1Kenya is at a crucial turning point in its history. The country has engaged in a deep institutional transformation, which in parallel to its relatively successful economic performance over the past years could place the East African nation on a path towards unswerving development in the coming decades. The recent discovery of oil and gas comes at the right time to contribute to that transformation by providing some of the financial foundations necessary for a successful transition from a state that used to be characterized by institutional fragility and internal conflict to a middle-income, peaceful democracy. But many challenges lie in the way of Kenya’s successful development of its oil and gas industry.
2In the first place, fears of the potentially destabilizing effects of Islamist radicalism in neighboring Somalia spreading out into Kenya (Anderson & Browne, 2011) sadly became a reality in September 2013, following the fatal armed assault of the Westgate shopping mall in Nairobi by the radical Islamist Al-Shabab militia. The terrorist attack, which left more than 60 civilians dead and hundreds injured, moved security concerns to the top of the agenda in Kenya and re-opened questions about the country’s ability to develop oil and gas reserves in areas where the Al-Shabab militia are known to be active. Particular uncertainty surrounds the country’s potential for ensuring safe oil operations, both onshore and offshore, and for protecting the oil export facilities that are being developed in the Lamu archipielago, located on the Indian Ocean coast, very close to the Somali border. Suspected pirates connected to Al-Shabab militia raided Lamu in 2011, killing one foreigner and kidnapping two. In response, Kenyan troops entered Somalia the following year. The September 2013 assault of the Westgate shopping mall in Nairobi was in retaliation for Kenya’s incursion in Somalia.
3The Westgate strike abruptly upset the general hope that had followed the presidential elections conducted in March 2013. The orderly and non-violent elections had seemed to mark a turning point in Kenya by leaving behind fears that the country would fall back into the bloodshed that characterized the three previous polls carried out since it gained its independence from Great Britain in 1963. The expectation was that having left those fears behind, investments would start to come in more steadily than before, especially into the oil and gas sectors (The Economist, 2013b).
4 Another major concern is that unless Kenya’s institutional weaknesses are addressed early on, the availability of hydrocarbon revenue, which should normally be a blessing, could turn into a curse. In that scenario, Kenya could become one more paradox of the plenty and assume the classic characteristics of a failed petro-State, as defined by Terry Lynn Karl (1997). Scholars agree that oil production in countries with weak institutions, where the reserves are located in regions populated by marginalized groups that carry strong grievances, are more vulnerable than others to violent conflict (Ross, 2012). There is thus a vast amount of literature defining the resource curse, be it in the way of state failure, poor economic performance, or increases in civil disorder (Collier & Hoeffler, 2004; Collier & Hoeffler, 2005; Fearon, 2005; Fearon & Laitin, 2003; Humphreys, 2005).
5In Kenya, the government is trying to address institutional vulnerabilities through Devolution, a process aimed at empowering local governments to better attend to local needs. Devolution is though in its initial stages of implementation and it is too early to judge its success. Devolution is expected to address existing challenges, particularly concerning oil governance, which will need to be put in order for Kenya to avoid the resource curse. Additionally, following the recent deadly terrorist attacks in Nairobi, the country may struggle to attract risk-adverse oil investors.
6Oil exploration is still ongoing in order to define the extent of the oil and gas reserves (Tullow Oil, 2013). This transition period, while the country's hydrocarbon potential is being determined, offers a unique window of opportunity for Kenya to tackle possible stumbling blocks to future development of its oil and gas industry. Kenya has four sedimentary basins — Lamu, Anza, Mandera, and Tertiary Rift Basins — and geological formations that are either an extension of, or have similar characteristics to, those of neighboring countries where large hydrocarbon reserves have already been found. The fact that these basins have revealed rich oil and gas resources in neighboring countries created much expectation and investment interest in recent years in Kenya (Anderson & Browne, 2011). Kenya’s Tertiary Rift Basin could be the eastern stretch of Uganda's Lake Albertine Rift Basin, which is said to hold up to 3.5 billion barrels of oil reserves. The onshore Anza Basin is a continuation of the Central Africa Rift system that expands from South Sudan, home to most of that country's oil reserves, estimated at around 6.7 billion barrels (BP, 2012). The geological formations of Kenya’s onshore Northeastern Mandera Basin extend into the Mandera-Lugh Basin of Somalia and the gas-rich Ogaden Basin of Ethiopia. Likewise, the geology of the onshore and offshore exploration areas of Kenya’s Lamu Basin show similar characteristics as coastal reservoirs of Tanzania and Mozambique, where natural gas deposits have been found (Nyoike, 2012).
Figure 1 - Kenya’s Four Hydrocarbon Basins
Source: Heya, 2012.
- 1 The CRA is an independent organization set up under the 2010 Constitution to make recommendations (...)
- 2 By comparison, the Rotterdam port, one of the largest seaports in Europe, has 23 berths.
7Investor interest in Kenya is not limited to its potential hydrocarbon reserves, but also extends to its strategic location, not too far from China and India, where oil and gas demand is projected to grow by as much as 60% and 50% respectively in the next two decades (Commission of Revenue Allocation, 2011)1. While the extent of its oil and gas reserves is being assessed, Kenya is putting much effort in playing up its strategic location on the Indian Ocean as a potential oil transit route that would provide an outlet not only to its own production once it starts, but also to some of its land-locked neighbors’ future — and current — output. Nairobi is committed to the $25.5 billion LAPSSET (Lamu Port, South Sudan, Ethiopia Transport and Economic Development Corridor) project aimed at connecting South Sudan, Ethiopia and Kenya through a series of ambitious infrastructure developments. Among these is an oil pipeline that will link South Sudan, and later on possibly Ugandan land-locked crude reservoirs, with the Kenyan port of Lamu, located on the Indian Ocean Manda Bay. As part of LAPSSET, plans are being made to expand the existing port in Lamu into a 32 berth harbor2, and also projected is construction of a new refinery, with the northern city of Isiolo now under consideration for its site, instead of the original idea of building it in Lamu. LAPSSET has also called for the construction of a 1,710 kilometer railway line, an 880 km highway to connect South Sudan, Ethiopia and Kenya, and the development of three resort cities (in Isiolo, Lamu and Turkana).
