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THE AWARDING OF PETROLEUM EXPLORATION AND PRODUCTION RIGHTS AND INCORPORATION OF ENVIRONMENTAL RULES IN KENYA: LESSONS FROM UNITED KINGDOM (UK) AND NORWAY Kenneth K. Joe, 277211 Department of Law University of Eastern Finland 12 December 2016 Supervisor: Prof. Kim Talus

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Page 1: THE AWARDING OF PETROLEUM EXPLORATION AND … · 2017-03-16 · Offshore Health and Safety in the Nigerian Oil and Gas Industry: Lessons from the United Kingdom’, Oil, Gas and Energy

THE AWARDING OF PETROLEUM EXPLORATION AND

PRODUCTION RIGHTS AND INCORPORATION OF

ENVIRONMENTAL RULES IN KENYA: LESSONS FROM UNITED

KINGDOM (UK) AND NORWAY

Kenneth K. Joe, 277211

Department of Law

University of Eastern Finland

12 December 2016

Supervisor: Prof. Kim Talus

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Abstract

UNIVERSITY OF EASTERN FINLAND

Faculty

Faculty of Social Sciences and Business Studies

Department

Department of Law

Author

Kenneth Kaunda Joe

Title

The Awarding of Petroleum Exploration and Production Rights and Incorporation of

Environmental Rules in Kenya: Lessons from UK and Norway

Major Subject

International Economic and

Resources Law

Work type

Master’s Thesis

Time

Autumn

2016

Pages

xxxi + 72

Abstract

The discovery of substantial amount of oil in Kenya and ongoing further explorations, the most

important issue that requires attention is the legal framework of the sector. This paper will focus

on the process of awarding exploration and production rights and how environmental regulations

can be incorporated into that process. The discovery comes at a time when environmental issues

are of great importance owing to the climate change regime and the significant growth of

international environmental law and climate change law as distinct disciplines. This implies that

environmental issues can no-longer be downplayed and the current petroleum legislative

frameworks must properly address the issue in agreements with oil companies.

The process of awarding exploration and production rights is extremely important more so for

developing nations. In-order as to ensure that oil companies are in line with the requirements of a

particular country, there is need for viable legal and regulatory structures that will lead to

selection of the most suitable companies. There are other considerations that must be taken by the

awarding state such as environmental issues, transparency and credibility of the company, local

content, financial capability but the emphasis of the thesis will be incorporation of environmental

regulations into the process.

This is a comparative analysis that aims at identifying the loopholes in the current legal and

regulatory framework of awarding petroleum rights in Kenya by looking at developed and stable

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jurisdictions and for this case UK and Norway. These two countries have developed regulatory

frameworks which Kenya can learn from as it looks forward to developing the petroleum sector.

When suitable and competent companies (IOCs) are awarded contracts, not only will Kenya

maintain high environmental standards, it will minimize challenges in the whole sector hence

better development.

Key words: Exploration and Production, Awarding of Rights, Petroleum, Incorporation of Environmental

Regulations, Legal and regulatory Framework, Act

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Table of Contents

Bibliography .................................................................................................................................. v

Abbreviations ............................................................................................................................ xxx

1. INTRODUCTION..................................................................................................................... 1

1.1 Background ................................................................................................................................. 2

1.2 Existing Legislative framework.............................................................................................. 3

1.3 Objectives and Research Question ........................................................................................ 4

1.4 Need for Comparative Law and Research Methodology ................................................. 5

1.5 Structure ...................................................................................................................................... 6

1.6 Definition of Terms ................................................................................................................... 7

2. DEVELOPMENT OF LICENSING....................................................................................... 9

2.1 History of Licensing .................................................................................................................. 9

2.2 Early Licensing and Environmental Regulations ............................................................ 13

2.3 Contractual Systems for Access to Petroleum .................................................................. 16

2.3.1 Modern Concessions ........................................................................................... 16

2.3.2 Service Contracts ................................................................................................ 17

2.3.4 Joint Ventures ..................................................................................................... 19

2.3.5 Production Sharing Contracts ........................................................................... 20

3. ALLOCATION OF EXPLORATION & PRODUCTION RIGHTS ................................ 22

3.1 Legal Regimes in Allocation of E&P Rights………………………………………....22

3.2 Licensing .................................................................................................................................... 23

3.2.1 Discretionary Allocation of Licenses in UK and Norway................................ 24

3.2.2 Competitive Bidding ........................................................................................... 30

3.2.2.1 Cash programme .............................................................................................. 32

3.2.2.2 Work Programme ............................................................................................ 34

3.2.3 Direct Negotiations/Open door system.............................................................. 35

3.2.4 First come first serve basis ................................................................................. 36

4. INCORPORATION OF ENVIRONMENTAL REGULATIONS INTO AWARDING OF

E&P RIGHTS.............................................................................................................................. 39

4.1 Importance of Incorporating Environmental Regulations……………………………… 46

4.2 United Kingdom (UK) ................................................................................................................ 43

4.2.1 Laws and Regulations ..................................................................................................... 43

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4.2.3 Licensing and Environmental Regulations in UK ........................................................ 46

4.3 Norway ......................................................................................................................................... 54

4.3.1 Laws and Regulations ..................................................................................................... 54

4.3.2 Licensing and Environmental Regulations in Norway ................................................. 55

4.4 Lessons for Kenya ....................................................................................................................... 65

5. CONCLUSION ....................................................................................................................... 70

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Abbreviations

AAPL American Association of Petroleum Landmen

APA American Petroleum Association

CS Cabinet Secretary

DECC Department of Energy and Climate Change

DSG Decommissioning Steering Group

E&P Exploration and Production

EEA European Economic Area

EIA Environmental Impact Assessment

EITI Extractive Industry Transparency Initiative

EU European Union

HSE Health and Safety, Environment

ICOP Industry based Codes of Practice

IMO International Maritime Organization

IOC International Oil Company

JOA Joint Operating Agreement

L&R Legal and Regulatory

ME Ministry of Energy

ML Ministry of Labor

MPA Minerals Planning Authority

MPE Ministry of Petroleum Energy

NAFFAC National Fossil Fuels Advisory Committee

NCS Norwegian Continental Shelf

NEMA National Environmental Management Authority

NOC National Oil Company

NOCK National Oil Company of Kenya

NPD Norwegian Petroleum Directorate

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OGA Oil and Gas Authority

OGED Offshore Oil and Gas Environment and Decommissioning

OGITS Oil and Gas Industry Task Force

OPEC Organization of the Petroleum Exporting Countries

OPOL Offshore Pollution Liability Association

OSDR Offshore Safety Directive Regulator

OSPRAG Oil Spill Prevention and Response Advisory Group

PDO Plan for Development and Operation

PED Petroleum Exploration and Development License

PEEA Petroleum Institute of East Africa

PIO Plan for Installation and Operation

PLMU Petroleum Licensing and Monitoring Unit

PSA Petroleum Safety Authority

PSC Production Sharing Contract

SC Service Contract

SIA Social Impact Assessment

UK United Kingdom

UKCS United Kingdom Continental Shelf

UKOOG United Kingdom Onshore Operators Group

UN United Nations

UNCTC United Nations Centre on Transnational Corporations

UNFCCC United Nations Framework Convention for Climate Change

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1. INTRODUCTION

The discovery of substantial amount of oil in Kenya and ongoing exploration in various regions

requires better legal and regulatory framework that will guide the sector. Because the legal

framework of the oil industry would be very broad area to look into at this stage, my focus will

be more on the process of awarding of exploration and production rights or licensing. The focus

of the paper will be on the process of awarding rights and the criteria used in Kenya, the legal

framework that guides that process and the incorporation of environmental regulations in to that

process in comparison to United Kingdom and Norway. The process of awarding exploration and

production rights is considered very important more so for developing nations like Kenya. Many

developing states have faced challenges because of the flawed or less regulated process of

awarding such rights. So as to ensure that International Oil Companies are in line with the

requirements of a country, there is need to have viable Legal and Regulatory structures in place

that will lead to selection of the most suitable companies.

There are considerations that must be taken by the awarding state such as environmental issues,

transparency and credibility of the company, local content, financial capability but the paper will

only focus on incorporation of environmental regulations into the process of awarding petroleum

rights. The exploration and production of oil and gas is a very complex activity with several

perspectives such as the economic, legal, financial, political and environmental.1 The choice to

look into the incorporation of environmental regulations is due to lack of substantial academic

work in that area in Kenya and the need to come up with valid lessons from other jurisdictions.

This paper will explore the legal and regulatory frameworks of the factors above in UK and

Norway and make a comparison to Kenya and consequently draw some lessons. United

Kingdom colonized Kenya hence most of the legal roots were adopted from its system and there

still exist similarities between the legal system and besides that, Kenya has recently borrowed

from the UK in its formulation of new petroleum laws. Besides the UK, there are other countries

that have very stable legal frameworks within Europe such as Norway that will give insights on

what actually can be done. If Kenya ensures that the process of awarding of exploration and

production rights is well conducted, there will be few problems in the later stages of the oil

1 T. HUNTER, Regulation of the Upstream Petroleum Sector: A Comparative Study of Licensing and Concession

Systems (Edward Elgar Publishing 2015), p. 3.

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production and disposal because with a proper foundation, the whole sector will be able to stand

other likely challenges.

1.1 Background

Most oil companies have always adopted regulations that are geared towards compliance with

the rules and regulations set up by host governments but they avoid adequate adoption and

incorporation of environmental issues into their activities.2 The consideration of environmental

issues has been a challenge for the oil industry and more so for nascent countries such as Kenya.

Currently the need to ensure effective environmental standards is more than a moral or ethical

obligation but a demand by the society. The paper therefore focuses on environmental rules and

their incorporation into the awarding of rights due to limited academic focus in that area. Oil has

been the lifeblood of the industrialised nations;3 oil has become the world's most important

source of energy since the mid-1950s4. Its products underpin modern society, mainly supplying

energy to power industry, heat homes and provide fuel for vehicles and aeroplanes to carry goods

and people all over the world.5 The developing nations on the other hand are trying to reap the

maximum benefits from the petroleum industry in-order to spur economic growth and

development. Africa specifically is increasingly becoming a major player in the oil and gas

industry with latest discoveries of oil and gas in countries such as Tanzania, Uganda, Namibia,

Sierra Leone, Liberia, Mozambique and Kenya.6 It is estimated that over 500 companies are

currently participating in oil and gas exploration in Africa.7 With that high number it is clear that

Africa as a continent is a key player in the petroleum industry and is still poised to maintain that

status with increasing discoveries.

Kenya is one of the countries with recent discovery of oil after several years of intensive

exploration. Kenya made its first discovery of oil in March 2012 in the Lokichar basin in the

northwest of the country by Tullow oil.8 The exploration activities began in 1950s by British

Petroleum (BP) and Shell but none of the wells drilled at that time were declared discoveries.

The two initial companies were later joined by Total, Pacific and Chevron and more wells were

2 Environmental Impacts of the Oil Industry: [http://www.eolss.net/sample-chapters/c08/e6-185-18.pdf] accessed 5

December 2016. 3 K. TALUS (ed), Research Handbook on International Energy Law, (Edward Elgar Publishing 2014), p. 3. 4Ibid. 5United Kingdom Oil and Gas (UKOG): Why Oil is important. Available at

[http://www.ukogplc.com/page.php<last] accessed 1 July 2016. 6 E. G. PEREIRA and K. TALUS, African Upstream Oil and Gas: A Practical Guide to the Law and Regulation,

Volume II: 2 (Globe Law and Business 2014), p. 2. 7Ibid 207. 8Ibid.

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drilled but were all unsuccessful.9 There have been nine successful wells in Turkana County

containing commercially viable oil reserves.10 With such discoveries and the ongoing exploration

activities in various blocks, Kenya is poised to become an oil producing country. Currently there

are over 46 petroleum exploration blocks in Kenya and 44 of those blocks are currently licensed

and operated by IOCs.11 More blocks are expected to be relinquished and subsequently gazetted

as required by the law pushing the number of blocks under exploration to over 55.12 There are

over 25 companies that are currently involved in exploration activities in various parts of Kenya

and with the current growth of the industry; there is likelihood of other players joining the

industry in the roadmap to oil development and production.13

1.2 Existing Legislative framework

The upstream segments of oil and gas activities in Kenya are governed by the Petroleum

(Exploration and Production) Act Cap 308 of 1984, as revised in 1986 (herein after the

Petroleum Act of Kenya).14 Currently this Act is the primary legislation that governs oil and gas

exploration, development and production. It gives the minister in charge powers to negotiate and

enter into agreements on behalf of the government.15 The policy and regulatory framework is

currently undergoing some review, to ensure that Kenya has a good upstream policy and law that

encourages growth of the industry and ensures that the country also benefits from the sector even

though the paper is based on the current legislation.16 There are other legislative frameworks that

guide the development and exploration activities in Kenya such as the Environmental

Management Coordination Act,17 Energy Act,18 Draft Energy Bill19 and the Draft National

Energy Policy.20 The Petroleum (Exploration, Development and Production) Bill, 2015 is

9Ibid. 10Ibid. 11Ministry of Energy and Petroleum: Licensing of petroleum exploration blocks, available at

[http://www.energy.go.ke/index.php/about-us/directorates/petroleum.html] accessed 24 August 2016. 12Ministry of Energy and Petroleum: Licensing of petroleum exploration blocks, available at

[http://www.energy.go.ke/index.php/about-us/directorates/petroleum.html] accessed 24 August 2016. 13 E. G. PEREIRA and K. TALUS, note 6 above, p. 207. 14Petroleum (Exploration and Production) Act 1984, s 6. 15Ibid, s 5(1). 16‘Oil and Gas in Kenya - Overview’ (MBendi.com), available at [//www.mbendi.com/indy/oilg/af/ke/p0005.htm]

accessed 4 November 2016.

*It is important to note that this paper is written based on the current legislation, the Petroleum Exploration and

Production Act Cap. 308 of 1984 as revised in 1986. There is a bill pending before parliament that will change the

legislations in this sector which the paper does not discuss as at now since it was not in place by finalization of the

paper. The paper is therefore based on legislations in place including up to 01.08.2016. 17Environmental Management and Co-ordination (Amendment) Act, 2013. 18The Energy Act, 2006. 19The Petroleum (Exploration and Production) Bill 2015. 20E. G. PEREIRA and K. TALUS, note 6 above, p. 208.

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currently before the parliament of Kenya and it proposes a number of changes.21 This bill if

passed, will improve substantially the legal and regulatory framework of the petroleum industry

in Kenya. This bill was passed through Parliament and forwarded to the senate for debate and

has been referred back to Parliament22 for further amendments and debate23 which may still

change the structure extensively hence the paper will mainly focus on the existing legal and

regulatory framework with slight mention of the expected changes.

The principal legislative document that guides the petroleum activities is the constitution of

Kenya 2010.24 The ownership of all minerals including oil and gas are vested in the people of

Kenya while the national government is meant to ensure their utilization is for the benefit of

Kenya.25 According to the constitution, the awarding of Exploration and Production rights should

be through the parliament of Kenya even though this has not come in to effect due to certain

supporting legislations that should be passed.26 This is also one of the major weaknesses of the

legal framework at the moment that is likely to affect the process of awarding rights because the

contracts currently operational did not go through parliament as provided by the constitution.

1.3 Objectives and Research Question

One of the most important processes in the upstream petroleum industry is the allocation of

rights and this is based on the fact that through the process of awarding contracts, the

government seeks to achieve economic, social and political objectives while on the other hand

the International Oil Companies (IOCs) want to maximize profits and returns from the

production.27 This process therefore requires certain standards set by the government and certain

specific requirements that such bidding companies should have in-order to be given the

exploration and production rights. Each country is unique and there are certain exogenous factors

that must be taken into consideration before adopting any method for effective allocation of

21The Petroleum (Exploration. Development and Production) Bill, 2015. available at

[http://www.erc.go.ke/images/docs/Petroleum_Bill_3rd_Aug_2015.pdf] accessed 11 August 2016. 22Parliament of Kenya: Bills from National Assembly, available at [http://www.parliament.go.ke/the-national-

assembly/house-business/bills] accessed 11 August 2016. 23Parliament of Kenya: Bills from National Assembly, available at [http://www.parliament.go.ke/the-national-

assembly/house-business/bills] last accessed 11/8/2016. 24Constitution of Kenya 2010, Art 71-Agreements Relating to Natural Resources. 25Ibid. 26Constitution of Kenya 2010, Art 71(1), (a)-Agreements relating to Natural Resources. 27S. TORDO, D. JOHNSTON and D. JOHNSTON, ‘Countries’ Experience with Allocation of E&P Rights:

Strategies and Design Issues’ (June 2009), p.1. Available at

[http://siteresources.worldbank.org/EXTOGMC/Resources/allocation_of_petroleum_rights_tordo.pdf] accessed 4

November 2016.

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exploration and production rights.28 The main focus would be to explore the legal framework of

awarding of petroleum rights in Kenya and look at the legal framework of United Kingdom (UK)

and Norway and how to effectively incorporate environmental regulations into the process.

The research seeks to delve into the incorporation of environmental regulations in to the

awarding of Exploration and Production (E&P) rights and avoiding political interference in such

processes. Environmental issues may pose significant challenges to the process of awarding of

Exploration and Production (E&P) rights in Kenya and therefore it is important that the research

address it adequately by looking at the Legal and Regulatory frameworks in other countries and

what is in place within Kenya’s jurisdiction and what improvements are needed so as to achieve

the best results. The challenge may be due to the fact that Kenya is just getting into oil

production and there is not much academic work that has been done in that area. The paper takes

a broad and in-depth study of the process of awarding of Exploration and Production rights in

Kenya by looking at the alternative approaches to awarding of Exploration and Production rights

and analysing if the first come first serve model currently in use is the best based on Kenya’s

situation and other various systems of allocation of Exploration and Production rights and the

best alternative for Kenya considering the Legal & Regulatory structure in place.

1.4 Need for Comparative Law and Research Methodology

The need and the interest for comparative law have seen renewed interest due to the discovery of

its importance in the current global system.29 Comparative law has evolved from mere study of

certain sections of the law to comparing various legal systems and that is the reason it is

commonly referred to as comparative legal systems.30 It is very important to compare various

legal systems so as to know what best works in every situation. Comparative law has served as a

fertile ground for the development of various legal systems with the study of foreign systems to

improve local or national legislations taking root.31 This comparative study has in some cases led

to transplantation which refers to the movement of one legal tradition to another by conscious

process of law-making or legal reform.32 This kind of comparative study of different legal

systems has helped many countries to develop very viable legal systems, for example Kenya that

28 Ibid. 29S. C. HICKS, ‘The Jurisprudence of Comparative Legal Systems’, 6 Loy. L.A. Int'l & Comp. L. Rev. 83 (1983), p.

83. Available at [http://digitalcommons.lmu.edu/ilr/vol6/iss1/4] accessed 12 August 2016. 30Ibid 85. 31J. M. SMITH, ‘Comparative Law and its Influence on National Legal Systems’, in M. REIMANN and R.

