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15 Feb 2018

Study Report on Harmonisation of Petroleum Policies, Legal, Regulatory and Institutional Frameworks in the East African Community

Energy Access
Energy Efficiency
Study Report on Harmonisation of Petroleum Policies, Legal, Regulatory and Institutional Frameworks in the East African Community

The East African Community with their present member states Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda are moving towards their target vision of forming an East African federation. As important steps on the way, the East African Community has established the Customs Union and the Common Market.

The issue of harmonisation of policies and frameworks is recognised as a pillar in the development of East African Community and is clearly reflected in the EAC Treaty. This is also valid for the petroleum sector, and the Treaty includes explicit statements on the adoption of common policies for joint fossil exploration and exploitation in the region.

The process of harmonising the institutional and legal framework of the petroleum sector within the East African Community is an essential measure to stimulate the integration process. As such, it is also closely aligned with the strategic priorities of the African Development Bank where one of the Bank’s “High 5” development priorities is to “integrate Africa”.

The first oil production from the region started in 1998 from Sudan, and the first gas production came from the Songo Songo field in Tanzania in 2004. The latest round of petroleum exploration within the East African Community member states has seen major onshore oil discoveries in Uganda and Kenya and giant offshore gas accumulations in Tanzania. There have also been major offshore gas discoveries in the EAC neighbour country Mozambique. East Africa is now widely presented as one of the emerging hydrocarbon provinces of the 21 st Century.

Energy is a key pillar and ‘enabler’ of the East African Community Vision 2050. The type, level and intensity of commercial energy use in the region is a key indicator of the degree of economic growth and development. There are however, major differences between the Community’s member countries concerning the use of energy including oil and gas. The per capita consumption of petroleum products in Kenya, for example, is 14 times higher than it is in Burundi. There are also large variations concerning the hydrocarbon resource potential. This will put constraints on the degree of institutional and legal framework harmonisation that is feasible within the Community.

Despite these challenges, a harmonisation process can produce substantial benefits. Firstly, harmonisation of frameworks can potentially make operational processes more effective and efficient. Secondly, it could also improve the perception of the region as a stable and predictable area for investments. Finally, harmonisation will underpin the institutional and political process of developing the Community.

The petroleum value chain may serve as a useful tool to identify the most prudent areas for framework  harmonisation. It will identify the key decision gates and the milestones where regulative interaction between the government and industry is most important from the perspective of value creation.

The reconnaissance part of the value chain stipulates different terms and conditions for the industry to receive a permit or license. In addition, the framework should provide for commercial acquisition of reconnaissance data. The area could benefit from harmonisation.

Both competitive licensing processes and direct awards have been applied to select companies for production sharing agreements. The difference in resource potential may justify that different approaches be followed. Good governance principles however, strongly suggest that the licensing should be based on transparency and competitive bidding.

The pre-qualification process stands out as an obvious process for common standards and simplified procedures. Hence, the validity of accepted qualifications of a company should be valid for all East African Community countries. Differences should be made in requirements between onshore and offshore and between roles as operator and participant.

Decommissioning presently suffers from a lack of common understanding of the project life cycle. It is important that the plans for disposal and future use of petroleum facilities be considered when preparing the development plan. The decommissioning fund needs to be established with this reference, but should be revised when a decommissioning plan is prepared to secure adequate funding.

The realisation of the value of the petroleum resources within East African Community critically depends on the development of adequate infrastructure. Hence, the process on harmonisation of land acquisition should aim at securing proper corridors to allow for the development of additional oil and gas pipelines in the future. Such corridors will also be important to secure downstream supply of petroleum products. Extension of present product lines are facing substantial challenging due to exorbitant cost of acquiring right of way.

The downstream area is largely a deregulated and well working commercial sub-sector. The EAC region has done well in harmonisation of petroleum product standards.

There is a common expectation among the East African Community member states that the development of petroleum resources should generate employment and additional economic benefits in the member country. However, it will be challenging to achieve compliance between the existing frameworks stipulating conditions for the development of national content and the principles and approved protocols for the EAC common market.

The Community member countries in general use production sharing agreements to govern the commercial relationships with the oil companies. Hence, the key fiscal elements used are also similar. There are differences however, concerning which elements are negotiable. Although international best practices in general recommend that profit oil be shared based on profitability, production-based sharing of profit oil is still used by some countries. 

The institutional structures for governance of the petroleum sector in the East African Community have moved towards a separation of functional responsibilities and established separate institutions as sector regulators. This is a welcomed development in compliance with good governance principles. In addition, the establishment or reform of national oil companies to become organisations to focus upon the government’s commercial interests is also in compliance with best practices.

There are still some principal differences concerning the institutional structures and responsibilities that may constitute challenges to the East African Community integration and harmonisation process. This includes the exclusive position on petroleum rights granted to the national oil companies in Tanzania (Tanzania Petroleum Development Corporation and Zanzibar Petroleum Development Company). There are also differences in the level of independence of the new regulators.

Furthermore, the policy responsibility for the petroleum sector is not always vested in the ministry. It is essential that a harmonisation process be integrated with a communications strategy. The East African Petroleum Conference and Exhibition will serve as an important venue to present the status on harmonisation to the industry. Annual EAC meetings to review the work programs would be useful and could provide opportunities for member countries to present and update their harmonisation status. The internet will be the best vehicle to disseminate current information and a new EAC petroleum sector portal can be an effective approach to present stakeholders with updated information.

South Africa