8The LAPSSET project reached a peak in its momentum in 2012, as a result of the dispute between neighboring Sudan and South Sudan, when the latter cut off oil flows to the former and brought both sides to the verge of confrontation. Kenya’s ambitions of becoming a corridor for East Africa’s oil uncovered regional rivalries and set neighboring countries in a competition for center stage, to the extent that there are now at least five other pipeline route ideas and talk of building four other refineries in South Sudan, Uganda and Ethiopia (The Economist, 2012a). At least until the extent of its reserves is determined, it makes sense for Kenya to play all the cards at its disposal — as a potential s producer and/or an export hub — in order to take advantage of East Africa’s new oil and gas bonanza.
9There is much expectation surrounding Kenya’s potential for steering Eastern Africa, and possibly even the whole continent, towards long-term, sustainable economic growth. A unique confluence of occurrences, including recent signs of commitment by the political class to resolve past mistakes, have placed Kenya at a positive junction in its history to become a top candidate for assuming that leading role. Some of the main factors contributing to Kenya’s potential as a key regional player include:
10First, following peaceful and democratic presidential elections in March 2013, and with fears of political bloodshed behind, at least in the short term, it was thought the government would be able to mainly focus on economic growth, and oil investments were a key component within that scenario (The Economist, 2013c). But the brutal assault on the Nairobi shopping mall inSeptember 2013 by Somali terrorists will most likely alter that status quo, at least until the government manages to reassure investors, international organizations, the tourism industry, and others that Kenya is a safe place to do business. Bloody ethnic confrontations in different parts of the country earlier this year had already started to raise concerns among the international community about Kenya’s deteriorating risk profile.
11Secondly, Kenya’s economy has been growing at around 4.3% since 2010, and was expected to improve in 2013 to 5.5% - 6% (Macharia, 2013), although the September shopping mall attack may alter that trend, at least in the short term. Kenya’s past growth figures remain relatively low compared to other African countries (World Bank, 2012a), and this has been largely attributed to its vulnerability to external and internal shocks, such as frequent droughts, macroeconomic instability (World Bank, 2012a), and the post-election bloodshed of 2007 that left more than 1000 dead and some 650,000 displaced from their lands, amidst evidence of vote rigging, The impressive growth rates shown by other African countries resulted primarily from a boom in commodity prices that greatly enhanced foreign direct investment (FDI) to the region: just in 2012, FDI flows to Africa increased by 5.5% — to $37.7 billion, and by 2015, they are projected to reach a record $54 billion, mainly concentrated in the extractives sector (World Bank, 2013b). Kenya’s proportionately slower growth rates may actually hide a relative strength compared to other African countries, resulting from a more diversified economy rather than one centered on natural resource extraction only. Kenya has one of the most diversified economies in Eastern Africa.
12Thirdly, the constitutional reforms of 2010 introduced important institutional changes aimed at turning an extremely divisive and exclusionary socio-political context into a more democratic and inclusive one. The new administration of President Uhuru Kenyatta, who took office in April 2013, will be responsible for implementing groundbreaking institutional changes, which should reduce the highly centralized nature of the Kenyan State, through the creation of new sub-national levels of government. This new sub-national institutional division is expected to ensure a more direct connection between the authorities and the local population, making government officials more accountable for their actions. Thus a new governing model should replace an old-style system characterized by decisions taken in the capital city, Nairobi, by officials who were usually disconnected from the local needs of the population, and who tended to favor their next of kin and their own districts when it came to revenue distribution. Fiscal decentralization could be also effective in reducing the size of the central government’s future discretionary oil windfall (Ross, 2012, 5682–5785). But the expected positive effects of Devolution have yet to be tested, particularly in light of experiences in other oil producing countries where in the presence of oil revenues, the process of decentralization had extremely negative results (see below ‘Conflicts around oil revenue allocation’).
- 3 See chapter Eleven-Devolved Government. Part I, 174 (b),(c), (e), and 175 (c) of the Constitution (...)
13Lastly, oil and gas discoveries, once quantified, could come at the right time to usher in an era of transformation for Kenya by providing financial resources, investments and hopefully generating new direct or indirect job creation not only in the producing areas, but also in neighboring regions. This could be an enormous contribution to carry out the strong commitment to reduce Kenya’s entrenched inequalities and ethnic rivalries, as stated by the 2010 constitution. The new constitution includes an explicit recognition of diversity and of the rights of minorities and marginalized communities, and a realization of the need to test new mechanisms for improving gender based differences3.
- 4 The Gini coefficient is a number between zero and one that measures the degree of income inequalit (...)
14Deep-rooted inequalities, especially in the areas where oil and gas reserves are located, are one of the main challenges to Kenya’s socio-economic and political transformation. Kenya remains one of the world’s most unequal countries and this has always been the source of many grievances. Kenya’s Gini coefficient (a measure of inequality) for household income was estimated on average at 0.47 between 2000-20104. Generally speaking, during those years Kenya's inequality levels were higher than those of its neighbors – Uganda, Mozambique, Tanzania – but slightly better off than some of Africa's most important oil producing countries, namely Nigeria and Angola (UNDP, 2013).
Graph 1 - Gini Coefficient (2000-2010)
Source: Compiled by the Author with data from the UNDP Human Development
Report 2013 (UNDP, 2013).