ZIMMERMANN., The Oxford Handbook of Comparative Law (Oxford: Oxford University Press, 2006), p. 515. 32A. WATSON, ‘Legal Transplants: An Approach to Comparative Law’ (1974; 2d ed. 1993) 95; A. WATSON

‘Aspects of Reception of Law’ (1996) 44 Am. J. Comp. L. 335, 335.

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currently borrows a lot from UK, but there is need to ensure that different countries or

jurisdictions take into account the various differences before transplanting laws. Transplanting is,

in fact, the most fertile source of development. Most changes in most systems are the result of

borrowing.33 This paper will use the functional comparative approach hence looking at the laws

that are passed to govern the sector and the institutions that are supposed to ensure the

implementation of such laws. The focus will therefore be on both laws and institutions.

Kenya having been a British colony tends to borrow from British legal system despite some

changes over time. It therefore provides a very common basis for a comparative study. Norway

on the other hand uses a mixture of legal system and it has established viable laws in the

petroleum sector that would serve as reference point for Kenya. In a bid to come up with useful

lessons for the petroleum industry, there is need to ensure comparison is made with some of the

most developed and established jurisdictions with experience of the petroleum industry. Having

strong regulatory framework for the petroleum sector ensures that there is responsible

development of resources for the growth of the state and the citizens.34 The laws should

encourage investments by the International Oil Companies (IOCs) but avoid leaving them in

control of the development.35

One of the reasons research is undertaken is to come up with solutions to certain problems36 and

therefore the paper seeks to come up with lessons that will guide the awarding of exploration and

production rights. This will involve comparing and analysing documents both official and

academic with relevant information and especially the legal documents that the countries in

question have in place for the awarding of such rights in the petroleum industry. It is therefore a

comparative and analytical study using existing works and official legal documents from

different jurisdictions to come up with lessons Kenya may benefit from. This will be functional

comparative analysis since it will cover the laws and regulations and the responsible institutions

or bodies responsible for the implementation and monitoring.

1.5 Structure

In an attempt to explore the legal and regulatory framework of the awarding of exploration and

production rights in Kenya and compare it to UK and Norway, the paper begins with a focused

33Ibid. 34T. HUNTER, note 1 above, p. 36. 35Norwegian Petroleum Directorate: Plan for Development and Operation (2014), available at

[http://www.npd.no/en/Topics/Development-and-operations/Temaartikler/Plans-and-processes-for-PDOs-and-

PIOs/] accessed 10 August 2016. 36J. H. FARRAR and A. M. DUGDALE, Introduction to Legal Method, 3rd ed. (Sweet & Maxwell 1990), p. 5.

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introduction into some of the basic but most important issues so as to set the foundation for the

comparison and analysis. Under introduction, it gives an in-depth view into the upstream

activities in Kenya with a brief history of its development and the existing regulatory framework

combined with reasons for the comparative study and the objectives of this study.

The second chapter then focuses on the background and development of licensing and the

changes over-time. It will also look at the reasons for these changes and the manner in which

environmental regulations were earlier considered and incorporated into the licensing process, if

that was done at all. The chapter also gives a brief view into different kinds of contracts and that

is necessary in the beginning of the research so as to set the foundation and get a proper

understanding of the topics to come. When discussing awarding of rights, it is necessary to

understand the different kinds of contracts that can be awarded hence setting the foundation. The

third chapter then focuses on the systems of allocation such as direct negotiation,

competitive/auctions, discretionary and first come first serve and then asses what Kenya

currently uses and the likelihood of success based on Kenya’s circumstances.

Chapter four will focus on the incorporation of environmental regulations into the awarding

process and the current legislation in Kenya in that respect. United Kingdom (UK) and Norway

will serve as reference points on how environmental issues have been incorporated in to the

awarding of exploration and production rights and how the process has been kept transparent and

accountable to boost investor confidence and withstand public scrutiny. The final chapter then

gives a concrete conclusion and tries to give a conclusive answer to the research question.

1.6 Definition of Terms

The petroleum industry is broadly divided into three segments namely: upstream (exploration

and production), mid-stream (storage, refining and transportation) and downstream (supply and

distribution).37 The upstream segment primarily involves the processes of exploration,

development and production of crude oil and natural gas. As there is no production in Kenya

today, this segment is primarily involved in exploration.38

37Terms Used in the Oil Industry: Institutional Data Base, available at

[http://www.ri.pemex.com/files/content/Glossary%20201101071.pdf] accessed on 4 July 2016. 38 Ibid.

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Crude oil; this refers to the oil that is produced from a reservoir, after separation from any

associated gas , and processed in a refinery; often referred to as crude.39

Exploration phase; this is the phase of operations in which a company searches for oil and gas by

carrying out detailed geological and geophysical surveys followed up where appropriate by

exploratory drilling.40

Petroleum; refers to all liquid and gaseous hydrocarbons existing in a natural condition in the

strata, as well as all substances produced in association with such hydrocarbons, including

sulphur, but excluding basic sediments and water.41

License round; this is the a stage in the allocation of licenses (both onshore and offshore) in

which a country places a number of specified areas in its sector on offer to oil companies at

one.42

Basin; refers to A large, natural depression on the Earth’s surface in which sediments, generally

brought by water, accumulate. This is the environment in which oil and gas can be found.43

Production Sharing Contract (PSC); An agreement between a host government and an

International oil company outlining obligations of each party and defining a mechanism for

reward in the event oil and gas is discovered in economically recoverable. The PSC also gives an

oil exploration company the rights to explore for hydrocarbons in a country.44

39Ibid. 40Upstream oil and gas news for exploration and production professionals available at [http://www.energy-

pedia.com/glossary.aspx] accessed on 4 July 2016. 41Ibid. 42 Ibid. 43 Overview of the Terms used in Petroleum Industry, available at [http://www.riftenergycorp.com/] accessed 4 July

2016. 44 Ibid.

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2. DEVELOPMENT OF LICENSING

2.1 History of Licensing

It is important to study the history of licensing or the process of awarding rights for purposes of

Exploration and Production because it will set a proper foundation for the understanding of the

current awarding process. It also helps in identifying the changes that have taken place over the

period of time and reasons for such changes. There have been disputes on the exact time when

the first oil well was drilled with some authors attributing it to the Canadian entrepreneur James

Miller Williams (1818-1890) who drilled and successfully produced oil in the township of

Enniskillen between Lake Erie and Lake Huron near the town later named Oil Springs in what is

now Southwest Ontario.45 That therefore puts the beginning of the petroleum industry as we

know it today to 1857.46 This is widely not regarded as the first oil drill by most academic works.

Most authors have argued that the petroleum industry began in 1859 with the first oil struck by

Edwin Drake after drilling the first well in Titusville, Pennsylvania.47 This first borehole was

drilled on the 27th August 1859 at a depth of 69.5 feet.48 The boring of this well is still considered

the beginning of extractive petroleum industry.49 The initial lease in the United States of America

was based on the leasing method of the salt industry.50 The history and the development of

licensing can best be understood from the beginning of the extractive petroleum industry.

There were no immediate companies that were involved in the drilling of oil and therefore there

were different independent individuals who engaged in oil drilling in small size oil fields and

they could sell their output to the buyers individually hence the market price mainly depended on

the demand and supply mechanisms.51 The first oil company that was involved in the production,

transportation, refining and marketing was formed in 1863 by John D. Rockefeller (1839-

45F. HABASHI, The first oil well in the world, 25(1) Bull. Hist. Chem. (2000), p. 64, available at

[http://www.scs.illinois.edu/~mainzv/HIST/bulletin_open_access/v25-1/v25-1%20p64-66.pdf] accessed 31 October

2016. 46Ibid 64. 47D. URJA, Edwin Drake and the Drill Pipe: The Pennsylavia Oil Drill (2008), available at

[http://pabook2.libraries.psu.edu/palitmap/DrakeOilWell.html] accessed 1 November 2016. 48B. TAVERNE, Petroleum, Industry and Governments: A Study of the Involvement of Industry and Governments in

the Production and Use of Petroleum 2nd ed. (Kluwer Law International 2008), p. 8. 49Ibid. 50Ibid.

*Licensing is the identification of potential petroleum investment opportunities within the government territory and

then subdividing of such into discrete contract areas of prospective size and then offering them to international oil companies through a suitable tendering process and the negotiation and agreement on the technical, financial and

contractual terms and conditions in line with their petroleum prospectivity and with the interest of the host

government. 51B. TAVERNE, note 48 above, p. 8.

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1937).52 By 1870 he formed the Standard oil outfit that was controlling up to 90% of United

States’ refineries and pipelines.53 Standard oil and the other companies that came into the oil

business therefore concentrated on the refining, transportation and distribution and therefore they

were able to control the prices in the market.54 They monopolized the refinery and the

transportation sectors by organizing themselves into groups and therefore the producers were left

with no choice but to sell their oil at the price that they dictated. Standard Oil later expanded its

activities into the production sector after the discovery of oil in other areas within the US and

other companies also got involved in the production.55 This move was not meant only to achieve

complete control of the market prices but mainly in order to ensure adequate development and

organization that could not be achieved by the independent producers.56 This was the beginning

of oil companies acquiring leases for the production of oil hence bearing the risks involved in the

process.57 The oil companies would then wait for the oil prospectors to discover oil and they

purchase the lands in which oil was discovered including the areas around that area so as to

ensure that any area for speculation fell within their jurisdiction.58

There were other major oil activities in other parts of the world and especially in the middle east

and Latin America where the first oil company was founded called “Compania Nacional Petrolia

del Tachira” by Antonio Pulido in 1878.59 He then requested the state to explore 100 hectares

parcel in the Venezuelan Andes and he began drilling using imported drillers from USA in

1880.60 In 1908 General Juan Vicente Gomez took power and opened the gate to foreign oil

investors mainly inform of companies and in 1909 he granted exploration rights to a British

company to explore twelve of the twenty states of Venezuela. John Allen founded a company

called “The Venezuelan Oilfield Exploration Company” which had a lease of approximately 27

million hectares.61 Gomez however revoked the concession in 1911 because it was not giving

enough revenues and royalties. Later Gomez gave almost the same concession to Rafael

Valladares who formed the Caribbean Petroleum Company which made numerous profits

52B. BRIAN, Boom and bust for first oil well driller Edwin Drake. Pittsburgh Tribune-Review 6 July 2008, available

at [http://www.pittsburghlive.com/x/pittsburghtrib/news/specialreports/250-anniversary/s_576222.html] accessed on

2 November 2016. 53Ibid. 54B. TAVERNE, note 48 above, p. 10. 55Ibid 20. 56Ibid. 57Ibid. 58Ibid. 59J. ALVAREZ and J. FIORITO, Venezuelan Oil Unifying Latin-America: Ethics of Development in a Global

Environment, (Stanford University 2005), p. 4. 60Ibid 5. 61Ibid.

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exploring oil and asphalt on the Lake of Maracaibo. In 1913 the concession was then transferred

to a British-Dutch operator known as the Royal Dutch-Shell Oil Company.62 This is a clear

example of how the early oil leases were awarded by leaders at that time. There were very few

laws and regulations and the companies benefited a great deal with huge oil fields covering most

of the country.

Meanwhile European companies led an outward expansion thereby driving the oil search to the

international scene hence the internationalization of the oil activities.63 This kind of expansion

therefore created a market outside the US and with the discovery of oil in Baku on the Apsheron

Peninsula in 1871 and the discovery in Atjeh, Sumatra in 1885, the oil produced in those places

was transported to Europe and China. One of the major early concessions was signed by William

Knox D’Arcy on 28th May 1901 which covered the whole country in-terms of acreage.64 The

concession was later taken over by the Anglo-Persian Company in 1909 which was a newly

incorporated company.65 The British later acquired the concession in 1914 and it was unilaterally

cancelled by Shah who later negotiated for a concession that covered 100,000 square miles still

considered relatively big at that time.66 A concession that covers the whole country awarded by

the ruler shows that there was no legal process and regulations into the acquiring of such

concessions. The process of awarding the early concessions was therefore vested in the rulers at

that time and they could do what they desired without the opinion or input from other quarters.

The US oil companies expressed their interest to be involved in the exploration of oil in Iraq but

this was rejected by the British and French companies that operated in Iraq at that time.67 In

1927, oil was discovered in Baba Gurgur and there was need for a quick solution to the US

continued push to get involved in the oil exploitation in Iraq.68 There was an agreement signed

between the said governments after lengthy talks and some companies of US origin were

permitted to participate in Turkish Petroleum Company (TPC) that was involved in oil

exploitation in Iraq at that time.69 After the rearranging of the shareholding of TPC, the company

was later renamed the Iraqi Petroleum Company to which the government of Iraq granted a new

62Ibid. 63F. PARRA, Oil Politics: A Modern History of Petroleum, (I. B. Tauris London & New York 2004), p. 6. 64B. TAVERNE, note 48 above, p. 22. 65F. PARRA, note 63 above, p. 21. 66B. TAVERNE, note 48 above, p. 22. 67E. FITZGERALD, ‘The Iraq Petroleum Company, Standard Oil of California, and the Contest for Eastern Arabia,

1930–1933’ (1991), 13 (The International History Review 441), p. 170. 68Ibid. 69Ibid.

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concession in 1931.70 This agreement that was reached between the British, French and US

companies became known as the Red Line Agreement but it never barred any other US

companies that were seeking concessions in the reserved areas.71 There was increased penetration

of the US companies and in order to prevent this, the Iraqi Petroleum Company (IPC) 72acquired

other concessions in Qatar (19340, Oman (1937) and Abhu Dhabi (1939). The chronology of

events shows the beginning of joint ventures in the petroleum industry that were meant to ensure

that risks and the burden of financial investment could be shared.

Another joint venture was formed in 1933 by more US and European companies in the Middle

East which concerned the Anglo-Persian concession.73 The concession was later nationalized in

1951 and the National Iranian Oil Company (NIOC) took over the operations for about three

years during which negotiations for contract was ongoing with another British Company and

they later agreed on a work program.74The foreign companies were often supported by their

governments and they used the rulers to gain access to the resources and exploited for the benefit

of their governments and not for the host countries.75 The major beneficiaries of the revenues

were those who were in power and this brought about a very rough start to the oil exploitation in

the Persian Gulf. The licensing regime was therefore marked with signs of intimidation and even

threats of military intervention.76

The need for contractual relationship between the governments and the oil companies was

therefore becoming inevitable with most governments realizing that the early concessions that

were awarded did not take into consideration the needs of the country. Concessions were the

most commonly used contractual form historically and they granted exclusive rights to the

companies for the exploration, development and production of petroleum.77 The original

concessions are always known for giving too much leeway to the IOCs. They granted rights to

petroleum development over a vast area, had a relatively long duration, granted extensive control

over the schedule and manner in which petroleum reserves were developed to the investor and

they reserved few rights for the sovereign, except the right to receive a payment based on

70B. TAVERNE, note 48 above, p. 23. 71F. PARRA, note 63 above, p. 13. 72B. TAVERNE, note 48 above, p. 23 73W. C. HAMILTON, Americans and oil in the Middle East,1st ed. (Gulf Publishing Co. 1962), p. 11. 74 Ibid. 75H. ASKARI, ‘Oil—Discovery and Production in the Persian Gulf, 1900–1945’, in H. ASKARI, Collaborative

Colonialism (Palgrave Macmillan US 2013), p. 28, available at

[http://link.springer.com/chapter/10.1057/9781137353771_2] accessed 2 November 2016. 76Ibid 29. 77F. PARRA, note 63 above, p. 7.

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production.78 Oil companies have always favored concessions as the legal instrument for the

getting petroleum rights due to the exclusive control that they get and the power to make

decisions concerning their investments without due interference from the host government. The

host governments in this case usually remain very passive and only get some financial benefits

in-terms of royalties and bonuses.79

In 1950, the idea of state sharing the production of oil and gas surfaced in Bolivia.80 The

Production Sharing Contracts therefore became popular and was introduced in Indonesia in 1966

and then later to other countries.81 During this time there were no major laws and regulations that

could specifically address the awarding process and most of the contracts were awarded through

direct negotiations with the authorities. The move towards production sharing contracts away

from concessionary systems starting in 1966 in Indonesia was due to opposition against

international oil companies’ control over the world oil prices and sovereignty issues over the

natural resources.82 It is clear from the history that for about 100 years, there have been major

developments in the contractual systems and move from concessions to Production Sharing

Contracts (PSC) which involve more participation of the host states in the exploitation of their

resources.83 With the increased participation by the state, it means that the governments were

also preferred such. The awarding of concessions traditionally was mainly done through direct

negotiations with the rulers whereby the investor came and asked to exploit resources in a piece

of land and then negotiations would take place. There were no proper laws and regulations that

guided the process of awarding these contracts. The discussions or the negotiations mainly

depended on the petroleum law, the market environment and the political situations at the time.84

2.2 Early Licensing and Environmental Regulations

The history above shows that there were limited environmental regulations at the time. There

was no major concern of the environmental impacts that exploitation of oil and gas could have

78Ibid. 79C. DUVAL, H. LE LEUCH, A. PERTUZIO and J. L. WEAVER, ‘International petroleum agreements-1:

Politics, Oil Prices Steer Evolution of Deal Forms’ available at [http://www.ogj.com/articles/print/volume-

107/issue-33/general-interest/international-petroleum.html] accessed 10 November 2016. 80ALLEN & OVERY, ‘Guide to Extractive Industries Documents – Oil & Gas,’ (World Bank Institute Governance

for extractive Industries Programme 2013), p. 1, available at

[http://www.allenovery.com/SiteCollectionDocuments/geiprogram.pdf] accessed 3 November 2016. 81Ibid 4. 82A. GHANDI and C. Y. LIN, Oil and Gas Service Contracts around the World: A Review, (University of California

at Davis 2014), p. 2, available at [http://www.des.ucdavis.edu/faculty/lin/service_contracts_review_paper.pdf]

accessed 3 November 2016. 83See 'Best Practice in Key Activities in the International Oil, Gas & Mining Industries’ (EI Sourcebook 2016)

available at [http://www.eisourcebook.org/] accessed 3 November 2016. 84ALLEN & OVERY, note 80 above, p. 5.

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and the concessions awarded at the time did not reflect the need to protect the environment. Even

though the history of the modern international environmental law can be dated back to 19th

century, they were only meant to protect birds, fisheries, seals and the utilization of navigable

rivers.85 There was little attention given to the natural resources extractive operations and the

effects they could have on the environment. Even though there were oil and gas activities, there

was no direct link to the environment and especially in the process of awarding contracts.86 The

world generally had very low environmental awareness and least so was the petroleum

industry.87

The UK, for example, has a very long history of petroleum development and one of the major oil

producers in the world but it did not have developed laws and regulations in relation to the

environment.88 The early legislation in the UK did not have any specific provisions in relation to

oil pollution even though it had petroleum law dating back to 1918.89 The Petroleum Production

Act of 1934 did not have any specific reference to environmental obligation to companies

applying for licenses but mainly focused on petroleum ownership and the provision of licenses.90

The Act had provisions for the introduction of other relevant obligations by the relevant minister

which presumably would include certain environmental obligations.91 The general obligations

that referred to oil pollution with reference to the environment were not introduced until 1964

when certain model clauses were introduced to be incorporated into the individual licenses.92

This marked the beginning of environmental obligations in the petroleum sector in the UK but

not to the process of awarding contracts. It is therefore clear that many of the early concessions

were silent on environmental protection and most host governments did not have proper ways of

ensuring that the companies operation within their jurisdictions were controlled and monitored in

relation to the environment.

