Kenya grants major tax incentives to advance South Lokichar oil development
(Bloomberg) – Kenya agreed to grant tax breaks and allow higher recovery costs to an energy trading firm that acquired Tullow Oil Plc’s blocks in the East African country to accelerate development of the project whose output is planned for next year.
Nairobi-based Gulf Energy Ltd. will be exempted from paying value-added tax, withholding taxes and import levies on goods and services used in developing the South Lokichar basin, according to an amended production sharing agreement submitted to Kenyan lawmakers.
The initial project deal stipulated that developers pay 16% value-added tax, 5% and 5.625% withholding tax on local and imported goods and services respectively, a 2% railway development levy and a 2.5% import declaration fee.
The developer of the $6.1 billion project will also be allowed to recover as much as 85% of exploration and production expenses annually. The cost-recovery ceiling was initially set at 55% and 65% for blocks T6 and T7, previously named 10BB and 13T.
The amendments are meant to harmonize provisions in the two blocks’ agreements and help the project move forward faster, according to National Oil Corp. of Kenya Chief Executive Officer Leparan Morintat.
Kenya also agreed to have its back-in rights for the oil project at 20% for both blocks, which will be held by the state-owned oil firm, Morintat said by phone.
Kenya’s Energy Minister Opiyo Wandayi approved Gulf Energy’s field development plan last month and it now requires approval from lawmakers.
Tullow agreed to sell the assets to the local firm in April for $120 million — after attempts over more than a decade to develop the finds — as it focuses on paying down debt.
Kenya’s share of profit will start at 50% in the initial stages and increase to 75% at peak production where output is expected at more than 150,000 bpd, according to the agreement signed by Kenya and Gulf Energy. Oil prices of at least $50 per barrel trigger a windfall tax of 26%, according to the deal.