15In addition to inequalities between households, there is a generalized sense that disparities are also horizontal, meaning that they affect socio-cultural groups as a whole and not just individuals (Stewart 2008, 3-23). Some groups and elites enjoy easier access to resources, to political participation and to the provision of justice, and these disparities, which are often linked to ethnicity, pose another challenge to Kenya’s peaceful and successful development and they are particularly strong in the oil and gas regions. By some accounts, inequality has increased in Kenya despite economic growth, precisely because economic revenues were unevenly distributed due to strong ethnic biases in the way politics and the government operate (Society for International Development, 2010). The connection between ethnicity and inequality has been historically most obvious in relation to access, ownership and use of land (Syagga, 2006) (see below ‘Conflicts related to competition for scarce resources’). In addition, ethnic favoritism and corruption go hand in hand in Kenya and this fuels inequality (Wrong, 2009, 41–65). Because corruption is very much linked to a patronage system, it benefits some socio-cultural groups more than others, especially those in control of the central government. The 2012 Transparency International Corruption Perceptions Index that measures the perceived level of public sector corruption around the world, put Kenya in 139th place out of 176 countries surveyed (Transparency International, 2012). Kenyans perceive corruption as endemic to their country, and there is a common belief among the population that political or ethnic connections normally prevent perpetrators of corruption from being properly prosecuted (Wrong 2009, 254-356).
16Two additional realities characteristic of Kenya’s oil and gas regions could get in the way of the country’s potential oil-fueled growth: One is the presence of an unusually high number of illegal weapons in the new oil areas, and the other is the proximity of hydrocarbon reserves to neighboring countries that have unresolved border disputes with Kenya.
17Kenya is a neighbor to nations with which it has a history of armed conflict and small arms are regularly smuggled across the border and have proved difficult to control. Between 530,000 and 680,000 firearms are thought to be in civilian hands throughout Kenya, even in areas where disarmament initiatives took place in recent years (Manasseh Wepundi, 2012). The proliferation of arms has already led to more violence and an increased number of deaths in rural areas that are traditionally affected by ethnic disputes (Daily Nation, 2012). Tribal conflicts around cattle ownership are common among some ethnic groups, and cattle-rustling is often associated with traditional rites of passage for young men. The presence of abundant weapons has reportedly turned those combats more violent over the past decade.
18Porous borders and unsettled trans-boundary disputes have already created tensions surrounding exploration for Kenya’s oil and gas. In the first case, the discovery of offshore hydrocarbon deposits in shared waters with neighboring Somalia brought to the fore a long, unresolved border dispute with that country (Gilblom, 2012). In the second case, historically unclear delimitation of Kenya’s borders with neighboring South Sudan threatened to become serious following the discovery of oil in Turkana. The dispute with Somalia is related to the granting of 13 offshore exploration licenses by Nairobi — to companies like Italian Eni, French Total and US Anadarko — in sea boundaries disputed by both countries. Also potentially contentious could be onshore oil blocks located in Kenya’s Mandera Basin that extend into neighboring Somalia’s Mandera-Lugh oil area (Petzet, 2011) and into Ethiopia’s rebel-contested Ogaden Basin. The Ogaden National Liberation Front (ONLF) has been blamed for past fatal attacks and intimidation of oil operatorsin the Ogaden region, which is estimated to hold around four trillion cubic feet of natural gas, and is just across the border with Kenya.
19Unsettled trans-boundary disputes also extend to northern Kenya’s oil-rich Turkana region, which is close to the so-called Ilemi triangle: a 10’300 square kilometer area where Kenya, Sudan and Ethiopia meet and whose border was never clearly demarcated (Anderson & Browne, 2011). Press reports recently maintained that South Sudan presented an international claim to the border area, although Juba denied them. If true, South Sudan’s claim could signal future trans-boundary differences around hydrocarbon reserves.
20If oil and gas revenues are not well managed, conflicts could ensue, particularly in light of historic inequalities and ethnic differences, and in a context of unsettled border conflicts and easy access to arms. At the moment, while exploration works are ongoing to determine if Kenya’s oil and gas reserves have commercial value, conflicts are most likely to develop at a regional and local level, where the exploration works are taking place. There have already been some instances of these types of disputes and in the future, when oil and gas revenues start to flow, conflicts may take on a more national scope.
21At the local and sub-regional level high risks of conflict in the presence of hydrocarbon resources in Kenya may be linked to two factors: a) unclear or non-existent oil revenue allocation mechanisms, and b) competition for scarce resources between the industry and the local population. These potential triggers of conflict appear in a context of complex ethnic interactions in the regions where oil and gas have been found.
22Devolution, or the decentralization of power among sub-national government structures, should be at the heart of a fair distribution of oil and gas revenues in Kenya, both as a guarantee against abuse of power by central elites, and to improve social service delivery by better connecting public policies with the needs of local populations (World Bank, 2012b, v-xi). According to the law, Devolution is expected to guarantee, among other things, that efficient and transparent resource allocation mechanisms will be in place to ensure that incomes from oil and gas are distributed in an equitable manner.
23Upon taking office, President Kenyatta placed Devolution among the three most important goals of his government (Daily Nation, 2013). Devolution is highlighted by the 2010 constitution as a national value and a principle of governance that has equal weight with the fundamental values of patriotism, democracy or the rule of law (Republic of Kenya, 2010). But historically, Devolution has been a controversial issue that divided Kenya’s society for decades. Perhaps that is the reason why public opinion is not yet fully convinced about the current government’s full commitment to the process of decentralization (Transparency International 2013). President Kenyatta's strong endorsement of Devolution is a welcomed and unexpected initial move, given that he originally comes from a political party — the Kenya African National Union (KANU) — that has historically opposed it. The country's first president and independence hero, Jomo Kenyatta, father of the recently elected Uhuru and founder of KANU, strongly opposed Devolution. The late Kenyatta adopted instead a strategy of centralization, in large part to ensure full control of the country’s resources as a prerogative for building a new state. Following independence from Britain, Jomo Kenyatta started to gradually reassemble political and economic power not only in the central government but also in one party and one ethnic group: the Kikuyus (Branch, 2011). In 2012, Uhuru Kenyatta parted from KANU and created his own political party, the National Alliance (TNA). Devolution was then introduced after the 2007-early 2008 presidential elections, in response to demands from opposition groups, who saw decentralization of power as the only channel for breaking up the political and economic power of the ruling Kikuyus. It was a political compromise at the time, and the fact that the newly elected President Uhuru Kenyatta has endorsed it is encouraging.