Some few concessions that were awarded at that time had general reference to environmental

protection which stated that all “operations must be conducted in a workmanlike manner with

reasonable caution” taken by the companies.93 Even though this did not explicitly refer to

85Z. GAO, Environmental Regulation of Oil and Gas, (Kluwer Law International 1998), P. 9. 86Ibid. 87Ibid. 88Ibid 10. 89Ibid. 90Petroleum (Production) Act 1934, s2. 91Ibid. 92Ibid. 93Z. GAO, note 85 above, p. 12.

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environmental protection, it was more concerned with the need for non-wasteful operation than it

was concerned with environmental obligations.94 It is also worth mentioning that most of these

obligations were not actually incorporated into the awarding process since they were not

considered very useful but they were included in the contracts that were to be awarded. There

were some exceptions to the lack of environmental obligations such as the 1925 Iraq Petroleum

Company (IPC) concession that includes a clause which reads;

“The company undertakes to take every reasonable precaution against the pollution of the

elements in the vicinity of the installations. But the government recognizes that there are certain

circumstances a pollution of the elements is inevitable by reason of the nature of the operations

of the oil industry, and will not for the purpose of preventing this inconvenience ask the company

to undertake any measures which it could not be reasonably asked to undertake.”95

Even the above provision contains certain loopholes that allow the company to pollute in some

circumstances without any recourse but this can be understood by the fact that environmental

issues were not quite developed then and it was until 1960s that it started becoming a major issue

albeit within the petroleum industry.96 Environmental concerns were therefore still very new and

the need for sustainable development came in 1980s hence there was no major call on states and

companies to ensure they had effective environmental obligations in the process of awarding

contracts.97

Another example is the Norwegian petroleum sector and the manner in which the government

ensured that it had control of the sector from an early stage. With the first licensing round that

was done in 1960s, there were provisions of environmental obligations already in the contracts.98

In 1972 there was already need for a more controlled petroleum sector and therefore the Norway

politicians came up with certain unanimous facts concerning the manner in which the petroleum

sector was to be run.99 They came up with ten basic principles and one of them was on the need

to conduct exploitation of oil and gas in an environmental friendly way so as to ensure that

94Ibid. 95Art. 2 of the 1934 Kuwait Oil Company Concession. 96Z. GAO, ‘International Petroleum Exploration and Exploitation Agreements: A Comprehensive Environmental

Appraisal’, 12 Journal of Energy & Natural Resources Law (1994), p. 240. 97Ibid 241. 98Norwegian Petroleum Directorate: Drilling Permits, [http://www.npd.no/en/news/Drilling-permits/] accessed 3

November 2016. 99Norwegian Petroleum Directorate: Norway’s Petroleum history,

[http://www.norskpetroleum.no/en/framework/norways-petroleum-history/] accessed 3 November 2016.

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nature is protected.100 The participation of the government at the early stages ensured that

environmental regulations became an integral part of the awarding of licenses. The original

regulations that were incorporated into the oil and gas realm were mainly focused on health and

security of facilities that were used for construction.101

2.3 Contractual Systems for Access to Petroleum

Generally there are no accepted model of contracts between the host governments and the

international oil companies and therefore they are usually drafted to meet specific goals and aims

of the country.102 There are common contracts in the world currently as will be discussed and the

contracts usually contain similar clauses, provisions, structures and approaches regardless of the

state in question.103 One of the current requirements by host governments besides revenue is to

ensure sustainable development hence when awarding contracts, governments tend to ensure that

the international companies have the capacity to operate in a sustainable manner.104 Even though

the focus of the paper is on the process of awarding such contracts and the environmental

concerns, it is important to look into the contract types briefly in-order to put into context the

main discussion.

2.3.1 Modern Concessions

A concession grants an oil company or a group of companies (usually referred to as a

consortium) the exclusive right to explore for, develop, and produce hydrocarbons within a

specific area (called the license area, block, or tract, depending on local laws) for a specific

period.105 The company assumes all risks and costs associated with the exploration, development,

and production of petroleum in the area covered by concession.106 Usually a license fee or bonus

is paid to the government. The government’s compensation for the use of the resource by the

investor will typically include royalty and tax payments if hydrocarbons are produced. Nearly

half of the countries worldwide use a concession-type regime. One of the main features of

concessions is that the state still retains the discretion to modify and change or even revoke in

some circumstances, the terms of the contract as stipulated in the legislation.107 This power

100Ibid. 101L. H. LYE, E. BURLESON, N. A. ROBINSON, Comparative Environmental Law & Regulation, (Thomson

Reuters 2016), p. 34. 102T. HUNTER, note 1 above, p. 14. 103Ibid. 104B. TAVERNE, note 48 above, p. 137. 105Ibid. 106Ibid. 107In other words, the state can alter unilaterally what are described as the ―regulatory conditions‖ of the

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vested in the states is not commonly abused due to the need and the intention to ensure there is a

stable environment for investments in a bid to spur economic growth.108

Some scholars and petroleum are of the opinion that despite the notion that concessions benefit

the companies more,109 they have substantial advantages for the developing countries such as

Kenya. Kenya still has very high prevalence of corrupt practices and therefore concessions are

believed to be more open especially if the bidding terms are publicly set.110 Concessions still

require a viable and established legal system with a judiciary capable of interpreting complex

agreements and that is why it has worked well in industrialized countries such as the UK,

Norway and Canada.111 The main issues that might still be of significant challenge to Kenya as

mentioned earlier will be on transparency of the process due to lack of strong laws. The other

will have to be environmental regulations and their incorporation into the process of awarding of

concessions and the consequences of weak laws in that sector too.

2.3.2 Service Contracts

In service contracts, the contractor provides all the capital necessary for the exploration,

development and the production of petroleum.112 In the case of successful exploration, the

government allows the contractor to recover the operation costs from the petroleum sale.113 The

contractor is usually required to conduct exploration and production within a certain area

determined by the state and the payment is fixed or in variables.114 The ownership rights remains

with the government unless the contract details that the contractor is to be paid in kind with oil

and gas or gives the contractor right or preference to purchase part of the production from the

government.115 There are just a few pure Service Contracts but most of them usually have some

level of risk for the contractor and they are most commonly used by net importing countries due

administrative contract (for a detailed discussion, see, for example, Smith and others, 2000; and Cordero

Moss,1998). The contractual or regulatory nature of an agreement is of extreme significance in evaluating

its stability and predictability. The focus should, however, be on the government’s track record, as opposed

to the legal nature of an agreement. 108S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 20. 109J. RADON, ‘The ABCs of Petroleum Contracts: License-Concession Agreements, Joint Ventures, and

Production-Sharing Agreements. Covering Oil: A reporter’s Guide to Energy and Development. Open Society

Initiative’, New York (2005), p. 63, available at [ http://archive. revenuewatch. org/reports/072305. shtml.] accessed

1 November 2016. 110Ibid. 111Ibid. 112D. JOHNSTON, International Petroleum Fiscal Systems and Production Sharing Contracts. (Penn-Well Books

1994), p. 87. 113Ibid. 114S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 10. 115Ibid.

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to the need for the crude.116 The differences between Service Contracts and Production Sharing

Contracts are usually very minimal with main point of diversion being the payment point. The

need for SCs is quite closely related to the need to maintain sovereignty and political

environment in most cases.117 This would be understood from the perspective of new or

prospecting producers due to the need to ensure that they maintain ownership of the petroleum

and the technical know-how and expertise from the International Oil Companies (IOCs).118

Countries considered major petroleum producers such as Brazil, Algeria, Bolivia, Iraq, Peru are

now adopting Service Contracts mainly due to the political environment in such states and the

issue of sovereignty and ownership of natural resources.119 The need to ensure control of the oil

and gas fields is pushing for the acceptance and move towards the Service Contracts. Countries

want to give as little control to the International Oil Companies (IOCs) as possible. In the

Production Sharing Contracts (SCs), countries give the decision making right to the International

Oil Companies (IOCs) and that gives them some level of control over the process and over the

natural resources.120

The level of economic efficiency of Service Contracts is not high and it is also prone to losses

and that is a big undoing for a country that is still at the early stages of production.121 The current

Service Contracts do not have the mechanisms to adopt the dynamic profit maximization

objectives that would ensure the government gets maximum profits from the production while in

PSCs, the IOCs given decision making power and ownership rights over the produced petroleum

and together with the state owned oil company, they make decisions over the whole field hence

giving it higher chances of achieving high economic efficiency.122 Service Contracts may also

not be the best for a country still willing to woo international investors.123 Investment by

international companies is necessary for a country like Kenya and hence it is important that any

kind of approach it chooses best serves its interest and also help in attracting investors. The

petroleum industry is quite complex with massive investment requirements and high risks hence

the government is best placed with International Oil Companies (IOCs).

116D. JOHNSTON, note 112 above, p. 87. 117A. GHANDI and C. Y. LIN, note 82 above, p. 3. 118The know-how of the IOCs is sometimes considered even more important than the technical equipment that they

bring to the host country due to the fact that they understand better the operation of the investments and how it

should be invested hence the need by governments to contract IOCs. 119A. GHANDI and C. Y. LIN, note 82 above, p. 5. 120Ibid 4. 121Ibid. 122Ibid. 123Ibid.

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2.3.4 Joint Ventures

Joint Ventures (JVs) or Joint Operating Associations (JOAs) do not have a definite and specific

definition as noted by many scholars in the field of oil and gas. There is no commonly accepted

meaning.124 In simple terms it refers to two or more parties that wish to pursue an undertaking

together moreless like a modern day marriage because of the period that the parties must take to

know one another and understand the goals, interests and features of the other.125 This type of

contract is quite open ended and is not very common among countries and the IOCs due to the

high chances of failure or disagreements. Nigeria’s national oil company used JVs but later

abandoned it due to inability to meet its end of the bargain.126 On the other hand JV between

different companies is quite common due to the need to diversify risks that are associated with

the petroleum industry and the need to distribute such risks but it is not very common in

government-IOC relationship.127

The JVs are usually composed of the operators and the non-operators and it is the duty of the

operator to ensure that all the daily activities are as planned and smooth operations are sustained

over time128 There are a lot of model Joint Operating Agreements (JOAs) like that of the

American Association of Petroleum Landmen 610 (AAPL), Association of International

Petroleum Negotiators 2002 (AIPN), Canadian Association of Petroleum Landmen 2007

(CAPL), and Oil and Gas UK Standard JOA 2007 (OGUK) which specifies and details different

features of the JOA.129 There is usually the JOA that is composed of both the operators and the

non-operators and one of their duties is to ensure that they use the voting rights to keep tension

low such that they do not affect operations.130 Joint Ventures (JV) may have high returns at the

end of the day for the host government but the risks that are associated with it require a very

stable legal and regulatory framework. The high risks of conflicts and stalling of activities is not

good for a country at its early stages of production.

124J. RADON, note 109 above, p. 65. 125Ibid. 126Ibid 66. 127D. JOHNSTON, note 112 above, p. 102. 128M. WAQAS, ‘Joint Operating Agreements', History and Development of JOAS in the Oil and Gas Industry, 10

September 2014, available at [http://www.ogfj.com/articles/print/volume-11/issue-10/features/joint-operating-

agreements.html] accessed 12 November 2016. 129Ibid para. 4. 130Ibid para. 5.

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2.3.5 Production Sharing Contracts

In-order to understand how PSCs operate; a state contracts an international (and in some cases a

domestic or another state’s national) oil company for it to provide the necessary finance and

technical skills in order to explore for and produce oil and/or gas.131 The State will usually be

represented by the government or a government authority, such as the National Oil Company

(NOC), who will take delivery of the State’s share of production. The IOC is granted an

exclusive right to explore and produce oil and gas within a defined area and hence bears the

entire risk of the project, financial and otherwise.132 Should a commercial discovery be declared,

the IOC becomes entitled to a portion of any oil produced as ‘payment’ for its efforts (generally

at the end of the quarter in which the oil is produced), in addition to recouping its costs out of

production; conversely, if no discoveries are made, the IOC receives nothing.133 The State retains

ownership of all oil and/or gas produced (subject only to the IOC’s entitlement to a portion of

any oil produced on a successful discovery). The extent of NOC involvement with the E&P

process varies from country to country and that depends on other local factors too.

Most developing countries with large or potentially large oil and gas deposits are currently using

the Production Sharing Contract.134 It is important to understand the resulting relationship

between the government and the IOC when they enter into PSC.135 In this case the government

must ensure that it draws a contract that will ensure it gets maximum economic benefit from the

natural resource and at the same time have a contract that will encourage investors to explore and

produce oil and gas.136 PSCs were initially introduced in 1966 in Indonesia but initially they are

widely used especially in the developing countries with over 40 countries including Africa and

South East Asia.137 It is imperative that most of the countries that have chosen PSCs as the means

of awarding rights have political reasons behind their choices.138 It is quite clear from the model

of PSCs that the state would like to ensure it retains control and get maximum revenue while the

oil company would be interested in minimizing the involvement of the state as much as possible

and ensuring maximum profits from its operations hence conflict of interest.

131ALLEN & OVERY, note 80 above, p. 3. 132Ibid. 133Ibid. 134N. PONGSIRI, Partnerships in oil and gas production-sharing contracts, 17(5) International Journal of Public

Sector Management (2004), p. 431-442. 135Ibid. 136Ibid. 137ALLEN & OVERY, note 80 above, p. 7. 138Ibid.

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The sharing of the production in PSCs usually depends on the formula agreed on and captured in

the contract by the parties.139 In case of any changes in the in the prices of oil and gas, there are

adjustments on the sharing of the production between the parties.140 Due to the nationalistic

protests and sentiments that came up against the early concessions, states were forced to

maintain ownership of natural resources and PSCs became quite common especially in countries

that were initially colonized.141 The PSC always recognize the fact that the natural resources

remains with the state while the IOC is meant to help with the exploration and production of

such in return for part of the revenues.142 PSCs have developed overtime and currently there is no

standard form of PSC143 for all countries and this is based on several factors unique to each

country. Countries with developed legal structures do not have very elaborate and complex PSCs

because several issues are already covered in law while countries with weak legal structures still

have to ensure that all details that not covered by law are addressed in the PSC hence more

elaborate contracts.144

The fiscal matters in the PSC have changed overtime and each country now have a unique way

of getting revenues from the production.145 Royalties, taxes and other forms of payment to the

state are now not standard in all the contracts.146 Other PSCs have various fiscal regimes such as

income taxes, domestic credit, bonuses and tax holidays.147 The Kenya’s PSC cost recovery

model is negotiable under the contract but currently it is set at a recovery limit of 75% which is

considered a high commercial take for a country which has not registered any production yet.148

The Kenyan government also participates in the petroleum activities within the development

areas or it can also do so through a body that is appointed directly by the government.149 By

understanding the history and development of licensing and contractual systems that are used to

access petroleum, it is easier to understand the main concept which is the awarding process and

the incorporation of environmental regulations into that process.

139S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 10. 140Ibid. 141J. RADON, note 109 above, p. 68. 142Ibid. 143Ibid. 144J. RADON, note 109 above, p. 69. 145K. BINDEMANN, ‘Production Sharing Agreements : An Economic Analysis’, UK Oxford: Oxford Institute for

Energy Studies, (1999), p. 5 146Ibid. 147A. K. NJERU, ‘Kenya Oil & Gas Fiscal Regime: An Economic Analysis on Attainment of the Government

Objectives’, 7(3) Oil, Gas & Energy Law Intelligence-OGEL (2009), p. 5. 148Ibid. 149Ibid.

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3. ALLOCATION OF EXPLORATION & PRODUCTION RIGHTS

3.1 Legal Regimes in Allocation of E&P Rights

Governments usually face a heavy task in choosing IOCs that should be granted the exclusive

right to explore, develop and produce its natural resources150 and Kenya is now at a point it

should ensure that the oil companies that will be granted rights are up to task and will also

operate with the interest of the country and ensure that environmental concerns are of interest. It

is during the allocation of rights that the government should ensure that it does so with

environmental regulations that are in place. This should be one of the non-negotiable factors

when awarding rights so that companies getting into any agreement know the environmental

requirements and are aware of consequences of breach. Some companies are skeptical following

the weak laws that have stalled the development and production of oil in Uganda and believe that

Kenya would face the same problem hence the need to ensure that Kenya moves fast to

strengthen its legal framework.151

The UN Charter152 recognizes the sovereignty of states over their natural resources153 and hence

the states have exclusive rights to determine which legal regime would best help it benefit from

natural resources within its boundaries.154 In Kenya the Petroleum Act governs and regulates any

kind of negotiations and agreements related to the exploration, development and production of

petroleum.155 Negotiations for awarding petroleum rights are usually very vital to governments in

a bid to reap maximum benefits from its natural resources.156 Different countries use different

systems in allocating such rights and some call for licensing rounds while others use the open

door system while some just involve companies in unique types of negotiations.157 Each country

therefore makes the choice of system based on certain priorities such as economic viability and

efficiency, transparency and accountability and one that will help in getting the best company.158

150‘Oil and Gas in Kenya - Overview’ (MBendi.com), available at [//www.mbendi.com/indy/oilg/af/ke/p0005.htm]

accessed 4 November 2016. 151Ibid. 152United Nations General Assembly Resolution 1803 (XVII) of 14 December 1962, Permanent Sovereignty over

Natural Resources. 153The principle of a state's permanent sovereignty over its natural resources is a fundamental principle of

contemporary international law. It is invoked by states in their relations with transnational corporations engaged in

the exploitation of natural resources located in their territory. The precise scope of the principle of permanent

sovereignty remains an important issue. 154K. HOSSAIN and S.R. CHOWDHURY, Permanent Sovereignty Over Natural Resources in International Law,

New York, St. Martin's Press (1984), p. 19. 155E. G. PEREIRA and K. TALUS, note 6 above, p. 212. 156J. RADON, note 109 above, p. 63. 157S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 14. 158Ibid.

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Under the above categories, countries have various ways of negotiating based on different

factors; some are negotiable while some are not.159

3.2 Licensing

The process of allocation of licenses involves the identification by government of potential

(upstream) petroleum investment opportunities within the territorial jurisdiction and their

subdivision into discrete contract areas of prospective size,160 then offering them to national oil

companies or international oil companies through a suitable tendering process and the

establishment and negotiation of technical, financial and contractual terms and conditions (for

award) consistent with their petroleum prospectivity and with the national interest,161 In most

cases licensing is done through the formal licensing rounds.162

This is one of the most important processes in the petroleum industry due to factors that require

consideration at this stage.163 When incompetent companies get licenses for operation then it can

lead to massive losses in economic and non-economic terms hence the need to ensure it is done

in a proper way. In-order to ensure as much control as possible, countries modifies legislations

for example Norway has changed its legislation severally to increase the level of state

participation.164 In most countries this is done by the Petroleum Licensing and Monitoring Unit

(PLMU) charged with the tasks of promotion and licensing.165 This is usually done according to

certain international standards and practices that are considered ethical and above board.166 There

are several issues that need to be taken into consideration such as public participation and the

financial benefits to the local people and environmental issues also needs to be incorporated in

the process.167

Under the administrative process licenses are awarded based on certain predetermined and

criteria while under the auctioning process, licenses are awarded to the highest bidder.168 Michael

159Ibid. 160T. HUNTER, note 1 above, p. 40. 161M. A. G. BUNTER, The Promotion and Licensing of Petroleum Prospective Acreage, (Kluwer Law International

2002), p. xxii. 162Ibid. 163Ibid. 164B. F. NELSEN, The State offshore: Petroleum, Politics, and State Intervention on the British and Norwegian

Continental Shelves (Praeger Frederick 1991), p. 12. 165M. BUNTER, A New Approach to Petroleum Licensing, 1(1) Oil, Gas and Law Intelligence-OGEL (2004),

available at [https://www.ogel.org/article.asp?key=1023] accessed 2 November 2016. 166 Ibid. 167T. HUNTER, note 1 above, p. 43. 168S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 16.

