The Auditor-General has warned Parliament that the proposed changes to the fiscal terms governing oil Blocks T6 and T7 in Turkana could substantially reduce the government’s share of future petroleum revenues.
- •Centering her concerns on a plan to raise the cost-recovery ceiling to 85% of annual crude output, Nancy Gathungu cautioned that the shift could delay and dilute the state’s share of the profits once production begins.
- •Appearing before a joint sitting of the National Assembly and Senate energy committees, she told lawmakers that no approved recoverable cost statements for Blocks T6 and T7 in the South Lokichar Basin have been submitted for audit, even as contractors seek expanded cost-recovery ceilings and sweeping tax exemptions.
- •Under the Petroleum Act, cost recovery is capped at 60% but the revised production-sharing terms for Block T7 raise the ceiling from 65% to 85%.
According to Gathungu, the cost recovery cap increase would allow the contractor to take a larger share of early production as “cost oil,” postponing the state’s access to profit oil. Kenya’s oil contracts are structured so that companies first recoup exploration, development and operating expenses before profit oil is split with the government.
Total investment across the basin is projected at $6.1 billion over 25 years, with recoverable reserves estimated at 326 million barrels and initial output targeted for December 2026.
The field development plan also broadens the definition of capital expenditure eligible for recovery to include drilling, surveys, hauling, mobilization and decommissioning costs. In frontier projects with high upfront capital expenditure, cost recovery can dominate revenue flows for years.
Kenya has also granted Gulf Energy E&P B.V., operator of the two oil blocks, an addendum removing value-added tax, withholding tax on services and interest, the Railway Development Levy, and the Import Declaration Fee for petroleum operations. While acknowledging that such incentives may aim to attract investment, the Auditor-General warned that they could materially diminish early government revenues and create long-term fiscal risk.
Delayed Audits, Decomissioning Gaps
Gathungu also cautioned that delayed audits could further narrow the government’s take. The Petroleum Act allows audits of contractors’ books within seven years; beyond that window, accounts risk being deemed correct by default. Exploration-phase costs for the two blocks have not been audited, denying the state an opportunity to disallow ineligible expenditures before production begins.
She noted that her office has previously flagged inconsistent submission of cost-recovery statements, weak monitoring of work programs and budgets, and gaps in enforcing local-content and training obligations.
A 2021 performance audit of Tullow Kenya B.V., which ended its oil plans in the country last year, found that work programs and budgets were implemented before approval, cost-recovery statements were irregular and insufficiently detailed, and local employment and training obligations went largely unmet, with unpaid training fees running into millions. Gathungu stated that Parliament has largely ignored such reports, leaving longstanding gaps in policy and oversight unresolved.
The Auditor-General also noted Kenya’s non-membership in the Extractive Industries Transparency Initiative (EITI) and called for stronger legal backing to enable direct and timely auditing of recoverable costs, as practiced in some peer producers. She pointed to Uganda and Indonesia, where supreme audit institutions have explicit authority to audit oil companies’ recoverable costs directly.
She also questioned proposals embedded in the Field Development Plan including the absence of a comprehensive decommissioning plan compliant with 2025 guidelines. The Auditor-General cited Nigeria, Brazil, and Indonesia, where contributions to decommissioning funds begin early in the production phase thus ensuring resources are available for site restoration, contrasting sharply with Kenya’s delayed 2036 schedule.
Separately, the Controller of Budget, Margaret Nyakango, reminded Parliament that no withdrawals from public funds can be authorized unless expenditure is grounded in law and consistent with constitutional public-finance principles. As oil exports begin, her office will oversee the receipt, accounting and budgeting of petroleum revenues including profit shares and any transfers to public funds.
Nyakango emphasized the need for clear reporting mechanisms and legislative certainty to ensure oil proceeds flow transparently through the Consolidated Fund and related accounts.
Under the revised contract framework, the government’s minimum entitlement from contractor sales rises to 20% from 15% in the original T7 agreement, with profit-oil splits starting at 50% for Kenya and climbing to 75% at peak production. A 26% windfall tax is triggered at US$50 per barrel. The state retains 20% back-in rights through the National Oil Corporation.
Parliament will ratify the new contract terms of the South Lokichar development, which will determine if oil will become a durable revenue stream or a prolonged exercise in deferred state earnings.