24Devolution was put to the test with the sub-national institutional realignment that started after the March 2013 presidential elections that brought President Kenyatta to power. Forty-seven new sub-national government structures are in the process of being set up at the county level, and political and economic decision-making is being transferred to them from the central government. It is expected that, because local governments will be closer to their constituencies than central government authorities in Nairobi, they will be able to meet local needs in a more timely and efficient way, and will be held directly accountable by local communities (World Bank, 2012b). Newly-created institutional structures at the county level reflect those of the central government: a County Executive headed by an elected governor, who is responsible for implementing county and national legislation, generating bills, and managing local county affairs (Art.183 of Kenya's 2010 Constitution); and a County Assembly that has a mandate to legislate at the local level and to review proposals for development programs presented by the county Executive Committee (Art.185). Counties oversee local policy implementation; the delivery of some services such as primary health care; the implementation of public works; and transportation. Multiple layers of elected county authorities — such as the county assembly and the county executive committee — plus the creation of a national senate representing counties at the National Assembly, will be expected to provide checks and balances against the kinds of individualistic political excesses of the past (Nyanjom, 2011).
25The new sub-national governments receive a constitutionally guaranteed 15% budget allocation from Nairobi, and additional funding is available for the 14 most impoverished counties through the Equalization Fund created under the 2010 constitution (Article 204). There is little doubt that the 15% constitutionally stipulated allocations not be sufficient to meet all county needs, and the constitution takes this into account when it allows for each sub-national government to generate its own additional revenues. But a recent World Bank report concluded that Turkana county, where oil had already been found, as well as other counties with high exploration potential — such as Mandera, Marsabit, Garisa and Lamu — may lack the necessary capacity to collect their own revenues (World Bank, 2012b, 58-68). Earlier this year, Kenya’s National Commission on Revenue Allocation (CRA) threatened to sanction 25 counties for failing to balance the first budgets they produced, in what could be early proof of their knowledge limitations (Okoth, 2013).
26The inability of counties to raise and manage their own revenues could be debilitating for the smooth implementation of Devolution if sub-national authorities continue to depend on central government allocations to meet their local needs. Unfortunately, instead of concentrating on improving the competence of counties, the main focus at the moment has been on raising the 15% central government subsidy. Opposition politician Raila Odinga, who lost the March presidential election to Kenyatta by just a few thousand votes, has been the main advocate of increased central government transfers. He has called for a referendum to amend the constitution in order to increase monetary allocations to counties — from 15% to 45% — and to give more functions to governors, a move he maintains would strengthen Devolution. Odinga has also questioned President Kenyatta’s real commitment to Devolution in the light of obvious limitations to its implementation.
- 5 According to Kenya’s 2009 Population and Housing Census, the Kikuyu are the largest ethnic group w (...)
27There is a line of thought in Nairobi that considers it not to be a question of whether the constitution should be amended but when this will happen, as a necessary step to introduce a more equitable monetary distribution system. However, the question should be if now is the right time to call for a constitutional amendment coming so close after an extremely tense presidential election that emphasized political alliances along ethnic lines, without adequate time to heal, and less than six months since Devolution has been implemented, which is not seen as long enough to judge its effectiveness. The winning ticket of the 2013 presidential election was formed by an alliance of the Kikuyu and the Kalenjin ethnic groups, represented by the now President Uhuru Kenyatta and Deputy President William Ruto, respectively. Odinga, who belongs to the fourth largest ethnic group — Luos —5 and finished in a close second place, contested the results at the Supreme Court, arguing vote-counting irregularities. After weeks of heated hearings and built up of popular expectations, the Supreme Court declared Kenyatta the winner, a verdict Odinga reluctantly accepted. His acceptance was a relief for those who feared the elections might mirror the violence of the previous poll in 2007-early 2008. But the electoral results clearly stressed the country’s ethnic and political divide.
28If successful, Devolution could contribute to an easing of ethnic splits by attending to the needs of the population as a whole, regardless of their ethnicity, and oil and gas revenues could be a key to allowing that process. But for that to happen Devolution needs to be put to the test first and its inefficiencies amended along the way. Declaring Devolution ineffective right from the start and tampering with the constitution before it is made effective would not necessarily guarantee a better form of decentralization. Instead it could strip Devolution of its legitimacy if the amendments are associated with the resolve of one ethnic group over others, and if there is not enough empirical data to prove its weaknesses.
29In order to prevent the misuse of oil proceeds, counties should adopt clearly defined participatory resource management mechanisms well before hydrocarbons start to generate revenues. Preferably, by the time oil and gas moneys start to flow, a list of prioritized development projects to be funded with the new revenues should be identified, with direct input from the community. The limitations of participatory approaches to development funding are well known, particularly when it comes to identifying representative community leaders (Humphreys et.al., 2006). However, even if community participation does not always produce sound policies, it is crucial for ensuring the legitimacy of development programs. Judging from international experience, particularly in Latin America, without transparent and participatory resource allocation mechanisms established well before oil and gas revenues start to be generated, there is a high risk of the funds being mishandled and of high levels of corruption developing down the line (Vasquez, 2014 forthcoming). The lack of clarity about how oil and gas revenues will be distributed once generated can create misinterpretations and false expectations that may eventually lead to conflict if the local population fails to enjoy the fruits of hydrocarbon development (Ross, 2008, 2-8).