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Bunter has divided the process into the formal and informal process.169 The formal process of

licensing is usually structured and the areas that are to be awarded are gazetted and the

prospective IOCs identify the blocks they would want to explore and send applications and after

a certain period the process is closed and the government makes decisions on the applicants.170

The informal process on the other hand calls for the negotiations between the landowner or the

government after the oil company identifies a particular area that it would want to explore.171 It is

quite clear upfront on which of the systems would benefit a particular party and in this case the

formal process gives the government higher chances of getting more suitable oil companies than

the informal process due to the fact that the latter do not allow competition and only depends on

negotiations with a single party. The informal process is not very common in the current

petroleum industry due to such perceived and experienced disadvantages.172 In the UK for

example, the size and nature of the block falls under the secretary and is administrative in nature

because the decision lies purely with the secretary.173 Petroleum Act 1998s4 (1) (d) dictates the

regulations to define “areas” in which licenses may be granted.174 The regulations identify them

as “blocks” as is available on a Ministry map, but it is silent on how blocks are to be laid out.175

There is certainly no explicit power to withdraw areas from licensing and this is due to the fact

that it lacks any legal standing.176

3.2.1 Discretionary Allocation of Licenses in UK and Norway

In the discretionary method of awarding licenses, the government usually has laid down criteria

which are formulated administratively or through a political process.177 This process gives the

government an opportunity to determine the legal conditions under which the interested oil

companies are to participate.178 This method was developed by Norway when it began awarding

of licenses in 1963.179 There have been doubts on the transparency of the discretionary method

169M. BUNTER, Some Important New Issues in Petroleum Licensing, 1(1) Oil, Gas and Law Intelligence-OGEL

(2003), available at [https://www.ogel.org/article.asp?key=17] accessed 2 November 2016. 170Ibid. 171Ibid. 172Ibid. 173Petroleum Act 1998, s.4 (1). 174Ibid. 175T. DAINTITH, Discretion in the Administration of Offshore Oil and Gas: A Comparative Study, 4(1)Oil, Gas

and Law Intelligence- OGEL (2006), p. 16, available at [https://www-ogel-

org.ezproxy.uef.fi:2443/article.asp?key=2042] accessed 3 November 2016. 176 Ibid 17. 177B. TAVERNE, note 48 above, p. 24. 178J. D. DAVIS, ‘Does One Size Fit All: Reflecting on Governance and North Sea Licensing Systems’, presentation

held at MASC Workshop for Lawyers, Dunsmuir Lodge, Sidney BC, ‘British Columbia Offshore: Potentials and

Problems’, 18 March 2004, 4/5. 179B. F. NELSEN, note 164 above, p. 23.

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but this has been mitigated by the need for an objective process of awarding licenses mainly in

the EU and EEA countries.180 This method has been used in various jurisdictions such Norway,

UK and Denmark as it is a flexible way of awarding licenses based on work program as set by

the company during application or the government with the resources.181 The main consideration

in the discretionary system is the level and type of work that a company is prepared to do in an

exploration.182 This system therefore allows the states to select the most suitable companies for

the award of rights based on the objectives and the goals of the state.183 The system therefore

does not limit the state hence it can use any factors that it considers important in getting a

company and it can also introduce as many factors as it finds fit so as to align the selection

criteria with the objectives of the state.184 It is an effective method of awarding licenses as it will

allow the government to control the exploration and the development of the fields in question.185

The system can also help the state control the number of companies that operate within the state

and the types of companies within the state.186 The discretionary system is also a proper channel

for ensuring that environmental regulations are well incorporated into the process of awarding

licenses. With the government in control of the process, it is able to ensure that environmental

concerns are also part of the criteria laid down for the companies that are applying for rights to

adhere to. This would be one of the most effective ways of ensuring that companies that are

awarded rights have the capacity to ensure environmental protection.

The discretionary method gives the government an opportunity to choose which program

proposed by the applicants will carry-out exploration187 and hence the government also needs to

have enough knowledge and resources to help determine which of the programs will be most

suitable.188 There should be a body that is mandated by the government, usually the petroleum

management body and licensing regulators who will then formally evaluate the applications

based on the set criteria which always include the legal, financial, technical, local content and

180DIRECTIVE 1994/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for

granting and using authorizations for the Prospection, Exploration and Production of hydrocarbons, OJ L 164,

30.6.1994, p. 3–8. 181M. BUNTER, note 165 above, p.87. 182G. FREWER, ‘Auctions vs. Discretion in the Licensing of Oil and Gas Acreage’, in G. MACKERRON, P.

PEARSON (eds), The International Energy Experience: Markets, Regulation and the Environment (Imperial

College Press, London, 2000), p.166. 183T. HUNTER, note 1 above, p. 53. 184B. F. NELSEN, note 164 above, p. 19. 185Ibid. 186P. D. CAMERON, Property Rights and Sovereign Rights: The Case of North Sea Oil, (Academic Press, London,

1983), p. 15-16. 187G. FREWER, note 182 above, p. 166. 188Ibid.

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health, safety and environment.189 The discretionary system is not fully confidential and enclosed

as it can be done from both extreme ends such as the one in Norway before 1994,190 to the

objective and transparent allocation of licenses.191 The environmental objectives can therefore be

one of the criteria with which the government will decide what level of control it needs to retain

hence the award is mainly based on the applicant with a work program that fulfills the objectives

set. When the government advertises the selection criteria, it will only attract companies which

fulfill them and therefore avoid companies that only have the financial capacity but do not meet

the other standards.192 The system therefore enables the government to ensure control over the

petroleum activities and the more the influence a state will be able to exert over the exploration

and production activities.193

The UK debated the merits of using discretionary system in 1960s and the auction system and

later settled for the discretionary due to the level of influence it would give the state in the

petroleum activities compared to Auction system194. The system therefore was used in awarding

rights for the UK Continental Shelf (UKCS) based on the need for rapid development of the

resources therein for their economic benefits.195 In the UK, the Oil and Gas Authority (OGA)

administers the licensing process. The secretary still has the authority to award licenses for the

purpose of exploration, development and production even with the formation of the authority to

oversee the process.196 The Hydrocarbons Licensing Directive Regulations 1995 (HLDR) also

must be taken in to consideration during awarding of licenses as it contains certain directives that

were passed within EU.197 In the UK, licensing is usually done in what they call the licensing

rounds in which a number of blocks are made available for the prospective companies.198 The

government then receives applications for the floated blocks and evaluate based on certain

criteria and the ability of the companies to achieve the desired results and then licenses are

awarded. In certain circumstances the government also grants ‘out of round’ licenses which are

189T. HUNTER, note 1 above, p. 54. 190G. FREWER, note 182 above, p. 165. 191Ibid. 192T. HUNTER, note 1 above, p. 55. 193G. FREWER, note 182 above, p. 168. 194B. F. NELSEN, note 164 above, p. 19. 195T. HUNTER, note 1 above, p. 56. 196United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 8 August 2016. 197Ibid. 198Oil and Gas: Petroleum Licensing Guidance. [https://www.gov.uk/guidance/oil-and-gas-petroleum-licensing-

guidance] accessed 8 August 2016.

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awarded when rounds are closed.199 The licenses take the form of a deed and the company that

holds the license is expected to perform its duties as spelt out in the license and observe the

conditions therein without prejudice.200 The conditions are usually referred to as model clauses

and are then published in the secondary legislation.201 The licenses that are granted in the UK are

considered both contractual and regulatory in nature because they are a way of passing on the

rights to the company and they also form part of legislation with certain conditions that must be

adhered to by the holder.202 The model clauses usually read;

“In consideration of the payments hereinafter provided for and the performance and observance

by the licensee of all the terms and conditions hereof, the Minister, in exercise of the powers

conferred upon him by the Act hereby grants to the Licensee exclusive license and liberty during

the continuance of this license and subject to the provisions hereof to search and bore for, and

get, Petroleum in the sea bed and subsoil under the seaward area more particularly described in

Schedule 1 to this license.”203 UK has various types of licenses that are used for different areas

and this fragmentation also makes it easy and effective to control the petroleum industry. There

are different license types based on the area and whether it is onshore or offshore activities.204

Norway also has the licensing system which is discretionary in nature and is considered

independent and transparent.205 Norway has an elaborate legislation that requires all companies

to attain licenses before conducting any activities in the petroleum industry.206 The Norwegian

system grants rights to explore, develop and produce in accordance to the Petroleum Law.207

Production licenses in Norway are awarded in two different rounds also known as the licensing

rounds.208 Awards in Predefined Areas (APA) rounds are made every year and awards in less

mature areas are made in more regular licensing rounds.209 The work programme as spelt out in

199Ibid. 200Ibid. 201Ibid. 202United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 8 August 2016. 203Petroleum and Submarine Pipelines Act 1975, s. 18. 204United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 8 August 2016. 205Norwegian Petroleum: Fundamental Regulatory Principles. [http://www.norskpetroleum.no/en/facts/] accessed 8

August 2016 and J. KJODE, in Norwegian Petroleum Directorate, ‘Along Road to Travel: How Norway Hands Out

Petroleum Acreage’, 24(1) Norwegian Continental Shelf (2007), p. 24. 206Norwegian Petroleum: The Petroleum Act and the Licensing System

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/#production-licences]

accessed on 8 August 2016. 207Ibid. 208Ibid. 209Ibid.

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the two separate awards is different and the APA usually dictates a faster work program than the

regular.210 The Norwegian system is based purely on the qualification of the companies that are

interested and they test the qualifications based on the technical know-how and the skills

available.211

The licensing system in Norway is under the control of the Norwegian Petroleum Directorate

(NPD) and the Ministry of Petroleum and Energy (MPE) and is mounted on the values of

transparency and accountability.212 There is a great role division under the ministry so that there

is coordinated regulation of the sector with all necessary interests taken into consideration for the

ultimate benefit of the people of Norway.213 There is always very close state involvement in the

activities of the petroleum industry with an aim to ensure that it benefits the state and also to

ensure the protection of the rights of the investors.214 This is also due to the constitution of

Norway that dictates that all natural resources within the state are supposed to benefit the people

of Norway hence the state has to be involved to ensure that this is achieved.215

The regular licensing rounds begin when invitations are sent to the companies to state which

blocks they believe should be announced for exploration.216 Then scrutiny of the areas that are

suggested by the companies is conducted by the Ministry of Petroleum and Energy with some

input from the NPD. The blocks that are agreed on by the authorities are then announced after a

consultation and negotiation with various parties involved such as the environmental bodies and

the fishery department.217 Exploration license can be granted to any legal person who is living

within an EEA/EU state after the payment of a fee.218 The exploration licenses in Norway are

210Norway: Oil and Gas Regulation 2016 [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-and-gas-

regulation-2016/norway] accessed 8 August 2016. 211Ibid. 212See for more detail the Ministry of Petroleum and Energy, Norwegian Petroleum Directorate, Facts 2012: The

Norwegian Petroleum Sector 17 (2006), available at http://www.npd.no/en/ accessed 8 August 2016. 213Ibid.

*The Norwegian Licensing System differs from the approach taken in many other countries in that licenses go to the

companies which are best qualified for the job rather than those making the highest bid in an action- Norwegian

Petroleum Directorate. 214T. HUNTER, The offshore petroleum regulatory frameworks of Australia and Norway, 8(4) Oil, Gas & Energy

Law Intelligence (2010), pp. 38, available at [http://epublications.bond.edu.au/law_pubs/352/] accessed 8 August

2016. 215INTSOK: Norwegian Oil and Gas Partners [http://www.intsok.no/PHP/index.php?id=79] accessed 8 August

2016. 216Norwegian Petroleum Directorate: Production license – license to explore, discover and produce.

[http://www.npd.no/en/Topics/Production-licences/Theme-articles/Production-licence--licence-to-explore-discover-

and-produce-/] accessed 8 August 2016. 217Ibid. 218Ibid.

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currently given for one calendar year.219 After the working period has ended, the results are

supposed to be submitted to the relevant government authority with detailed report of the

exploratory activities.220 Before the opening of any areas for the licensing round, there is a

detailed impact assessment221 carried out by the relevant bodies and there is widespread public

participation.222 This is meant to ensure that all those likely to be affected by the exploration

activities are consulted and involved the process as much as possible and any actions taken to

avert such occurrences including avoiding exploration in certain areas based on the level of

effects expected. Before the opening of any areas, the authorities ensure that they have all the

arguments for and against the specific areas so as to be certain of the activities likely effects.223

One important fact to note in the awarding of licenses in the Norwegian system is that the

exploration license award does not give the right of production. The application for a production

license can be submitted to the government after the acreages have been released and

subsequently published in the gazette and the official journal of the EU.224 This is usually done to

ensure that it complies with the EUs directive on the licensing process.225 There are fees that are

to be paid once the license is granted such as a bonus which is paid once and the rest paid based

on an agreed format calculated on the production levels.226 Production licenses are also awarded

through separate rounds in which the government invites applications for specific blocks.227 In

instances where there are joint applications, the companies are scrutinized and it is within the

discretion of the ministry to award license as a group or not.228 Usually, a single operator on such

a license ensures that operations under that license are as stipulated in the contract.229 The license

that is awarded does not grant any exclusive rights in regard to other natural resources230 which is

a very important point in the Petroleum Act of Norway and therefore companies are expected to

ensure that the license only operates within the area it is awarded for. In-case there arise such a

219Ibid. 220Petroleum Activities Act 1996 (Norway), ss4-5. 221Petroleum Activities Act 1996 (Norway), ss4-5. 222Ibid. 223Ibid. 224Petroleum Activities Act 1996 (Norway), s2-1. 225DIRECTIVE 1994/22/EC, note 179 above. 226Petroleum Activities Act 1996 (Norway), s4-10. 227Ibid. 228Petroleum Activities Act 1996 (Norway), s3-4. 229Petroleum Activities Act 1996 (Norway) s3-7. 230Petroleum Activities Act 1996 (Norway), s3-13.

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scenario; the government will make the decision which of the natural resources to be exploited

on a first basis based on several considerations and study.231

The conditions and the granting of the license are within the discretion of the state and it decides

the basis to award such licenses even if it may fall outside the criteria listed.232 This is to state

that the government is not obliged to follow a certain set criteria in the award of licenses but can

make certain decisions besides the criteria. The state is also in a position to award production

licenses without announcing and it is also able to regulate the content of application and the

production of the resource.233 The participation of the state in the production process is possible

and lawful in the Norwegian system and it is able to participate at any stage of the production.

3.2.2 Competitive Bidding

Competitive bidding has been used widely by governments whereby there is public call for

companies interested in exploration and production in specific areas to submit bids.234 The

bidding is usually based on a predetermined criteria set by the government and only the

companies that meet such criteria are allowed into the bidding process.235 This is referred to as

restrictive bid due to the need to qualify before participation. The determination of the qualified

companies before the actual bid is pre-qualification process.236 Competitive bidding has

commonly been floated as the best tool of ensuring that governments can achieve the highest

possible economic advantage on natural resources and it can help in achieving high transparency

levels especially in countries with relatively poor transparency record. It also gives the

government an opportunity for a proper selection mechanism if there is a set down criteria. The

government is able to select companies based on the issues it considers most important such as

environment, human rights and local participation. This auctioning process provides the

government with information about the perceptions the companies have on the blocks and hence

gives it better information for future licensing processes.237

231Petroleum Activities Act 1996 (Norway), ss3-13. 232Petroleum Activities Act 1996 (Norway), s3-3. 233Petroleum Activities Act 1996 (Norway), s3-5. 234Granting Rights to Natural Resources: Determining Who Takes Natural Resources out of the Ground

[http://www.resourcegovernance.org/sites/default/files/nrgi_Granting-Rights.pdf] accessed 22 December 2016. 235Ibid. 236Ibid. 237M. R. RODRIGUEZ and S. B. SUSLICK, ‘An Overview of Brazilian Petroleum Exploration Lease Auctions’,

6(1) TERRAE (2009), p. 6-20.

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Bidding method of rights allocation may be good in-terms of the rent payment but the issue of

data availability also makes it difficult to determine the value of the blocks under bid.238 This

lack of information by the companies can sometimes lead to overestimation or underestimation

of the value of certain blocks. This can also lead to lack of rent maximization by the government.

The government also relies on the information submitted by the companies and therefore they

lack recourse. Usually bidders who are operating in the adjacent blocks are able to have more

information about the block under bid but such companies may still be able to secure the blocks

with low bids intentionally.239 Even with availability of all the data for the companies, there will

be different perceptions of the value of such blocks hence still lowering the bids.240 Due to the

risk levels of the petroleum sector, sometimes companies bid for certain blocks jointly in-order

to spread the risk among them and in some instances the alliances can be quite complex.241 Rent

maximization from the government can be influenced by such alliances between different

companies during bidding but that depends largely on other parameters such as market structure

and rent extraction mechanisms.242 This is to illustrate that the number of competitors in a

particular bid affect the bidding system and usually the outcome too. When there are many

competitors the government is likely to get higher rent from the bidding and less when there are

fewer companies.243 It is within this reasoning that some governments restrict or prohibit joint

applications or any other practices that will lead to less competition between companies in the

bidding process.244

Competitive bidding is considered transparent and this is one of the major advantages but some

scholars argue that this can also be a disadvantage for governments that want to ensure close

control of the process. In instances where the government wants to implement other policies such

as environmental issues or bilateral trade agreements, it does not give much allowance due to

that level of transparency.245 There are several biddable factors and this is usually dependent on

the laws and regulations that govern the sector in a particular country and the licensing procedure

that the government settles for. Certain countries choose a more rigid system whereby only a few

238S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 15. 239Ibid. 240Ibid. 241P. KEMPERER, ‘Using and Abusing Economic Theory’ 1 Journal of the European Economic Association (2003)

p. 272-300. 242 Ibid. 243 Ibid. 244 P. R. MILGROM, ‘Putting Action Theory to Work’, Cambridge- United Kingdom, Cambridge University Press

(2004). 245 Ibid.

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factors are negotiable while others are more flexible and leave most factors negotiable or at the

discretion of the authorities.246 In the bidding system of allocation, the auction is usually made

based on cash auction or based on a work program bid system.247 The company that bids the

highest value, either in cash or work program therefore gets the license.

