with Article 35 of the Constitution of Kenya, 2010 on the right of access to information together with the principles of participation of the people, transparency and accountability as enshrined under Article 10 which provides for the principles of good governance.


Kenya needs to re-evaluate the national action plan 2016-2018 to fight corruption and put in place effective transparent and accountability measures within the extractive industry. Dr. TerraLawson-Remer in her thesis on ‘Property Rights, Economic Development and Resource Governance’, argues that the secret to improve governance in resource-rich countries is to improve cooperation among capital-exporting countries, international financial institutions and private sector companies. Our contention is that it is imperative to include a fourth group: The Civil Society. An ideal governance structure in the Kenyan extractive industry should therefore comprise of the National Oil Corporation (as a representative of the national government), County Governments, Independent Oversight Authorities and Civil Society working together with International Oil Companies in the process of negotiating an oil and gas agreement and disclosing all relevant information to the public.


It should come as a sign of hope that the National Management Environment Agency has requested for more time for the Project Oil Kenya developers to consult the community in the South Lokichar Basin on among other things, land acquisition issues. To ensure successful project implementation, the government should sustain such public participation initiatives.Nevertheless, effective public participation makes sense when all the participants are adequately informed.

Conclusion

In order to achieve the government’s Big 4 agenda and overall Vision 2030, it is incumbent upon all stakeholders to conduct progressive and collective monitoring and evaluation of all government projects under sector-specific robust frameworks. Since 2013, Kshs. 72.5 Billion has been spent implementing mega projects and the progress is disproportionate to the investment if Parliamentary Budget Office recent report is anything to go by. It is important to understand the multi-jurisdictional aspects of a project when negotiating either a Heads of Terms Agreement or any other infrastructure project-based contract. We need to go back to basics and seek full disclosure of contracts regarding all government projects and scrutinize beyond where the rain started to beat us before it is too late. As one renowned gentleman posited: “It never goes wrong, it starts wrong”.

Disclaimer

This information should not be used as a substitute for seeking legal advice on this and any other issue. If you need legal advice, please do not hesitate to contact the author or your usual contact person at the firm. All intellectual property arising herein belongs to Kimakia Magara &Partners LLP.

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