30When local governments lack the capacity to manage large oil or gas resources, or when the allocation of these is not transparent or clearly determined early on, there is a risk that decentralization will serve as a re-location of governance flaws from central states to regional or local governments. Some authors have defined this process as a new form of resource curse (Arellano-Yanguas, 2008). In Peru, the transfer of natural resource revenues to local governments in producing areas contributed to exacerbating local conflicts due in part to inefficiencies in the process, and sometimes to the absence of pre-existing, locally-defined development programs to be funded with the new resources (Vasquez, 2014 forthcoming; Arellano-Yanguas, 2011). Among oil-producing countries, Nigeria is a key example of the possible negative outcomes of fiscal decentralization, which have been summarized as: the decentralization of corruptionassociated with increased oil revenue flows to sub-national governments; the democratization of the means of violence, where widespread deployment of arms at the local level undercut the state monopoly on violence; and a considerable increase of wealth and power among state governors, as a result of the reallocation of oil revenues to sub-national governments (Watts, 2009).
31Kenya is still in the initial stages of building a new institutional framework, which might be a good time to start designing mechanisms for managing future oil and gas revenues in order to avoid the mistakes of other oil-producing countries. Parallel to the adoption of Devolution, Kenya has engaged in the upgrading of the two main laws that govern the oil and gas sector: the Petroleum (Exploration and Production) Act‐Chapter 308 1986 (the Petroleum Act); and the Energy Act of 2006. Both pieces of legislation are in the process of being revised by the government, with technical assistance provided by the World Bank. The Petroleum Act regulates the negotiation of oil contracts between the government and the oil companies, and the Energy Act sets the rules that govern the country’s energy industry, including the controversial distribution of oil and gas revenues. Until now, oil and gas exploration licenses were given by the Ministry of Energy as part of bilateral negotiations with companies, in a process largely criticized by the civil society for its lack of transparency. The government has expressed its intention of modifying this modus operandi by incorporating in revised laws participatory bidding processes for granting hydrocarbon licenses.
32In Kenya, where a pronounced competition for scarce resources exists in a context of deep ethnic and economic differences, producing counties should ensure participatory allocation mechanisms are in place before oil and gas revenues start to flow. There are more than 40 ethnic groups in Kenya that share different geographies and enjoy variable levels of economic development. From the arid and semi-arid northern region to the urban centers of Nairobi, Mombasa and Kisumu, members of diverse ethnicities coexist in competition for access to scarce resources. Devolution will not suppress that competition, but it could contribute to setting up more equitable redistribution systems, particularly for new oil or gas revenues. Once counties start receiving the proceeds from oil and gas, competition between local groups for access to these and to the benefits of projects developed around them, may increase particularly during the initial phases of Devolution. Unless promptly and efficiently attended to, the race for access to the new oil resources could turn into a permanent and probably violent conflict that would no doubt be intensified by ethnic rivalries. An indication of the type of wrestling that may develop around projects generated by hydrocarbons is the increased violence registered in the past year in the Eastern Province town of Isiolo, one of the core development centers of LAPSSET. There, violent confrontations are common and have been historically associated with ethnic differences, cattle rustling and competition for scarce resources. Lately, those confrontations were emphasized by unclear land adjudication practices and speculative expectations of a rise in the price of land associated with future oil developments.
33Communities living in the areas where oil has been found have already started to position themselves, way before actual production begins, to ensure they will get a fair share of the oil revenues. In Turkana, as soon as news of the oil finds were made public, local communities started to mobilize to actively demand a share of future royalties. Various civil society organizations were created, and others are in the process of being formed to defend the rights of communities living in future hydrocarbon-producing areas. A conglomerate of recently-formed Turkana-based civil society organizations requested a 50% royalty share, and they also demanded that each family affected by oil operations receive monthly stipends as soon as production begins (Turkana Civil Society Organizations, 2012). For the moment, extraction industries in Kenya are required to pay royalties to the central government, not to producing counties.
34Also key for guaranteeing sound oil revenue allocation in Kenya will be the ability to rapidly address allegations of corruption by authorities, particularly at regional and local levels in new oil and gas producing areas, where the local population and civil society repeatedly complain of shady deals by those in charge. For example, in the remote and marginalized Turkana region, where communities depend on emergency aid during droughts, local authorities have been accused by human rights groups of confiscating and selling relief food. The set up of multiple layers of elected county authorities being designed through Devolution is not only expected to provide checks and balances against political excesses but in the long run, it could also contribute to developing institutional horizontal accountability mechanisms, by which one government entity holds another accountable (O'Donnel, 1998). Above all, given the widespread culture of corruption among government officials in Kenya, it might be helpful to set up county-level instruments for citizens and the civil society to act as whistle blowers, and to ensure the judiciary operates competently and with no interference.
35Kenya's oil and gas reserves are located in areas that have been historically prone to conflict over scarce resources, such as land and water. Violent competition for these has always existed in what is commonly known as Northern Kenya, which encompasses almost 80% of the country's land mass, and consists mostly of arid and semi-arid Lands (ASALs). Frequent droughts, intensified in recent years by climate change have stressed rivalries over water and land in the ASALs. By some estimates, only 17% of the land in Kenya is fertile and over 80% of Kenyans depend on it for subsistence (Kanyinga, 2004), which explains the intense competition for land and the deep-rooted grievances that exist around it.