The incorporation of environmental rules into the awarding process can be achieved by having

an effective bidding process. Being effective would require high levels of transparency of the

process, clear environmental obligations included, a pre-qualification criteria and close

involvement of all the relevant institutions. These environmental policies would then be

categorized as non-negotiable parameters when bidding. This would ensure that governments

only award rights to companies with proper environmental records and plans for the new blocks.

3.2.2.1 Cash programme

Cash bidding enables the oil companies to have control of the licensing process by showing its

readiness and ability to pay for the acreage being offered by the government.248 The acreage

value is usually expressed based on the how much a company can pay either as cash bonus or as

special royalty rate.249 Cash biding is one of the most efficient allocation systems for the states

at least in theory since it gets resource rent and other benefits as the most efficient company will

bid highest.250Bidding is known to be purely market based in that it only helps the state in

pursuing the market objectives in monetary terms.251 Usually there may be several basis of

bidding such as the royalties and or bonuses and other profit sharing mechanisms.252 In other

words it is usually referred to as auctioning of the blocks. One of the most important things to

note is that it does not make the government vulnerable in-terms of pursuing other objectives

such as environmental and health standards as the government still find other means of pursuing

such objectives.253 This is because due to its profit based nature one may tend to believe that it

pushes other important issues to the perimeter in the bidding process and this is not the case as

governments still ensure that they find avenues to pursue other objectives in the process. There

246 S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 32. 247T. HUNTER, note 1 above, p. 47. 248K. SINDING, Auctions and discretions in oil and natural gas licensing, (Centre for Energy, Petroleum and

Mineral Law and Policy Publication 1999), p. 2. 249T. HUNTER, note 1 above, p. 47. 250T. RODGERS AND S. WEBSTER, ‘Resource Rent Mechanism in Australian Primary Industries: Some

Observations and Issues’, presented at the 51st Annual Conference of the Australian Agricultural and Resource

Economics Society, 13-16 February 2007, Queenstown New Zealand, 1. 251S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 15. 252Ibid. 253Ibid.

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are different types of bidding and each country that uses the method can choose which of the

bidding methods to use and best suits its environment. There are four main forms of bidding;

Ascending bid; this is also known as the English auctioning and in this case the price is raised

usually by a bidder calling out prices, an auctioneer or the prices are posted electronically until

there is only one company left.254 This means that it goes higher and higher out of reach for other

companies hence an elimination method. Descending bid; this contrasts ascending bidding

whereby there is an initial high price stated and then it is brought down to the first bidder to

accept the current price. It is also known as the Dutch auction.255 First price sealed bidder;

submission of sealed bids by the bidders and each one of them is supposed to make the

submission only once. The decision is then made based on the highest price bidder and the

results are announced. The bidder with the best price in this case therefore gets the contract.256

Second price sealed bidder whereby the companies submit sealed bids and the highest is given

the contract but then pays the price equal to the second highest bidder also known as the Vickrey

auction.257

It is also quite important to note that there may be other variations in the way bids or auctioning

are carried out due to the complex and unique nature of petroleum industry in every country and

not all countries follow a predetermined set of rules.258 Some scholars are of the opinion that the

cash bidding system actually serves the best interest of the country as the most efficient in

economic terms gets the contract for the exploration.259 This is usually based on the theory that

the company which is able to pay the highest for acreage is the most suitable for the job.260 It is

also see as a system that can avoid corruption unlike the discretionary method and other issues

that come with discretion.261 An inherent disadvantage of the cash bidding is also the fact that

companies are usually uncertain of the economic viability of certain areas and they may end up

cutting on the bids.262 This would be a disadvantage to the state as there is no surety if the

amount a company is bidding will in essence reflect what is paid for it. The cash bidding system

254Ibid. 255Ibid. 256Ibid. 257W. VICKREY, Counterspeculation, Auctions, and Competitive Sealed Tenders, 16(1) The Journal of finance

(1961), p. 8-37. 258Ibid 10. 259T. HUNTER, note 1 above, p. 48. 260T. WARMAN., & L. GOLDBLATT, ‘The Work Program Bidding System For Exploration Permits Under the

Petroleum (Submerged Land) Act 1967 (Cth)’, 27 Australian Resources and Energy Law Journal (2008), p. 178-

179. 261Ibid 179. 262Ibid.

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is usually considered an optimal system because the state seeks to ensure it gains the optimal rent

for a specific area.263 This system also helps the state to estimate the value of certain acreage and

hence gives the state the necessary data on particular blocks.264 In conclusion, there is the general

belief that bidding is the most efficient method of allocation of rights but for the petroleum

industry this may not be true owing to the high uncertainty of the sector.265 This is because

neither the governments nor the companies knows the real value of the acreage in question and in

some cases companies working close to certain auctioned blocks may know the real value of

certain blocks without necessarily giving such information to the government.266 This will then

lead to such companies acquiring certain areas with less rent than it actually should fetch.267 The

bidding process is just an auction and usually there is lack of adequate knowledge about the

chances of success since exploration is done after the bidding and this is one disadvantage both

to the governments and the companies from a commercial perspective.268 Most oil companies are

careful on the amount of money they bid due to lack of certainty of recovering the amount and

getting profits.269 Discretionary method would give countries a better chance of ensuring control

and specifically in relation to environmental regulations.

3.2.2.2 Work Programme

Work bidding system is a competitive system that is based on the fact that the company awarded

the license is the one able to perform the most exploration.270 In this case there are specific

activities that the government wishes to perform and the company which shows the ability to do

so in the program wins the bid. The main reasoning behind this system has been to encourage

companies to actively explore for potential petroleum resources.271 The bidding usually depend

on the number of bids available and the quality of such areas.272 The oil companies always

263S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 17. 264K. SUNNEVAG, ‘Designing Auctions for Offshore Petroleum Lease Allocation’, 26(1) Resources Policy (2000),

p. 5. 265S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 17. 266Ibid. 267Ibid. 268Ibid 64. 269Ibid. 270W. J. MEAD, ‘Toward an Optimal Oil and Gas Leasing System’, 15(4) The Energy Journal (1994), p. 10. 271T. WARMAN., & L. GOLDBLATT, note 247 above, p. 180. 272A. MARITZ, ‘Work Program Bidding in Australia’s Upstream Oil and Gas Industry, 1985-1999’, Report 03:14

Prepared for the Department of Industry, Tourism and Resources (2003), available at

[www.abare.gov.au/publications_html/energy/energy_03/er03_work_program],pdf, 2, accessed 10 August 2016.

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decide to enter into the bid based on the assessment of the business environment within the

country and the possibility of getting returns for bearing such risks.273

The companies will look into factors such as the prospects of the acreage, the future oil prices in

the market and then come up with a work program which is related to the expected profits from

the area.274 The companies may also consider the depth and costs of the expected exploration and

the likely type of crude that the field may contain before actually entering a bid.275 Just like in

the cash bidding system, the more the companies that bid for the acreage the more the

competition between companies and the more the chances of attaining an optimal bid.276 The

operator in this case has very limited discretion due to the fact that the work program stipulated,

if successful, binds hence it has to go by that.277 One of the major issue with both types of

bidding is the lack of information since the companies may not really know the availability of

petroleum in a field since sometimes there is limited data.278 The companies therefore have to

rely on the market forces in determining the value of the fields and the most optimistic company

wins the bid.279

3.2.3 Direct Negotiations/Open door system

This is another system of allocation of exploration and production rights and this is also known

as the negotiated procedure and it involves negotiation between the company and the

government.280 In this case the government invites offers from the potential or interested

companies on specific areas within a specific timeline and when all the offers are submitted,

negotiations can begin at anytime as the government chooses.281 Usually the submission is made

to the ministry in charge or the authority that regulates the petroleum issues within the country

whichever the designation may be. The government may also seek to bring in competition in to

the process by holding parallel negotiations with different companies and this will depend on the

existing laws and regulations of the country.282 In certain cases the government may make this

process take the form of an auction by holding parallel negotiations therefore forcing the

273Ibid. 274Ibid 4. 275Ibid 3. 276W. J. MEAD, note 270 above, p. 4. 277T. HUNTER, note 1 above, p. 51. 278Ibid. 279Ibid. 280R. H. PEDERSEN, ‘The Politics of Oil, Gas Contract Negotiations in Sub-Saharan Africa’, 25 Policies and

Finance for Economic Development and Trade (2014), p. 28-29. 281Ibid. 282Ibid.

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companies to give genuine reports about the economic viability of the areas.283 The main point of

criticism is the lack of transparency, accountability and open competition.284 The level of

discretion maintained by the government by the direct negotiations is a breeding ground for lack

of transparency due to the fact that there is no set of criteria to be used by the government.285 The

government usually holds too much discretion in the process and wields a lot of power in the

process hence lack of competition among the companies so as to end up with the most efficient

company. In countries where there are no proper laws and regulations that can help control

corruption, direct negotiations would not suffice and can end up affecting the industry to a large

extent. There is also the lack of information on the negotiations to the public and even for

scholars it is a problem getting proper information on how the negotiations are conducted and the

end results.286 This lack of public scrutiny in the negotiations is a big obstacle for accountability

and transparency in the petroleum industry.

3.2.4 First come first serve basis

First come first serve basis has been used in Kenya initially in awarding rights to earlier

companies involved in exploration but with the oil strike, the government has adopted the

negotiation method as it awaits amendments to the Petroleum Act. Just like the name suggests,

first come first serve allocation method is where the company that makes its application first for

acreage is awarded the license. It is important to note the company does not automatically get the

license without meeting certain criteria or fulfilling certain legal and regulatory measures.

Countries may only use the first come first serve method when there is little information

available about the acreage or when the information is not so encouraging.287 It is recommended

that governments should go for this method when the country has low operation interest hence

open bids may fail to generate strong competition.288 Kenya has always used the first come first

serve basis for the allocation of licenses even though it shifted to direct negotiations after the oil

283R.P. MCAFEE and J. MCMILLAN, ‘Auctions and Bidding’, 25(2) Journal of economic literature (1987), pp.

699-738. 284R. H. PEDERSEN, note 280 above, p. 30. 285Ibid 31. 286 S. TORDO, D. JOHNSTON and D. JOHNSTON, note 27 above, p. 20. 287 Natural Resource Governance Institute, ‘Granting Rights to Natural Resources: Determining Who Takes Natural

Resources Out of the Ground. March 2015,’ [http://www.resourcegovernance.org/sites/default/files/nrgi_Granting-

Rights.pdf] accessed 12 August 2016. 288 V. MARCEL, ‘Guidelines for Good Governance in Emerging Oil and Gas Producers’, The Royal Institute of

International Affairs (2013), p. 12.

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struck. In the current bill, Kenya is set to introduce competitive bidding in the awarding of

licenses.289

Currently in Kenya, awarding of petroleum rights is done through negotiations by the cabinet

secretary of the ministry who is has the mandate to oversee the petroleum industry in Kenya.290

The cabinet secretary has the powers to negotiate, agree and sign petroleum agreements and also

to approve any amendments to such agreements.291 He is advised by National Fossil Fuels

Advisory Committee (NAFFAC) which is composed of the attorney general, the Ministry of

Finance, National Oil Corporation of Kenya (NOCK), National Environmental Management

Authority (NEMA), Kenya Revenue Authority (KRA) and Petroleum Institute of East Africa

(PEEA).292 He is the head of the committee and still has the final say in matters petroleum. There

is too much power invested in an individual and therefore it gets very difficult to control and

have transparency. One of the current and most relevant cases in Kenya that illustrates the lack

of adequate and clear channels of awarding rights is the case involving Interstate Oil Company,

the Ministry of Energy and other parties.293 Interstate Oil Company accused the Permanent

Secretary and the Cabinet Secretary of Energy for abuse of secret and denying the company the

right to explore for and develop oil in certain blocks contrary to section 5(2) of the Petroleum

Act of Kenya.294 The case came about due to an incident in 2005 when Interstate Oil Company

stumbled upon a substance that it suspected to be crude oil and subsequently submitted samples

to the ministry of energy for laboratory analysis.295 The Petroleum Refinery Limited then

responded by confirming that the substance was oil and the company then went ahead to apply

for an exploration permit under section 5(2) of the Petroleum Act. The alleged blocks were later

expropriated by a different company known as Turkana Oil Company forcing IOC to sue the

Ministry of Energy for being denied information and abuse of secret by the minister.296 The

company claimed that it was not aware that production permit should be obtained separately

from the exploration permit that it applied for already. The application was therefore opposed by

all the interested parties on the grounds that it had not issued any exploration permit to the

289The Petroleum (Exploration, Development and Production) Bill, 2015, Pt. 43, available at

[http://www.erc.go.ke/images/docs/Petroleum_Bill_3rd_Aug_2015.pdf] accessed 11 November 2016. 290 Petroleum (Exploration and Production) Act 1984, s5. 291 Petroleum (Exploration and Production) Act 1984, s5. 292 Ibid. 293Case Concerning Exploration Permit Granted to Centric Imaging Inc. (Republic v Permanent Secretary, Ministry

of Energy & 5 Others ex parte Interstate Petroleum Limited) [2010] eKLR, available at

[http://kenyalaw.org/Downloads_FreeCases/79673.pdf] accessed 20 August 2016. 294 Petroleum (Exploration and Production) Act 1984, s5. 295 Case Concerning Exploration Permit Granted to Centric Imaging Inc., note 279 above, para. 9-14. 296 Ibid.

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claimant and that the availability of oil in the disputed blocks was in public domain and was

available in the library and Website of National Oil Corporation of Kenya.297 The most

interesting part in the decision of the court was its reference to the fact that the minister is given

the discretion to award permits and therefore it could not interfere.298 This shows that there is too

much power and authority vested in an individual and therefore leaving so many loopholes for

the process to be fraudulently carried out.

According to Transparency International (TI) 2015 report, Kenya is among the most corrupt

countries at position 139 out of the 165 ranked countries with a high level of corruption.299 With

this level of corruption, vesting too much power of such a sensitive and complex industry in an

individual poses risk to the sector and to the country in general as well as to the investors. The

issue of resource curse has been discussed for decades in Africa300 and most of the African

nations do not cultivate from their natural resources due to high level of corruption by the leaders

who are mandated to take charge of the petroleum sector. One of the lessons Kenya should learn

from the UK and Norway is how to ensure there is fragmented control of the petroleum sector

and especially the awarding of petroleum rights. Looking at the objective of the allocation policy

of the UK, “….to encourage the best possible prospection, the E&P of the country’s petroleum

resources under conditions that encourage competition and nondiscriminatory access to the

resource, taking into consideration the protection of the environment and the interests of other

users of the sea.”301 The direct negotiations used in Kenya cannot serve to the best interest of

competition and non-discrimination. The current system that Kenya uses in awarding rights is

likely to lead to lack of transparency and accountability which in turn leads to inefficient

companies getting contracts and thus culminating into possible negative environmental impacts.

There is also need for improved fragmentation of the sector and increased legislation to cover

various areas within the petroleum industry. This is the case with both UK and Norway which

have various sub-sections and various departments and legislations to deal with unique

situations.

297National Council for Law Reporting: Kenya Law Reports [http://kenyalaw.org/newsletter/20110107.html]

accessed 12 August 2016. 298 Ibid. 299Transparency International: Corruption Perceptions Index 2015

[http://www.transparency.org/cpi2015?gclid=CMXu4abMs84CFekW0wodSHMLUQ] accessed 9 August 2016. 300T. LAWSON-REMER and J. GREENSTEIN, ‘Beating the Resource Curse in Africa: Global Effort’, Council on

Foreign Relations (2012), available at [http://www.cfr.org/africa-sub-saharan/beating-resource-curse-africa-global-

effort/p28780] accessed 11 November 2016. 301Oil and Gas: Petroleum Licensing Guidance. [https://www.gov.uk/guidance/oil-and-gas-petroleum-licensing-

guidance] accessed 9 August 2016.

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4. INCORPORATION OF ENVIRONMENTAL REGULATIONS INTO AWARDING OF

E&P RIGHTS

4.1 Importance of Incorporating Environmental Regulations

According to reports by International Energy Agency, the demand for energy production reached

unprecedented level of 13800 million tons of oil equivalent in 2014 which reflected an increase

of 1.5% from that of 2013.302 Despite the increase in the production of renewable energy, it is

clear that there will still be increased demand in oil and gas. Oil production rose by 2.1% while

natural gas production rose by 0.6%.303 The total consumption of oil has grown to more than

double between 1971 and 2014304 which also shows that there is no slow down in the overall

consumption of oil and gas. The statistics is meant to show that despite the calls to move from

fossil fuels to Renewables, people still use fossil fuels to a large extent. The exploitation of oil

and gas reserves without doubt has led to certain ecological effects.305 There have been air

pollutions, water pollution in large scale, social impact on people, sound pollution and even

destruction of conservation parks.306 Recently there is outcry of local communities especially in

the developing nations, who are largely affected by such activities and increased need to ensure

that environmental management is incorporated into oil and gas exploration and production.307

Countries like UK and Norway have made considerable steps to that direction with stable and

broad legislations both at the local, regional and international level.

Environmental issues have become one of the most serious global concerns owing to the climate

change regime. There is scientific proof that climate change is real and requires the intervention

of all industries and multiple regulations at the local, national and international levels.308 The

United Nations Conference on Environment and Development (UNCED) held in Rio in 1992

brought to the fore the strong link between the environment and social and economic

development309 and therefore encouraged countries to initiate ways of ensuring that

environmental issues are incorporated in to development agendas. There has been widespread

302 International Energy Agency: World Energy Outlook. [https://www.iea.org] accessed 10 August 2016. 303 Ibid. 304 Ibid. 305I. BORTHWICK, F. BALKAU, T. READ, and J. MONOPOLIS, ‘Environmental Management in Oil and Gas

Exploration and Production: An Overview of Issues and Management Approaches’, 37 UNEP Technical

Publication, IE/PAC Technical Report (1997), pp. 4-7. 306 Ibid. 307 Ibid. 308K. KULOVESI, ‘Exploring the Landscape of Climate Law and Scholarship: Two Emerging Trends’, in K.

KULOVESI, M. MEHLING, E. J. HOLLO (eds), Climate Change and the Law (Springer Science+Business Media

Dordretch 2013), p. 31/32. 309 United Nations Conference on Environment & Development Rio de Janerio, Brazil, 3 to 14 June 1992 AGENDA

21, United Nations Division for Sustainable Development (1992).