36The ASALs areas have historically been neglected and today lag far behind other rapidly growing areas (Okoth-Ogendo, 1991; Mwathane, 2010; Syagga, 2011). For that reason, the economic development of the ASALs to reduce regional inequalities — and risks of conflict — has become one of Kenya’s top priorities, and recently discovered hydrocarbon sources there could play a fundamental role in that process (Republic of Kenya, 2011). There is a national ASALs policy and a development strategy specifically geared to addressing the particularities of these areas: a unique geography; dispersed populations; unique pastoral livelihood; low levels of education; and unskilled labor, among others (Republic of Kenya, 2012). .
37Two of the four oil basins — Anza and Mandera — fall entirely within Kenya's ASALs. So does most of the Tertiary Rift Basin — where oil exploration is most advanced — with the exception of the western part that stretches throughout Lake Victoria. The northern half of the coastal Lamu Basin is within arid land, and the south in semi-arid areas. An extraordinarily large percentage of the population living in these future oil and gas producing regions lives below the poverty line. Graph 2 shows some of the districts in each basin with the highest level of poverty. Of note here are Moyale, in the Anza Basin, and Malindi, in the Lamu Basin, with 71% and 65% of inhabitants falling below the poverty line respectively. No figures are available for the Mandera Basin.
Graph 2 - Percentage of Individuals living below the poverty line in the oil region
Source: Compiled by author from data (World Bank, 2013a).
38In the northwestern Turkana region where Tullow Oil found the first oil reserves within the Tertiary Rift Basin, violent clashes between the Pokot and Turkana peoples have taken place since colonial times, mainly over cattle and scarce land and water. Exploration for oil in Turkana is ongoing, and the exact location of the reservoirs has yet to be determined, which explains why current oil blocks expand through relatively large areas and have flexible borders for the moment. Uncertainty over the location of the oil finds has already generated disputes. Following the announcement of the discovery of the Ngamia 1 oil well, the Pokot and the Turkana peoples contested the location of the reservoir, and the former accused the latter of having illegally occupied part of their territory in the past where the reservoir now happens to be located.
39Speculation by members of the political elite over the future value of oil lands, which added to the migration of population to future producing areas in search of jobs has already started to deepen competition over land. According to some estimates, at least 100’000 hectares of land were bought in recent years in Lamu by people from outside the region — known locally as speculators, — in expectation of an increase in its value following oil and gas discoveries (Nunow, 2012). In some cases, non-residents bought land in Lamu and received a title for their purchase, creating much friction with the local population that consistently failed to secure legal rights to the plots where they have always lived. In Kenya in general, local authorities have been publicly accused of illegally allocating government plots in urban areas, or of misusing trust lands, which the 2010 constitution describes as native reserves where communities live collectively and with no formal ownership (Republic of Kenya, 2004). The areas where oil has now been found are no exception to this history of land irregularities.
40The 2010 constitution tried to give a fresh start to efforts at resolving land conflicts, by creating three new categories of land tenure: community, private and public [Art.62(2)]. Also, a National Land Commission was created with a temporary mandate to, among other issues, investigate present and past land injustices and recommend appropriate action [Art.67(e)]. Eventually, the Commission is supposed to devolve its mandate for managing community land to a county management Board. The work of the Commission has already borne fruit in some counties, where local governments have started to issue land titles to area residents. However, local populations have raised concerns about improper and hasty prior investigations as to who should get the new land titles. Unless done in a participatory way, the process of identifying land title beneficiaries may lack legitimacy from the start and could result in conflict in the future. To avoid this, the civil society has demanded the Commission be more inclusive and allow for community participation, which would in turn make the Commission’s work more accountable.
- 6 Author interviews with several land experts who asked to remain anonymous 29/01/2013-27/02/2013.
41In addition, the establishment of land grievance mechanisms, such as a Land Ombudsman, would also be recommended to attend to the dozens of on-going land claims and complaints about the work of the Commission. Once County Boards become functional, they run the risk of replicating the same flaws as their centralized sister organizations unless participatory and grievance mechanisms are in place from early on to help spot and eventually modify operational mistakes. Bloody land competition between counties looking to position themselves vis a vis expected oil-related economic growth has already started and should not be overlooked. In Meru county, which borders with the up-and-coming Isiolo county, the local governor requested the central government to deploy security forces, following bloody confrontations between residents of both counties in a dispute about border land. The National Land Commission and an independent Electoral and Boundaries Commission are expected to determine the border between the two counties. Unfortunately, the extent to which the National Land Commission can carry out its mandate is unclear due to insufficient funding, which land experts take as a deliberate maneuvering by elites holding an interest in valuable lands6.
- 7 Petroleum (Exploration and Prodution) Act, Chapter 308. (Revised Edition 2012). Nairobi: National (...)
- 8 See World Bank (1999) OP 4.01‐ Environmental Assessment. Available at: http://web.worldbank.org/W (...)
- 9 See International Financial Corporation & World Bank Group (2007) Environmental, Health and Safety (...)
42Probably the greatest controversy at the moment is the lack of clear safeguards for compensating displaced population in areas earmarked for oil and gas exploration. Various scattered laws incorporate environmental and social safeguards but their implementation is not systematically monitored. The 2010 constitution emphasizes the need to adopt permanent systems of environmental impact assessment, and of environmental audit and monitoring [Art.69]. For displaced populations, the Petroleum Exploration and Production Act calls for compensation when oil or natural gas activities take place in private lands7. In 2012, Kenya signed the Internally Displaced Persons Bill, which includes elements of the World Bank’s [OP 4.12] safeguards on Involuntary Resettlement. Also, some of the foreign companies operating in Kenya claim to apply the latest international safeguards. For example, Tullow Oil, the most active oil company in the country claims to adhere to the latest World Bank8 and International Finance Corporation (IFC)9 safeguards. But in general, the perception among the local population is that they are not being fairly compensated. It may still be too early for regional and international development organizations to use their weight to guarantee sound implementation of environmental and social safeguards around oil and gas operations. But when the right moment comes, perhaps the example of the Camisea natural gas project in Peru, where the Inter-American Development Bank (IADB) took extraordinary steps to ensure the highest possible level of monitoring and civil society participation could be examined to extract lessons learned (Vasquez, 2014 forthcoming). Although perfectible, the transparency and participatory elements of the Camisea project stand out, and the role of the IADB in it has been much praised.