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condemnation of fossil fuels under different umbrellas and most notably under the United

Nations Framework Convention on Climate Change (UNFCCC)310 and its Kyoto Protocol311 and

the expected actions that needs to be taken in-order to secure the environment and control

climate change.312 The complexity of climate change regime calls for proper regulation of every

sector that is deemed threat to the environment and oil and gas sector plays a huge part in the

pollution of the environment.313 Therefore there great need to incorporate environmental

regulations into awarding of exploration and production rights to ensure that companies that take

over such sectors have the capacity to maintain high level environmental standards and the state

should also have the ability to put in place supportive legislations, enforcement of such,

monitoring and compliance mechanisms. Research carried out by scientists proves that the

environment has been polluted and the earth is changing in fundamental ways and it puts

petroleum industry at the centre of the problem.314 It is important to note that environmental

issues are transboundary and they require a joint action from various actors so as to make

considerable achievements.315 Most countries are signatories to certain international conventions

on the environment for example Kenya is a signatory to environmental bodies that require action

to ensure proper environmental protection.316

The Organization of the Petroleum Exporting Countries (OPEC) advocates for the need to ensure

extensive environmental protection and sustainable development in the petroleum sector.317 All

OPEC members are signatories to the UNFCCC and they all take environmental issues

seriously318which adds weight to the level of attention that is given to environmental issues by

the petroleum producing countries.319 There is lack of adequate environmental laws and

310 United Nations Framework Convention on Climate Change, 9 May 1992, New York, in force 21 March 1994, 31

International Legal Materials (1992), 849. 311 Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto, 10 December 1997, in

force 16 February 2005, 37 International Legal Materials (1998) 22. (Kyoto Protocol). 312 K. KULOVESI, note 308 above, p. 32. 313 D. HELD and A. HERVEY, ‘Democracy, Climate Change and Global Governance: Democratic Agency and the

Policy Menu Ahead’, in D. HELD, A. HERVEY and M. THEORS (eds), The Governance of Climate Change:

Science, Economics, Politics & Ethics (Cornwall: Polity Press, 2011), p. 89. 314 Y. OMOROGBE, Oil and Gas Law in Nigeria: Simplified, (Malthouse Press Ltd, 2003), p. 126. 315 K. KULOVESI, note 308 above, p. 34. 316 UN General Assembly (1988), 'Protection of Global Climate for Present and Future Generations of Mankind’,

UN General Assembly Res. 43/53, UN Doc. A/43/49. 317Organization of Petroleum Exporting Countries: Environment

[http://www.opec.org/opec_web/en/press_room/315.htm] accessed 11 August 2016. 318 Ibid. 319 ‘Climate change is a concern for us all. Thus, negotiations to develop an agreement by 2015 and raise the levelof

ambitions for the pre-2020 period are extremely important. We have made some progress. But there is much left to

be done. Our common objective is the full, effective and sustained implementation of the United Nations

Framework Convention on Climate Change (UNFCCC). Its success, however, requires transparent, inclusive, and

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enforcement mechanisms in most of the developing countries320 and Kenya is not an exception.

This is the reason Kenya should adopt serious environmental regulations and proper

enforcement, compliance and monitoring mechanism so as to protect its environment in the wake

of oil discoveries. There have been calls in the international front for the companies operating in

the developing countries to ensure good practices due to the weak laws but there is general

tendency by the oil companies to be concerned more with the profits than environmental issues.

Kenya being a developing country is likely to concentrate on the exploitation of oil and gaining

revenue for economic growth of the country hence giving little or no attention to the critical issue

of environment.321 Kenya has laws that govern the environmental sector even though they may

not be adequate for the petroleum industry, but the main problem in Kenya and other developing

countries may not be lack of such legal and regulatory framework but ensuring that such laws are

adhered to by the oil companies.322

The success of the petroleum industry in Kenya will largely depend on such legal frameworks

and without proper environmental standards; there will be too many obstacles for the companies

in the local areas of operation. In 2013, there was announcement of suspension of exploration by

a company in Turkana East and Turkana South sub-counties due to demonstrations by locals and

one of the major issues was environmental destruction.323 The Petroleum Act of Kenya was

passed several decades before the discovery of oil in Kenya and therefore it cannot serve the

current dynamic and complex industry without major improvements.324 Currently there is a bill

before the parliament of Kenya325 that proposes several changes to the laws and it has extensive

environmental laws which would lead to environmental protection but it is not yet law. Despite

this attempt to regulate the industry, there are still valuable lessons that Kenya should learn from

other jurisdictions such as UK and Norway in incorporating of environmental regulations into

the awarding of exploration and production rights. The oil and gas industry and especially the

comprehensive and country driven negotiations that take into account the interest of all parties.’ (Delivered by

OPEC Secretary General, HE Abdalla Salem El-Badri, at the UN Climate Change Conference (COP19/CMP()),

Warsaw, Poland , 22 November 2013). 320A. S. WAWRYK, ‘International Environmental Standards in the Oil Industry: Improving the Operations of

Transnational Oil Companies in Emerging Economies’, 1(1) Oil Gas Energy Law Intelligence (2003), p. 1. 321 Ibid. 322 Ibid. 323How Kenyans will gain from proposed law to regulate the Petroleum Sector

[http://www.businessdailyafrica.com/Opinion-and-Analysis/539548-2879556-ehsq0c/index.html] accessed 11

August 2016. 324 Ibid. 325The Petroleum (Exploration, Development and Production) Bill, 2015.

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upstream sector have the potential to cause considerable damage to the environment.326 This

damage does not only affect the abstract environment but also the social, cultural, health and

safety of the local communities and their way of life.327 Due to the inadequate legislations and

the need for better environmental governance, there have been calls by different interest groups

on the International Oil Companies (IOCs) to improve their practices in the developing

countries.328 The best practices are seen as some of the uniform standards that are adopted by

different organizations, NGOs and intergovernmental organizations so that there is certain

uniformity in the application of best practices.329 Therefore there are various international

agreements that oil companies should follow in good faith but that is not the case with many

companies operating in developing countries. With lack of goodwill from certain companies,

there is need to ensure that Kenya is well prepared and to ensure there are legislations in place to

keep the companies in check.

There is increasing need to make environmental issues fundamental part of the licensing

process330so that most oil companies are able to adhere strictly to the details unlike most

countries that still classify environmental issues separately and only as supplementary

information in the contracts.331 As mentioned, initial contracts such as traditional concessions did

not have any specific provisions on environment and therefore there was a wide gap between

petroleum activities and environmental protection.332 This may have set a bad precedent for the

contracts that were later adopted but the trend is changing with environmental concern becoming

increasingly important. The need for environmental protection is also pushed by the need for

sustainable development and natural resource conservation.333 The developing countries have

always given conservation a wide berth due to development and economic reasons which has led

to environmental destruction in certain countries by the petroleum activities.334 The political

situations, the institutions and the governance style also contribute to the need for proper

environmental protection in Kenya. Exploration activities that are currently ongoing along the

326 R.P. MCAFEE and J. MCMILLAN, note 283 above, p. 700. 327 Ibid. 328 American Petroleum Institute - Onshore Oil and Gas Production Practices for Protection of the

Environment, 2nd ed. (Washington DC, API, 1995). 329 R.P. MCAFEE and J. MCMILLAN, note 283 above, p. 702. 330 Z. GAO, note 96 above, p. 240. 331 Ibid 240/241. 332 Ibid. 333 Z. GAO, Environmental regulation of oil and gas, (Kluwer Law International 1998), p. 8/9. 334 Ibid.

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coastal regions of Kenya also have likely pollution effects on marine.335 The likely production

along the coastal region of Mombasa is therefore another reason Kenya needs to draw lessons

from the more developed countries both in onshore and offshore petroleum activities.336

The United Nations Centre on Transnational Corporations (UNCTC) conducted research and

came up with a report based on contractual agreements for petroleum development that in many

developing countries' petroleum contracts, "the only explicit reference to environmental

protection is a brief clause", such as: "Contractor shall ...carry out operations in such a manner as

to cause minimum social and ecological disruption and use its best endeavors to cause no

damage to public and private properties. If pollution results from contractor's operations,

contractor shall promptly carry out cleaning operations to the satisfaction of the appropriate

governmental authorities and the costs therefore shall not be chargeable as exploration,

development or production costs."337 This shows how environmental issues have been ignored in

developing countries and the need for Kenya to have a different form of governance and more

explicit reference to environmental issues in the contracts or supportive regulatory measures. It is

quite apparent that parties of the contracts do not give enough weight to environmental issues as

it conflicts their revenue and profit prospects.338 Usually the producing companies are also taking

care not to scare away investors with strict environmental regulations.339 This kind of practice is

likely to be a danger to countries such as Kenya, which are still at the early stages of exploration

and production.

4.2 United Kingdom (UK)

4.2.1 Laws and Regulations

The focus on UK in this comparative analysis is because Kenya was colonized by the UK and

therefore the legal system currently in use was established by the colonial government despite

amendments that have taken place. The legal system currently in use has a lot to do with the

colonial government hence easy to compare and contrast. The UK is considered one of the

advanced in-terms of the legal system and specifically in the oil and gas production realm. Even

335B. O. OHOWA, ‘Evaluation of the Effectiveness of the Regulatory Regime in the Management of Oil Pollution in

Kenya’, 52(1) Elsevier B. V. (2008), pp. 17-21. 336Ibid. 337UNCTC, Alternative Arrangements for Petroleum Development: A Guide for Gov't Policy-Makers and

Negotiators, UN Doc ST/CTC/43, 1982, p. 43. 338Z. GAO, note 333 above, p. 4. 339Ibid 5.

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though the UK is still considered a net importer of crude oil, 340it still remains one of the largest

oil producers and its production capacity is the highest in the EU and second in the European

Economic Area (EEA) after Norway.341 The UK has also been an exporter of crude oil to some of

the largest European countries such as Germany, Netherlands, and France and outside the EU it

exported to the US even though the levels have decreased significantly.342 Kenya on the other

hand has not officially began commercial exportation and it is time to put laws to test so as to

avoid any pitfalls in the future and the UK will provide a strong base for comparative analysis.

The key laws and regulations that govern the exploration and production in the oil and gas

industry in the UK is the 1998 Petroleum Act (herein after the Petroleum Act of UK).343 The Act

specifies that all rights to the petroleum, to search for, bore for and get are vested in the

Crown.344 Regulations that govern the oil and gas sector has always been the principal duty of the

Secretary of State in-charge of Energy and Climate Change and it fell under the Department of

Energy of Climate Change (DECC) which is formed by the law.345 There was a recommendation

by the Wood Review to establish an independent regulator of the oil and gas sector in the UK

known as the Oil and Gas Authority which has formally taken charge of most of the regulatory

functions that were initially performed by the former on behalf of the secretary of state.346

Licenses are acquired through a competitive process conducted by the Department of Energy of

Climate Change (DECC).347 Companies make applications to the DECC either as consortiums or

individually for specific areas and sometimes they are acquired through asset transfers between

different companies even though in such a case they seek the permission from the DECC which

gives the green-light on the transfer.348 The specific conditions of the licenses are set out in

model clauses and usually contain details such as work limit, work duration and pollution.349

Directives by the EU to the member states that must be taken in to account by the DECC when

awarding petroleum licenses such as the directive granting and using authorizations for the

340United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 8 August 2016. 341 Ibid para. 2. 342United Kingdom: Department of Energy and Climate Change

[https://www.gov.uk/government/organisations/department-of-energy-climate-change] accessed 12 August 2016. 343B. PALMER and M. CULVER, C. MCKENNA, ‘Oil regulation in 33 Jurisdictions Worldwide’, 10 Law Business

research (2013), p. 212. 344Ibid. 345G. GORDON, ‘Petroleum Licensing’, in G. GORDON, J. PATERSON and E. USENMEZ, Oil and Gas Law:

Current Practice and Emerging Trends, 2nd ed. (Dundee University Press, Dundee, 2011), p. 65. 346 Ibid. 347 Ibid 66. 348 Ibid. 349 Ibid.

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prospection, exploration and production of hydrocarbons of 1995.350 There are other Industry

based Codes of Practice (ICOP) that most licensees have signed to and therefore this also helps

promote certain ethical and commercially viable activities by the companies.351 Before

commencing drilling operations for onshore oil and gas development the operator must obtain a

petroleum exploration and development licence (PEDL) from DECC352

There are other oversight bodies responsible for other specific issues such as the Health and

Safety Executive (HSE) which is responsible for the Health and Safety, the Hazardous

Installations Directorate which is responsible for improving the health and safety standards of the

offshore activities.353 There are also channels for appeals on the decisions that are made by the

Department of Energy of Climate Change (DECC) if one can prove that a decision was made

outside the powers of the DECC.354 All the exploration and production activities are carried out

both onshore and offshore but in UK such activities are predominantly offshore.355 There are

different licensing regimes for the onshore and offshore exploration activities and they can be

restricted and controlled for various reasons such as environmental concerns or public security

usually done after a field study and public participation.356 There are two different kinds of

licenses offered in the UK for exploration and production and none is considered exclusive.357

Licenses currently carry a charge known as Rental and it is usually due on the date of awarding

the license to the company.358

350 Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 establishing the conditions

for granting and using authorizations for the prospection, exploration and production of hydrocarbons, OJ L 164,

30.06.1994.

*Whereas, for this purpose, it is necessary to set up common rules for ensuring that the procedures for granting

authorizations for the prospection, exploration and production of hydrocarbons must be open to all entities

possessing the necessary capabilities; whereas authorizations must be granted on the basis of objective, published

criteria; whereas the conditions under which authorizations are granted must likewise be known in advance by all

entities taking part in the procedure. 351Oil and Gas: United Kingdom [http://oilandgasuk.co.uk/knowledgecentre/infrastructurecodeofpractice.cfm]

accessed 12 August 2016. 352Onshore Oil and Gas Exploration in the UK: Regulation and Best Practice

[www.gov.uk/government/uploads/system/uploads/attachment_data/file/503067/Onshore_UK_oil_and_gas_explora

tion_England_Dec15.pdf] accessed 12 August 2016. 353 Ibid. 354Oil and Gas: Petroleum Licensing Guidance [https://www.gov.uk/guidance/oil-and-gas-petroleum-licensing-

guidance] accessed 13 August 2016. 355 Ibid. 356 Ibid. 357 Ibid. 358 Ibid.

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The license durations are divided into periods of six, five and twenty years and the company is

required to complete the work in one period phase before proceeding to other phases.359 UK has

also taken steps in ensuring that companies that take up fields are actively developing them and a

taskforce was formed after the Oil and Gas Industry Task Force (OGITS) instituted an initiative

that was aimed at ensuring that the dormant areas are developed.360 This was done by

encouraging companies to explore areas not attractive to oil companies through tax incentives

and other avenues to attract investors especially in the offshore exploration and production.361

Smaller companies were also encouraged to sell acreages or bring in other companies to help in

the development of areas that were not well developed in an aim to ensure that all acreages are

developed.362 The process of awarding of exploration and production rights in the UK is clearly

developed with adequate regulatory frameworks meant to ensure everything is taken into

consideration before awarding rights and even after.

4.2.3 Licensing and Environmental Regulations in UK

The blowout of the Macondo well/BP Oil Spill in the Gulf of Mexico363 awakened the UK and

since 2010 it has been passing regulations meant to ensure that such disasters are prevented and

better managed when they occur.364 The Department of Energy and Climate Change (DECC)

strengthened the environmental rules therefore changing the environmental regime overtime with

increased inspections and better oil pollution emergency plans.365 The Oil Spill Prevention and

Response Advisory Group (OSPRAG) was formed immediately and it was to look into the

regulations, laws and policies of the petroleum sector and it was to come up with

recommendations on the state of such provisions and the emergency preparedness in-terms of

financial capacity.366 The House of Commons energy committee also expressed a view that it

should be a licensing requirement that companies are able to pay for such incidences that may

359Ibid. 360United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 13 August 2016. 361Ibid. 362Ibid.

*Within the jurisdiction of United Kingdom, a License, which is a draft model agreement, provides the IOC with

rights to explore, develop and to produce. It is virtually non-negotiable; the only variable quantities bring the size of

the contracted Work Commitment which also serves as the Consideration which changes hands upon award. 363See also BP Oil spill disaster in the Gulf of Mexico. On the evening of 20 April 2010, a gas release and

subsequent explosion occurred on the Deepwater Horizon oil rig working on the Macondo exploration well for BP

in the Gulf of Mexico. 364 B. PALMER and M. CULVER, C. MCKENNA, note 343 above, 214. 365 Ibid. 366 Ibid.

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occur and the need for small companies to provide third party insurance.367 Various legislations,

regulations and best practices368 that have been put in place in the UK to ensure that

environmental issues are well within the control of the state in the interest of the citizens.369 In-

order to conduct exploration and production activities in the petroleum sector, there are other

principal government statutory controls that must be adhered to besides the license even though

it is the main regulatory instrument.370

The focus of the paper is to understand how these regulations are incorporated into the process of

awarding of exploration and production rights and how this ensures proper enforcement,

compliance and the continued monitoring by the state. It is also important to note that some of

the regulations may have certain differences in other countries within the UK but such are

minimal and in most cases just designation variation.371 The UK is one of the countries with a

goal setting approach to regulations in the petroleum industry372due to the fact that it requires the

operators or the companies to prove that risks that are associated to the exploration activities are

minimized as much as possible.373 This is also the best way of ensuring that issuing of licenses

for exploration and production is conducted within the framework of environmental regulations.

It also encourages the operators to continuously improve to meet the set standards.374 One of the

requirements by the Oil and Gas Authority UK (OGA) is that the operator must agree to follow

oil field best practices375and as part of the licensing process, the operators must have clearly

defined operational and environmental management systems that will convince Oil and Gas

Authority to allow it to continue with the process of exploration.376

The UK has a detailed approach to environmental issues through several bodies that are meant to

control the petroleum sector and to ensure that the operators are compliant to the environmental

367Ibid. 368United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 13 August 2016. 369T. C. DAINTITH, G. D. WILLOUGHBY and A. HILL, 2nd ed. United Kingdom Oil and Gas Law, (Sweet &

Maxwell 1984), paras. 1-105-1-06. 370 United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 13 August 2016. 371 The Environmental Permitting (England and Wales) (Amendment) Regulations 2016

[http://www.legislation.gov.uk/uksi/2016/149/contents/made] accessed 14 August 2016. 372Onshore Oil and Gas Exploration in the UK: Regulation and Best Practice

[www.gov.uk/government/uploads/system/uploads/attachment_data/file/503067/Onshore_UK_oil_and_gas_explora

tion_England_Dec15.pdf] accessed 12 August 2016. 373Ibid. 374Ibid. 375 Environmental legislation applicable to the onshore hydrocarbon industry (England, Scotland and Wales),

[https://www.gov.uk/government/uploads/system/uploads/.../onshore_leg_1_.doc] accessed 14 August 2016. 376Ibid.

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regulations of the state. Being a member of the EU, it is also bound by certain laws in form of

directives.377 This also gives it a broader platform of ensuring that environmental issues are part

of the licensing process. One of the directives is the Council Directive (85/337/EEC) that covers

the assessment of the effects of certain public and private projects on the environment.378 This

always requires certain developments in the petroleum industry to prepare and provide

environmental statement which is considered part of the approval process.379 This directive

therefore is incorporated into the licensing process due to the fact that the statement must be

submitted before the approval of any activities. The other directive that is directly associated

with the petroleum industry is the EC Directive (92/43/EEC) which deals with conservation of

natural habitats and of wild fauna and flora380 which requires the hydrocarbon developments to

take note of the various conservation areas when undertaking the Environmental Impact

Assessment (EIA) before the commencement of the exploration activities. EIA is one of the

major requirements by the UK government for activities of exploration, development and

production and there must be a proper EIA before the commencement of any activities and in the

awarding of rights’ process.381

EC Directive (96/82/EC) which guides the control of major accident hazards382 and is associated

to the UK law Control of Major Hazards Regulations 1999 (COMAH) which requires the

authorisation of storage of certain substances which are considered hazardous to the

environment.383 The competence of the operator to efficiently handle any hazards is usually

established at the licensing stage and therefore it is important to give the license to those

companies that can manage any hazards.384 Licensees are also required to carry out elaborate risk

assessment on the environment covering the full cycle of the process including the health and

377 Oil and Gas Authority: Oil and Gas Petroleum Licensing Guidance, [https://www.gov.uk/oil-and-gas] petroleum-

licensing-guidance legislative-background [https://perma.cc/5KVH-NL76] (DECC's Guidance recognizes that

"Model Clauses attached to existing licenses are not affected by the issue of subsequent sets of Model Clauses,

except through specifically retrospective measures.") 378Council Directive of 27 June 1985 on the assessment of the effects of certain public and private projects on the

environment(85/337/EEC), OJ L 175, 5.7.1985, p. 40–48. 379 Ibid. 380Council Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora,

OJ L 206, 22.7.1992, p. 7–50. 381 Environment Act 1995, s2-10. 382Council Directive 96/82/EC of 9 December 1996 on the control of major-accident hazards involving dangerous

substances, OJ L 10, 14.1.1997, p. 13–33. 383 Ibid. 384R. BALDWIN, M CAVE, and M. LODGE, Understanding Regulation: Theory, Strategy and Practice, 2nd ed.

(Oxford University Press, 2012), p. 109.

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safety of the people.385 EC Directive (2006/118/EC) Groundwater Water Directive386 and EC

Directives 2006/118/EC and 2008/105/EC387 deals with safety of ground water during the

exploration and development stages and the likely effects of such activities to the environment.

The above directives are part of the Environment Permitting Regulations in England and Wales

and the Water Environment Controlled Activities (2011) of Scotland which are meant to ensure

that the permits and registrations can control the entry of pollutants to groundwater.388

EC directive (96/61/EC) concerning integrated pollution prevention and control which requires

control of emissions from industrial premises through the requirement to apply Best Available

Technology (BAT) and permitting.389 It is this kind of technological competence that should be

evaluated before granting of rights. The state ensures that not only is the company competent in-

terms of exploration skills but it also have the right technology that will help minimise pollution

as much as possible.390 This is therefore well incorporated into the process of awarding of

exploration and production rights in the UK. The EU also adopted the offshore safety directive

which is meant to deal with disasters in offshore petroleum activities know as the offshore safety

directive.391 It required the formation of an offshore safety regulatory authority and hence the

Offshore Safety Directive Regulator (OSDR) was formed for the authority of the directive.392

This body was to ensure that the directive is complied with and measures are in place to deal

385Onshore Oil and Gas Exploration in the UK: Regulation and Best Practice

[www.gov.uk/government/uploads/system/uploads/attachment_data/file/503067/Onshore_UK_oil_and_gas_explora

tion_England_Dec15.pdf] accessed 14 August 2016. 386 Directive 2006/118/EC of the European Parliament and of the Council of 12 December 2006 on the protection of

groundwater against pollution and deterioration, OJ L 182, 21.6.2014, p. 52–55. 387Directive 2008/105/EC of the European Parliament and of the Council of 16 December 2008 on environmental

quality standards in the field of water policy, amending and subsequently repealing Council Directives 82/176/EEC,

83/513/EEC, 84/156/EEC, 84/491/EEC, 86/280/EEC and amending Directive 2000/60/EC of the European

Parliament and of the Council, OJ L 348, 24.12.2008, p. 84–97. 388Onshore Oil and Gas Exploration in the UK: Regulation and Best Practice

[www.gov.uk/government/uploads/system/uploads/attachment_data/file/503067/Onshore_UK_oil_and_gas_explora

tion_England_Dec15.pdf] accessed 12 August 2016. 389Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution prevention and control, OJ L

257, 10.10.1996, p. 26–40. 390M.K. AMAKOROMO AND G.A. AGBAITORO, ‘Reforming the Regulatory Framework for Offshore Health

and Safety in the Nigerian Oil and Gas Industry: Lessons from the United Kingdom’, Oil, Gas and Energy Law

(2016), p. 126, available at [https://www.ogel.org/journal] accessed 14 August 2016. 391Directive 2013/30/EU of the European Parliament and of the Council of 12 June 2013 on safety of offshore oil

and gas operations and amending Directive 2004/35/EC, OJ L 178, 28.6.2013, p. 66–106. 392United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 14 August 2016.

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with issues such as oil emergency pollution.393 Operators have to accept such terms when being

granted the license to explore and produce petroleum in the UK or any other EU country.

Besides the EU key legislations discussed above, there are national environmental legislations

that are central to the regulation of petroleum activities and are duly incorporated in to the

process of awarding rights. Town and Country Planning Act 1990 (England and Wales) as

amended by the Planning Act 2008;394

Town and Country Planning (Scotland) Act 1997 as amended by the Planning (Scotland) Act

2006;395 Planning and Compensation Act 1991 (as amended);396 and Environment Act 1995 (as

amended).397 These broad legislations require permission when planning petroleum development

and this is required before such activities are initiated. This not only ensures compliance but also

raises the standard of environmental protection. The Pipeline Act of 1962 requires that pipelines

that are over 16km in length should prepare environmental statement before they are given the

approval to lay such.398 This shows that the licensee has to be approved at almost every stage

before conducting certain activities despite having the contract. In general therefore the state has

maintained a level of control without engaging into the activities so much. The regulations are

quite detailed on what is required and all these details are in the law or in the contract that is

awarded to the company. The energy act of 1976 and the Petroleum Act 1998 require the

licensees to ensure that oil is contained above and below the ground in onshore exploration.399

The operator is always required to provide the proof of management systems before the license is

awarded400 and this shows clearly that environmental management is part of the awarding

process. The management systems consist of the technology that is able to ensure that activities

are of minimal effect to the environment.401

393United Kingdom: Oil and Gas Regulation 2016. [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-

and-gas-regulation-2016/united-kingdom] accessed 14 August 2016. 394Town and Country Planning Act 1990 available at [http://www.legislation.gov.uk/ukpga/1990/8/contents]

accessed 14 August 2016. 395Town and Country Planning (Scotland) Act 1997 available at

[http://www.legislation.gov.uk/ukpga/1990/8/contents] accessed 14 August 2016. 396Planning and Compensation Act 1991 [http://www.legislation.gov.uk/ukpga/1990/8/contents] accessed 14 August

2016. 397 Environment Act 1995. 398 Petroleum and Minerals Pipeline Act of 1962 s7. 399 Energy Act 1976 s6 and The Petroleum Act 1998 s3. 400Onshore Oil and Gas Exploration in the UK: Regulation and Best Practice

[www.gov.uk/government/uploads/system/uploads/attachment_data/file/503067/Onshore_UK_oil_and_gas_explora

tion_England_Dec15.pdf] accessed 12 August 2016. 401Ibid.

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UK has also ensured that environmental regulations are incorporated into the awarding of rights

process by maintaining a high level and intensive public participation. Public participation is one

of the most important ways of ensuring the government captures the likely impacts of any

activity. Through the United Kingdom Onshore Operators Group (UKOOG), the operators

ensure that local community is fully engaged.402 The information that is collected from the

constant engagement of the local communities help in the incorporation of such concerns in the

awarding process. Oil and Gas Authority (OGA) requires public participation and its part of the

report by the operator.403 The operators are also required by law to make all the information

available for the public usually in the website and the library so that there is no secrecy in the

way its activities are carried out and the likely effects.404 The regulatory authorities consisting of

the Energy Agency (EA), the Department of Business, Energy and Industrial Strategy (DBEIS),

the Minerals Planning Authority (MPA) also ensures there is adequate information for the

public.405 With proper legislation and regulations in place on how to conduct it, this can be a

good way of integrating the environmental matters in to the process of awarding rights.

The environmental statement submitted by the operator is another way of ensuring that awarding

of licenses is done within the framework of environmental regulations. It gives detailed

information about the development and the non-technical summary of such study.406 It therefore

proves the level of adequacy of the Environmental Impact Assessment (EIA) that has been

conducted and explains details of the likely effects of the development and should go ahead to

outline the alternatives that are available according to the study.407 The Environment Agency

encourages the operators to have consultation with local EA agencies so as to know the

likelihood of getting the permission for development.408 The Energy Agency (EA) is also a prime

statutory body consulted in the event of any permit that is to be granted and companies cannot

exploit resources within UK without the input and permit from the Energy Agency (EA).409 The

UK maintains a fragmented regulatory system but with very close coordination between them so

402United Kingdom Onshore Oil and Gas [http://www.ukoog.org.uk/] accessed 14 August 2016. 403Oil and Gas: Petroleum Licensing Guidance [https://www.gov.uk/guidance/oil-and-gas-petroleum-licensing-

guidance] accessed 13 August 2016. 404United Kingdom Government Licensing Framework [http://www.nationalarchives.gov.uk/information-

management/uk-gov-licensing-framework.htm] accessed 15 August 2016. 405United Kingdom Government Licensing Framework [http://www.nationalarchives.gov.uk/information-

management/uk-gov-licensing-framework.htm] accessed 15 August 2016. 406 See, note 386 above. 407 Ibid. 408The Environmental Permitting (England and Wales) Regulations 2010, Pt. 2(13). 409United Kingdom Onshore Operators Group [http://www.ukoog.org.uk/environment/regulation] accessed 15

August 2016.

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as to ensure there are no loopholes in the functions that are carried out by the different regulatory

bodies.410 The different authorities maintain high level of coordination guided by the law in

ensuring they meet the mandate of integrating environmental regulations into oil and gas

decisions.411

The Minerals Planning Authority (MPA) is also a regulatory body in the UK that grants permit

for the location of any wells in onshore exploration and development.412 It ensures that the

impact of such drilling on the environment is acceptable according to the set standards.413 This

allows the operators to ensure that environmental concerns are addressed at every stage of the

process and it is a way of integrating environmental issues in to the awarding of licenses. Usually

such regulations are available to the applicants hence they have sufficient knowledge of the laws

and regulations and the required approval at every stage.

Maintaining high levels of transparency is another way the UK has managed to incorporate

environmental regulations in to the licensing process. The complexity of the oil and gas industry

with huge investments and capital flows has made it prone to certain corrupt practices.414 There is

always interaction between the oil companies and the government and especially in developing

countries where there are still several International Oil Companies (IOCs).415 When there are

weak laws that cannot ensure transparency and accountability, it gets difficult for a government

to control such massive resources and hence corruption resulting in the common epidemic of

resource curse.416 According to Transparency International 2015 index, UK was ranked top ten

among the cleanest countries with a score of 81417 and despite having certain corruption cases,

the petroleum industry has not had many corruption instances and it has been well insulated due

to the strong laws and regulations. The UK Bribery Act (2010) makes provisions in relation to

bribery and related practices as set out in the Act.418 It spells out that a person is guilty of an

offense ‘if offers, promises, or gives a financial or other advantage to another person and intends

410Ibid. 411Ibid. 412United Kingdom Onshore Operators Group [http://www.ukoog.org.uk/environment/regulation] accessed 15

August 2016. 413 Ibid. 414About this topic, see K. TALUS (Ed.), Research Handbook on International Energy Law. (Edward Elgar

Publishing, 2014), p. 475.

415Ibid. 416Ibid. 417 Transparency International: Corruption Perceptions Index 2015 [http://www.transparency.org/cpi2015] accessed

19 August 2016. 418Bribery Act 2010, c. 23 s. 1 (UK).

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the advantage to induce a person to perform improperly a relevant function or activity, or to

reward a person for the improper performance of such a function or activity.’419 There are other

sections of the same that are meant to ensure corrupt practices are curbed within the UK. By

maintaining such high levels of transparency, the government of UK ensures that it can

successfully award licenses to the companies that deserve it and that Environmental Impact

Assessment (EIA) and other approval related to the environment are conducted in an effective

and efficient manner so as to achieve the set objectives. The regulations also require all the

operators in the petroleum industry to ensure that they implement Environmental Management

Systems and also require the operating companies to be members of Offshore Pollution Liability

Association (OPOL) to be approved to conduct petroleum activities.420

The other way in which UK incorporates environmental regulations into the awarding of

exploration and production rights is the fact that decommissioning is usually discussed and its

details agreed upon during the issuing of rights. Decommissioning refers to the process of

abandoning of wells that have been drilled, the removal of all installations and the restoration of

the site so as to avoid any after effects.421 There are strict and detailed guidelines on the process

of decommissioning nationally, regionally and internationally.422 The UK has stable regulatory

framework in place and the Decommissioning Steering Group (DSG) ensures all issues revolving

around that is controlled.423 The discussion of the decommissioning process at the early stages of

licensing is quite important and necessary for the incorporation of environmental issues in to the

awarding of petroleum rights process. Offshore Oil and Gas Environment and Decommissioning

(OGED) is responsible for offshore environmental policy issues that are related to offshore oil

and gas exploration and production.424 It is involved in the environmental assessment of United

Kingdom Continental Shift (UKCS) before the licensing.425 OGED is also oversees approvals

419Bribery Act 2010, c. 23 s. 1 (UK) 420Offshore Pollution Liability Association [http://www.opol.org.uk/] and Environmental Management Systems

[http://www.iso.org/iso/catalogue_detail?csnumber=31807] accessed 16 August 2016. 421 United Kingdom Onshore Oil and Gas [http://www.ukoog.org.uk/] accessed 14 August 2016. 422DECC Guidance Notes, Decommissioning of Offshore Oil and Gas Installations and Pipelines under the

Petroleum Act 1998 and Decommissioning Steering Group UK available at

[http://oilandgasuk.co.uk/knowledgecentre/dsg.cfm] accessed 16 August 2016. 423 Ibid. 424Department of Energy and Climate Change: The Oil and Gas activities of the Energy Development Unit, available

at [https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/320222/edu_booklet_aug_13.pdf]

accessed 16 August 2016. 425 Ibid.

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and enforcement, approval of emergency response plans, prevention of pollution and the

decommissioning process of the offshore activities.426

In a nutshell, the issuance of Petroleum Exploration and Development License (PED) does not

give a green light to drill any well within UK but it is subject to other consents from other

authorities and planning permission.427 There are several other permits that are required as

specified by the laws and regulations of the whole sector that a licensee must agree to obtain

before any well operations. An operator must obtain permits from all the relevant environmental

agencies428 and convince the Department of Business, Energy and Industrial Strategy (DBEIS)

that there are adequate operational and environmental management systems in place to ensure

smooth operation.429 There is a clearly fragmented sector with very close coordination in the UK

and this has definitely improved the regulation of oil and gas sector in the light of environmental

concerns.

4.3 Norway

4.3.1 Laws and Regulations

Norway is one of the largest producers of oil430 and has a developed legal system and gives a

good ground for study. It is also known for the strong environmental laws and regulations that

help in regulating the petroleum sector. The application for the licenses in Norway has to be

submitted to the Ministry of Petroleum and Energy (MPE) with a different copy to the

Norwegian Petroleum Directorate (NPD) and that is a clear sign of the broad base that is set for

the awarding of exploration and production rights.431,432* The total estimated oil and natural gas

liquids production in 2015 was 108 million Sm3.433 In order to understand the Norwegian

petroleum activities, it is necessary to begin by mentioning that the ownership of the petroleum

426Ibid. 427United Kingdom Onshore Oil and Gas: Licensed Areas [http://www.ukoog.org.uk/onshore-extraction/where-we-

operate] accessed 16 August 2016. 428Ibid. 429Oil and Gas United Kingdom [https://www.gov.uk/oil-and-gaspetroleum-operations-notices] accessed 16 August

2016. 430F. AL-KASIM, Managing Petroleum Resources: the" Norwegian model" in a Broad Perspective, 30 (Oxford

Institute for Energy Studies 2006), p. 1. 431Guidelines for applying for production permits Revised 31 Oct. 2011 available at

[http://www.npd.no/global/engelsk/5-rules-and-regulations/guidelines/produksjonstillatelse_e.pdf] accessed 17

August 2016. 432Norway: Oil and Gas Regulation [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-and-gas-

regulation-2016/norway] accessed 17 August 2016. 433 Ibid.

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resources rests with the state and is adequately regulated.434 The principal legal framework that

regulates the oil and gas sector is the Petroleum Act of 1996 under which all other measures

relating to the exploration and production activities lie.435

The major government bodies that are in charge of the petroleum activities are the Ministry of

Petroleum and Energy (MPE), the Norwegian Petroleum Directorate (NPD), and the Petroleum

Safety Authority (PSA).436 Norway uses the licensing system whereby companies are given the

exclusive right to explore for and produce in geographical areas as defined by the license.437 One

of the companies is chosen as operator of the production license that details the work programme

and the mandatory work limit.438 The Norwegian Petroleum Directorate accepts the applications

and payment for the exploration and production licenses as stipulated in sections 3 and 4 of the

Petroleum Regulations.439 Submitting of information and reports concerning the petroleum

activities within exploration and production license to install and operate facilities for transport

and utilization of petroleum.440 In the case of exploration activity that entails drilling to a depth

exceeding 200 meters, separate consent has to be obtained for this kind activity that will entail

the regulations for health, environment and safety in the petroleum activities.441 The Petroleum

industry is the largest contributor to the economy of Norway and therefore extensive legislation

is required so that the industry is well managed for the benefit of the Norwegian people.442

4.3.2 Licensing and Environmental Regulations in Norway

Norway has an in-depth impact assessment that is carried out before opening of new areas for

exploration that include the economic, social and environmental impacts done by the Ministry of

Petroleum and Energy.443 The licenses that are given to the companies are meant to supplement

434Norwegian Petroleum Department: Comments to regulations relating to resource management in the petroleum

activities, [http://www.npd.no/en/Regulations/Regulations/Comments-to-regulations-relating-to-resource-

management-in-the-petroleum-activities-/] accessed 17 August 2016. 435Norway: Oil and Gas Regulation [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-and-gas-

regulation-2016/norway] accessed 17 August 2016. 436Ibid. 437Norway: Oil and Gas Regulation [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-and-gas-

regulation-2016/norway] accessed 17 August 2016. 438Ibid. 439Petroleum Activities Act 1996 (Norway), ss2-3. 440Ibid. 441Ibid. 442The Petroleum Act and The Licensing System: Health, Safety and Environment

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016. 443The Petroleum Act and The Licensing System: Health, Safety and Environment

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016.