43Large oil companies usually have the financial capacity to devote reasonable funds for the adoption of the latest internationally recognized social and environmental safeguards. Pressure from their stakeholders to do so is probably their strongest incentive. Then there is a layer of smaller oil players, known as ‘juniors’ in oil jargon, whose financial capacity is more limited than their larger counterparts, and whose adherence to the latest international regulations is not always as systematic. Some of these juniors are not publicly traded so that they do not have the investor pressure of majors to abide by the latest rules. The majority of oil companies present in Kenya at the moment are juniors doing exploration. On avergage, these small companies have a relatively short-term horizon because they expect to be acquired by their larger sisters once they find reserves, so that their commitment to the local population is transitory. Like juniors, Chinese national oil companies, which are increasingly present in Eastern Africa, also have a reputation for less stringent social, environmental and labor safeguards (Shankleman, 2009). In Kenya, China’s CNOOC is very active, and with a few exceptions – such as large oil companies like the British BG Group, Italian Eni and French Total; and the two large US independent oil and gas corporations Anadarko, and Apache, - most of the other oil companies are small juniors working on the initial exploration phase. Typically, conflicts start during that initial stage of oil or gas development.
44Compared to the other juniors, Tullow Oil is the biggest international oil operator in Kenya in terms of acreage and market capitalization. Tullow holds the largest market value among Kenya’s small oil players, at around U$S9.5 billion, followed by the two Canadian companies Africa Oil, with U$S2.5 billion and Taipan Resources with $23 million. Although a small global player when compared to Total’s U$S116 billion market value, Eni’s U$S60.5 billion, or BG Group’s U$S40.5 billion, Tullow’s imprint in East Africa is strong and is growing in tandem with its oil discoveries. Following discoveries in Uganda, Ghana and most recently Kenya, Tullow has grown from a relatively small and little known oil company to a strong East Africa player. It was thanks to its growing reputation in the region that Tullow managed to sell three giant fields in Uganda in 2011 to France’s Total and China’s CNOOC, in spite of a tax spat hanging over the company from the time Heritage Oil was Tullow’s partner in those fields (Anderson & Browne, 2011). Tullow recently won a court case against Heritage in relation to that case.
45 But Tullow’s operations are themselves not devoid of conflict. The company’s increased exploration and production activity in Kenya has been opposed by pastoralist communities of Lake Turkana, who complain that oil exploration interferes with the land they use to feed their cattle (NG’Asike, 2013). Oil exploration works had been delayed in Turkana due to disagreements with pastoralist communities at the time this article was being researched. There were calls for a slowdown of oil exploration while additional consultations were carried out with local communities. Tullow reassured the local population that only a small and restricted portion of their land was being affected by oil exploration.
- 10 The Extractive Industries Transparency Initiative (EITI) calls for extractive industries to report (...)
46In response to community unrest, Tullow is intensifying its corporate responsibility programs not only in Kenya, but throughout East Africa. In 2012, the company disclosed in its corporate responsibility report payments it made to eight governments in sub-Saharan Africa. The disclosure was unusual in Africa’s oil business, where secret deals between governments and companies are the norm rather than the exception, and it came as part of the requirements set by the international, multi-stakeholder, anti-corruption Extractive Industries Transparency Initiative (EITI) to which Tullow’s main producing country, Ghana, is a signatory10. Although Tullow’s disclosures fell short of full EITI obligations, it is a welcomed first step towards expanding transparency in Africa’s extractives industry, in the hope of curbing both corporate and government corruption (Callus, 2013). Unfortunately, Kenya is not yet a signatory of the EITI although the government has repeatedly expressed its intentions of signing it.
47For the moment, one of the strongest international instruments available to combat accounting corruption are: the US Dodd-Frank Walls Street Reform Act, which requires that oil, mining and gas companies listed in the US Securities and Exchange Commission (SEC) publish how much they pay the governments of the countries where they operate; and the European Union Transparency Directive, which proposes the same for European listed corporations. The larger companies operating in Kenya — Eni, Total, CNOOC, BG Group, Anadarko and Apache — are listed in both the US and/or Europe stock exchanges and are obliged to comply with both laws. However, of the other 17 smaller companies, only six are listed in either Europe or the US, while the remaining 11 are privately owned or listed in Canada, and thus are not legally obliged to make any such disclosures. Table 1 shows a list of the smaller oil companies operating in Kenya: the first 11 on the chart are private or listed in Canada, and the last six are listed in either the US or London stock exchanges.
Table 1 - Small oil companies operating in Kenya and their financial obligations*
Source: Compiled by the Author from company data. *Excludes the larger oil companies operating in Kenya: Eni, Total, CNOOC, BG Group, Anadarko and Apache.
48The National Environmental Management Authority (NEMA) is the government office in charge of monitoring compliance with Kenya’s social and environmental safeguards. But NEMA is understaffed and underfunded and does not have the full capacity needed for monitoring and assessment of oil and gas developments, particularly in environmentally and socially sensitive areas. Monitoring of company activities is thus not too systematic for the moment in Kenya. The contribution of Kenya’s civil society in this respect is currently equally weak. There is an increasingly active, although still embryonic, civil society that is trying to have a say in the formulation of hydrocarbon laws and in the development of the institutional framework. But the author received many complaints about the lack of transparency and of sufficiently participatory mechanisms around the design of the hydrocarbon institutional framework. In theory, the new hydrocarbon laws under discussion are expected to introduce transparent and participatory frameworks to ensure that oil revenues are equitably and efficiently shared with sub-national governments, and that oil operations are efficiently monitored at the local level.
- 11 Author meetings with Turkana civil society representatives (23/01/2013).
49Communities living in areas where oil exploration is taking place complain of a lack of consultation prior to the granting of oil licenses in Nairobi. The government first made a public announcement about the discovery of oil in Turkana in March of 2012, at least two years after the start-up of exploration works. By then, the livelihoods of communities living in the oil areas had already been affected by oil operations. A few months after the announcement, the local Turkana population blocked oil operations to get the attention of the central government. The actions were effective as the central government sent high-level officials to Lodwar, the capital city of Turkana, to meet with local communities affected by oil operations11. The outcome was positive and the protests were diffused in this particular case. But this modus operandi could set the stage for the pervasive use of conflict as a coercive tool to obtain answers from an otherwise distant government.
50Kenyan civil society is becoming increasingly connected with peers in Tanzania, Mozambique and particularly Uganda, following natural gas and oil discoveries in those countries. In some cases, various incidents in neighboring nations that are also in the process of developing their respective hydrocarbon industries contributed to creating alarm bells in Kenya. Such is the case with a series of corruption scandals linked to oil in Uganda and involving high-ranking government officials, at a time when long parliamentary debates were being held in that country around hydrocarbon laws. Particularly disturbing were reports associating Tullow Oil, which also has operations in Uganda, with a bribery case that directly implicated that country’s President Yoweri Museveni. Tullow is a key player in Uganda’s Lake Albert region, which is slated to become the source of East Africa’s first commercial oil production in the next three or four years.
- 12 See Chapter Eleven-Devolved Government, 174 (b),(c), (e), and 175 (c) of the Constitution of Kenya (...)
51Oil production has not yet started in Kenya, but local communities’ grievances are increasing. Kenya should consider the prompt establishment of grievance mechanisms in the producing areas to ensure those voices are heard. For example, an oil Ombudsman could be named from among well-respected community members, with a mandate to mediate disputes between companies, communities and authorities, and with easy access to judicial channels when no other solutions are at hand. The existence of grievance mechanisms would go along with Kenya’s 2010 constitution, which puts much emphasis on the need to develop a more inclusive society through increased participation, and the recognition of diversity, of the rights of minorities, and of marginalized communities12. In the absence of these mechanisms, communities in producing areas typically resort to action when they feel they are not getting enough benefits from of oil and gas developments in their regions. Turkana has already seen a glimpse of this when local youths recently blocked a main road and disrupted traffic to protest over what they considered to be discriminatory hiring by the oil company Tullow, who they said sidelined them when it came to employment.
52As oil exploration in Kenya moves forward with increasing success, the introduction of clear and participatory oil revenue allocation policies and of effective grievance mechanisms becomes imperative to avoid future disputes. Kenya’s civil society representatives need to be trained and educated on oil and gas-related issues so that they can monitor operations and develop their own judgment vis a vis oil disputes. They could be also instrumental in contributing to community participation for defining an investment agenda to be funded with oil and gas resources.
53A confluence of positive circumstances over the last few years may place Kenya on the right pathway to achieve long term sustainable development, to reduce large inequalities, to ensure the application of the rule of law, and to address some of its most pressing problems, such as corruption. Kenya is at the forefront among its East African peers and it could become Africa’s role model of success. Improved economic growth rates, a deep institutional transformation through the process of Devolution, and a reformed judiciary are some of the elements contributing to that process. The recent discovery of oil and natural gas could come at the right time to accompany Kenya through that path, provided planned institutional reforms are properly and timely adopted to manage the new revenues.
54The adoption of a more inclusive constitution, steady economic growth and a commitment to addressing inequalities, the embracing of Devolution and recent peaceful presidential elections, all contribute to setting the stage for Kenya to engage on a successful management of its oil and gas wealth. However, these achievements do not guarantee that the country’s transition to becoming an oil and gas producer will be conflict-free. Many of the new reforms have yet to be tested, the newly elected President Kenyatta has not been in power long enough to show the extent of his commitment to them, and one non-violent electoral process does not guarantee a lasting future peace. The terrorist attack in the Nairobi shopping mall in September 2013 that left dozens dead and hundreds injured certainly saw returning fears of conflict rising in Kenya. Furthermore, recent developments around the issue of Devolution have exposed the still fragile nature of Kenya’s political status quo, and have highlighted institutional weaknesses that could be easily emphasized with the arrival of oil and gas revenues.
55Oil and gas could be key for testing the effectiveness of the ongoing government decentralization process once revenues start to flow. Kenya’s constitution guarantees the transfer of minimum unconditional funds to local county governments, creating an opportunity for these to directly address some historical local grievances. This process is expected to introduce a more equitable distribution of resources and to make local authorities directly accountable for their actions.
56If successful, Devolution could transform Kenya and new oil and gas revenues, if well managed, could play a vital role in contributing to Kenya’s goal of becoming a middle-income country by 2030. However for the moment, many uncertainties remain, particularly around future management of the new oil and gas resources under an embryonic institutional framework that once in place will be very different from the one Kenyan politicians and public servants have been familiar with. Unless proper safeguards are put in place in a timely manner, there is a risk that Kenya’s history of non-transparent revenue management, political patronage, and abuse of power could be transferred to the newly created local governments where new hydrocarbons will be produced.
57In the producing areas, traditional competition for scarce natural resources — such as land and water —will most likely increase with the arrival of oil and gas developments. Unless the newly elected government gives priority to resolving the hundreds of land disputes that undermine the development of the country, oil and gas could become one more topic on the list of Kenyans’ grievances. To what extent the government is committed to resolving this contentious issue is not clear, particularly considering that the political elites have already started to make economic gains through land speculation in areas earmarked for oil developments, and that ethnic tensions are deeply rooted over the control of land.