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the laws and regulations that are already in place and do not serve as the main legislations.444 The

production license can go up to a 10 year period with the possibility of extension when the

agreed work commitment has been concluded and only if the licensee wishes to continue with

the work to the development and operation phase.445 In the case of discovery and the will to

continue working by the companies licensed, they will be required to prove the commercial

viability of the deposits and get a final nod from the authorities before the development begins.446

It is at this stage that the licensee is expected to submit a development plan for approval that will

also see impact assessment done and the interest of the public taken into consideration.447

The legal basis for the regulation of the petroleum sector is the Petroleum Act which also

provides the legal framework for the petroleum sector.448 The regulatory authority for the

offshore petroleum activities, Norwegian Continental Shelf (NCS), rests with the parliament also

referred to as “Stortinget”.449 State participation in the petroleum industry in Norway is quite

high and therefore gives it the opportunity to maintain a close control of the sector including the

environmental issues. On issues of environment, there are three key authorities that ensure

proper control of the sector; the Ministry of Petroleum and Energy, Norwegian Petroleum

Directorate and Petroleum Safety Authority.450 The Norwegian Petroleum Directorate has

fundamental regulatory principles that require great balance between the interest of the

companies in the petroleum sector and the authorities.451 They recognize the need for the

incorporation of all environmental concerns throughout the industry to ensure that oil and gas

production is conducted within an environmentally sound framework.452 This is done by ensuring

clear division of roles and with a very stable framework of what objectives are to be achieved.453

444Ibid. 445Facts 2013: The Norwegian Petroleum Sector pp. 9-18, available at [http://www.npd.no/Global/Engelsk/3-

Publications/Facts/Facts2013/FACTS_2013.pdf] accessed 17 August 2016. 446Ibid. 447Ibid. 448H. S. FREHILLS, ‘The European Energy Handbook 2012: in The Interface between EU Energy, Environmental

and Competition Law - A Survey’, 4 Oil and Gas Energy Law (2012), p. 99 available at [https://www.ogel.org]

accessed 17 August 2016. 449Ibid. 450Norway: Oil and Gas Regulation [http://www.iclg.co.uk/practice-areas/oil-and-gas-regulation/oil-and-gas-

regulation-2016/norway] accessed 17 August 2016. 451Norwegian Petroleum Directorate: Guidelines [http://www.npd.no/en/Regulations/Guidelines/] accessed 17

August 2016. 452Ibid. 453Norwegian Petroleum: Fundamental Regulatory Principles.

[http://www.norskpetroleum.no/en/framework/fundamental-regulatory-principles/] accessed 17 August 2016.

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One of the requirements in the Norwegian licensing rounds from the applicants is the proof of

safety and the environmental issues.454 One of the major ways in which the Norwegian Petroleum

Department has managed to incorporate environmental concerns in to the process of awarding of

licenses is by having a legislation that requires impact assessment done when opening new areas

for petroleum activities.455 Chapter three of the Petroleum Act and chapter two (a) of Petroleum

Regulations stipulates that there is need to conduct an EIA and regulates the way in which it is

supposed to be conducted.456 For example any offshore area in which there is expected

exploration and development of petroleum must have an extensive impact assessment on the

effects the activities will likely have on the flora and fauna and even to the fishermen and the

best alternatives.457 It is during the impact assessment that the authorities get a complete and

conclusive overview of the likely effects the activities will have on the environment and take

necessary steps towards abating them and providing it with information before the licensing.458

By doing this impact assessment, authorities are able to determine the level and type of

monitoring that will be required in certain exploration blocks whether onshore or offshore.459 The

extent to which impact assessment is done helps in informing the efficiency of the petroleum

activities and the likely success of the whole project460 due to the value of information that is

obtained from it before the licensing.

Norway has also ensured proper and coordinated approach to environmental issues through high

level public participation. During an opening process, authorities ensure that they have an

overview of all relevant arguments for and against petroleum activities in an area in to be opened

454Norwegian Petroleum: Environment and Technology. [http://www.norskpetroleum.no/en/environment-and-

technology/] accessed 17 August 2016. 455 Petroleum Activities Act 1996 (Norway) s1-3. For more details on this see, The Petroleum Act and the Licensing

System: Opening New Areas for Petroleum Activities, available at

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 18 August

2016. 456Regulations 27 June 1997 No. 653 to Act 29 November 1996 No. 72 relating to petroleum activities, laid down by

Royal Decree, section 3-6. 457F. OLSGARD and J. S. GRAY, ‘A comprehensive analysis of the effects of offshore oil and gas exploration and

production on the benthic communities of the Norwegian continental shelf’, 122 Marine Ecology Progress Series

(1995), p. 278. 458Norwegian Petroleum: The Petroleum Act and the Licensing System.

[http://www.norskpetroleum.no/en/framework] accessed 18 August 2016. 459J. S. GRAY, T. BAKKE, H. J. BECK and I. NILSSEN, ‘Managing the Environmental Effects of the Norwegian

Oil and Gas Industry: From Conflict to Consensus. 38(7) Elsevier B. V. (1999), pp. 525-530. 460C. FIDLER and B. NOBLE, ‘Advancing Strategic Environmental Assessment in the Offshore Oil and Gas Sector:

Lessons from Norway, Canada, and the United Kingdom. 34 Environmental Impact Assessment Review (2012), pp.

12-21.

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for exploration.461 Before opening any new areas, it is necessary to have such information to

ensure that during the licensing rounds, all information on the specific blocks are available and

measures that will be taken by the operator to avert them. There are likely to be impacts on the

groups of people and especially the local communities that could also be health related or even

impact to their existence.462 Such issues need to be incorporated in to the process of awarding of

the licenses and the best alternatives that are available to avert any such scenarios. With the

availability of such information, the decision of opening new areas is therefore left to the

parliament to make.463

During the licensing rounds, the Norwegian Petroleum Directorate (NPD) assesses all the

applications and from the information provided, makes its own geological assessment before

submitting its recommendations to the Ministry of Petroleum and Energy (MPE).464 The

recommendations by the Directorate were sent to the public in the 20th licensing round for the

first time in history and subsequently that has been the norm.465 This brings up another

opportunity for the public to participate in the awarding of petroleum rights. It is after this that

the state will decide which blocks to be given out and the specific environmental concerns or

fishery issues in the offshore exploration.466 Incorporation of the environmental issues at the

licensing stage is therefore important at the awarding of rights stage because the likely impacts

of the petroleum activities especially in offshore begins almost immediately exploration

begins.467 The exploration license only gives the opportunity to explore and not to produce hence

the need to make an application for a production license once a company wishes to continue.468

This is a way of ensuring that there is control and regulation of the industry effectively. It also

gives the state an opportunity to incorporate environmental issues in to the awarding of licenses

once again. In Norway, the ministry announces the blocks for which production licenses can be

submitted through notifications in the Norwegian Gazette (Norsk Lysingsblad) and in the

461Norwegian Petroleum: The Petroleum Act and the Licensing System.

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016. 462D. O'ROURKE, and S. CONNOLLY, ‘Just Oil? The Distribution of Environmental and Social Impacts of Oil

Production and Consumption. 28(1) Annual Review of Environment and Resources (2003), p. 588/589. 463Norwegian Petroleum: The Petroleum Act and the Licensing System.

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016. 464Ibid. 465Ibid. 466Ibid. 467J. M. NEFF, N. N. RABALAIS and D. F. BOESCH, ‘Long-Term Environmental Effects of Offshore Oil and Gas

Development’, London (UK): Elsevier (1987), p. 150. 468Petroleum Activities Act 1996 (Norway) s3.

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Official Journal of the European Communities and usually contains information as decided by

Ministry of Petroleum and Energy.469 The award of production license is purely based on facts

and hence the need for a company to make an adequate application.470

When making an application, the company takes into consideration certain environmental issues

based on the information gathered and its intention to minimize and even eliminate such

environmental effects. On the basis of this application therefore, the MPE will make decisions on

how best a particular company deals with environmental issues. It also gives the MPE an

opportunity to evaluate the level of commitment by the company to environmental issues based

on the work done in the exploration phase. The licensees who were in the exploration phase and

wish to continue with the development and production must do so in a responsible way that will

ensure environmental issues are well taken care of.471 The companies will then require approval

from the Ministry of Petroleum and Energy for any projects that they are carrying out whether

planning or implementation.472 Some major projects will require the approval of the Parliament

before the ministry gives such an approval.473 There is a clear chain of events before the

exploration and production activities take place and the state has every opportunity to ensure that

environmental concerns are well addressed and also monitored. The involvement of Parliament

is of great importance in the early stages of awarding of licenses due to the fact that it will

capture the opinions of a wide group of people. It therefore gives the Norwegian Petroleum

Directorate (NPD) and other relevant authorities the opportunity to ensure that environmental

regulations are incorporated into the awarding of exploration and production rights.

The regulations in Norway require that terminals in onshore and pipeline installations for

offshore should be a separate Plan for Installation and Operation (PIO) that must also be

submitted and approved.474 The Plan for Development and Operation (PDO) and Plan for

Installation and Operation (PIO) should therefore contain a detailed development plan and

impact assessment that has been conducted.475 The PIO will then provide an overview of the

469Petroleum Activities Act 1996 (Norway) s3-5. 470Ibid. 471Norwegian Petroleum: The Petroleum Act and the Licensing System.

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016. 472Ibid. 473Ibid. 474Norwegian Petroleum: The Petroleum Act and the Licensing System.

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016. 475Ibid.

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likely impacts on the environment, fishery and the society at large with ways of averting such

impacts.476 The sector is organized such that the authorities will only approve any development

plan after a conclusive preparation of the Plan for Installation and Operation (PIO) and the Plan

for Development and Operation (PDO) as stipulated in the Petroleum Act.477 There is a great

fragmentation in regulating the sector with various ministries that are relevant to such petroleum

activities having the opportunity to approve activities. The Ministry of Petroleum and Energy

(MPE), Ministry of Labor (ML), Ministry of Environment (ME) and the Ministry of Coastal

Affairs are all entitled by the regulations to comment on the PDOs.478 Such an overview of the

impacts assessments will be provided to the people who will be affected by the activities so they

have a chance to give their views.479 Providing a stable regulatory framework is very important

for the protection of marine life and specifically for the fishery department in Norway which

contributes to the economy of the country.480 The process as a whole takes in to account all

relevant arguments for and against the project usually before any decisions on development is

made.481 It also ensures that the field developments approved is responsible, and that their

impacts on other public interests are acceptable.482 Norway has also put in place regulations such

as that of compensation to fishermen in the event of occupation of certain fishing areas.483 All

these approvals before the development of oil gives the state an opportunity to ensure that there

is proper control of the petroleum sector and environmental concerns and regulations are well

incorporated into the process of awarding of petroleum rights.

Environmental issues therefore have become central to the petroleum industry and are considered

extremely important in the policy making and various legislations that have been adopted.484

Despite environmental issues principally being under the Ministry of Climate and Environment,

476Ibid. 477Guidelines for plan for development and operation of a petroleum deposit (PDO) and plan for installation and

operation of facilities for transport and utilisation of petroleum (PIO). 4 February 2010, pp. 7-15, available at

[http://www.npd.no/global/engelsk/5-rules-and-regulations/guidelines/pdo-pio-guidelines_2010.pdf] accessed 17

August 2016. 478Ibid 10. 479Ibid. 480H. P. HUNTINGTON, ‘A Preliminary Assessment of Threats to Arctic Marine Mammals and their Conservation

in the Coming Decades’, 33(1) Elsevier B. V. (2008), 33(1), pp. 77-82. 481Norwegian Petroleum: The Petroleum Act and the Licensing System.

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016. 482Ibid. 483Regulations to Chapter 8 of the Petroleum Act relating to compensation to fishermen. Stipulated by Royal Decree

of 12 December 2008 pursuant to Act of 29 November 1996 No. 72 sections 8 - 6 and 10 - 18. See also Petroleum

Activities Act 1996 (Norway) s8. 484Ministry of Petroleum and Energy: Oil and Gas. [https://www.regjeringen.no/en/topics/energy/oil-and-gas]

accessed 17 August 2016.

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environment laws and policies are largely integrated in to the oil and gas industry with a view to

ensure management of such resources in an environmentally friendly way.485 Norwegian

government has also ensured that it incorporates environmental regulations into the awarding of

exploration and production rights by informing the licensee and discussing decommissioning

plan in the early stages of awarding licenses. The Petroleum Act requires that the licensee should

submit a decommissioning plan to the ministry two to five years before the relinquishment or the

expiry of the license.486 This plan will also include an impact assessment and the way in which

the company plans to dispose of the installations.487

There is need for companies to be able to handle properly the decommissioning process and

there should be a legislative or regulatory framework that can guide this process. Most

developing countries mainly concerned with the petroleum revenues may not foresee or take into

consideration such issues at early stages hence it becomes an environmental problem. The

decommissioning is regulated by the Petroleum Act of Norway and the Petroleum Regulations.488

Norway is also a signatory to Oslo/Paris Convention (OSPAR), an international convention that

governs the protection and conservation of the North-East Atlantic and its resources.489 It

regulates the dumping and leaving any used offshore installations within the maritime area but

leaves some room for the authority of the contracting state to make decisions after an assessment

whether to leave an installment or not.490 Such international cooperation helps Norway to

strengthen its laws and regulations on environmental issues in oil and gas industry and this

regulation further creates a framework within which licenses for petroleum activities can be

awarded. According to section six of the Petroleum Regulation Act, the licensee must also

submit certain information before the commencement of work.491 The information should be

submitted to the Norwegian Petroleum Directorate and the Directorate of Fisheries and the

Ministry of Defense492 and it provides the time duration and accurate information about the exact

485Ministry of Petroleum and Energy: Oil and Gas, Climate and Environment

[https://www.regjeringen.no/en/topics/climate-and-environment/id925/] accessed 17 August 2016. 486Norwegian Petroleum: The Petroleum Act and the Licensing System.

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 17 August

2016. 487Ibid. 488 Petroleum Activities Act 1996 (Norway) s5 and Petroleum Regulations s6. 489OSPAR Commission. Offshore Installations [http://www.ospar.org/work-areas/oic/installations] accessed 17

August 2016. 490Ministerial meeting of the OSPAR Commission in Sintra, Portugal 22-23 July 1998 adopted the OSPAR Decision

98/3 on the Disposal of Disused Offshore Installations. 491Regulations to Act Relating to Petroleum Activities s6. 492Ibid.

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area of operation and the methods of operation that will be used including the vessel to be

used.493

The licensing rounds also give the Norwegian government an opportunity to award rights only to

those companies that have the right level of emergency preparedness incase of any emergencies

both for onshore and offshore petroleum activities.494 In the process of licensing the authorities

assesses the emergency response capacity of the companies to ensure that they are able to cope

with any kind of emergency.495 The law also requires the licensees to have a coordinated

emergency plan whenever different companies are working adjacently to one another and this

helps in managing emergencies better especially on the Norwegian Continental Shelf (NCS).496

The licensee should also be prepared to handle hazard and accident situations especially in

onshore activities.497 It is the responsibility of the authorities to ensure that companies that are

awarded licenses have this information and also meets the capacity to handle them effectively.

This will ensure that the process of awarding of exploration and production rights is within the

standards set by the state.

Where there is need to develop and exploit oil and gas fields that are transboundary in nature,

countries ensure that environmental concerns are addressed at the awarding of rights stage. An

example is Norway and UK with transboundary field and the framework that has been put in

place to ensure the exploitation is successful.498 For any discoveries that are considered to be

significantly within the jurisdiction of the UK, Department of Business, Energy and Industrial

Strategy will be in charge while for those in Norway; Norwegian Petroleum Department will

take control and oversee the process.499 The licensees must come together and ensure coordinated

approach to the exploitation as required by the regulatory framework of both countries. This

means that even though there may be another state involved, environmental regulations are not in

any way compromised.

493Ibid. 494Petroleum Safety Authority: Regulations relating to health, safety and the environment in the petroleum activities

and at certain onshore facilities (the framework regulations), section 1-8, available at

[http://www.ptil.no/getfile.php/Regelverket/Rammeforskriften_e.pdf] accessed 18 August 2016. 495Ibid s20-22. 496Ibid. 497Ibid. 498Department of Energy and Climate Change and Norwegian Petroleum Directorate. UK – Norway. Trans-

boundary Oil and Gas fields. Guidelines for development of trans-boundary oil and gas fields Version 1 (for

comment), 26 February 2010, pp. 1-14, available at [http://www.npd.no/global/engelsk/1-whats-new/news/uk-

norway-guidance-notes-for-trans-boundary-fields-orginal-2010.pdf] accessed 18 August 2016. 499Ibid.

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The Norwegian government ensures incorporation of environmental concerns and regulations

into the awarding of petroleum rights by maintaining a high level of transparency and non-

discriminatory principle through the process. There are certain principles that are applicable to

the process of awarding of petroleum rights that help guide the process contained in Petroleum

Activities Regulations.500 In most developing nations that are engaged in petroleum production,

there is widespread corruption and mismanagement of the sector due to lack of proper legislation

to curb the act and lack of good industry ethics. One major example is Nigeria which has

abundant oil and gas but has featured as one of the most corrupt and with high level of poverty

among the people.501 The fact that many companies in both the developed and developing world

now moves towards ensuring that they take lead roles in exploitation of oil and gas within their

jurisdictions have also changed a lot in-terms of revenue flow.502 Oil companies always have to

deal with the government bodies in-order to get involved in the petroleum activities for example

the Minister, the security officers, the local county leaders, the NOC, the environmental experts

in the country and many more.503 It is this corruption epidemic that has made most countries

experience the common ‘resource curse’ where discovery or the availability of hydrocarbons

have led to increased poverty level and lack of economic growth and development.504 According

to Transparency International, most corrupt countries are also the major producers of oil and gas

and it happens due to lack of transparency in the sector with details such as revenues being kept

from the public.505 Norway ranks high in the corruption perception index and in 2014 it was

ranked as the fifth cleanest country.506 It is considered one of the few countries that have

managed to escape the resource curse epidemic in most oil and gas producing countries.507

The Extractive Industry Transparency Initiative (EITI) was formed so as to promote public

awareness on the management of resources such as minerals, oil and gas.508 It also articulates the

500Regulations to Act Relating to Petroleum Activities. 501X. SALA-I-MARTIN and A. SUBRAMANIAN, ‘Addressing the Natural Resource Curse: An Illustration from

Nigeria’ in P. COLLIER, C. CHUKWUMA (eds), Economic Policy Options for a Prosperous Nigeria (Palgrave

Macmillan UK, 2008), p. 62. 502K. TALUS (Ed.), note 414 above, p. 475. 503Ibid 476. 504Ibid. 505Transparency International: Oil and Gas. [http://www.transparency.org/topic/detail/oil_and_gas] accessed 18

August 2016. 506Transparency International: Oil and Gas. [http://www.transparency.org/topic/detail/oil_and_gas] accessed 18

August 2016. 507Promoting Revenue Transparency: 2008 Report on Revenue Transparency of Oil and Gas Companies, available at

[http://www.transparency.org/topic/detail/oil_and_gas] accessed 18 August 2016. 508Extractive Industries Transparency Initiative. [https://eiti.org/implementing_country/15] accessed 18 August

2016.

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availability of information on the licensing procedure and the need to ensure that all legislations

and regulations of the licensing process are not adhoc and clearly states what is expected of the

operators.509 This will help in ensuring that the public is aware of what is expected of the

companies and of the government.510 EITI has also gone further to publish certain guidance notes

that are meant to give clear guidance on how to achieve EITI standards on the process of

allocation of petroleum rights.511 There are other bodies such as the United Nations that have also

weighed in on the issue of corruption and have certain conventions that improve transparency

within the sector.512

International agreements also help in promoting environmental concerns and some demand for

the incorporation of environmental regulations in the awarding of petroleum rights. By having

certain obligations in relation to environmental protection, a state may be obliged to ensure that

all the companies that are awarded E&P rights have the capacity to manage any environmental

concerns hence incorporation into the awarding of rights process. Norway has several

international agreements and corporations with other countries.513 One such agreement is

between Norway and Belgium on exchange of information on safety related matters and the

consultation procedures between Norwegian Petroleum Directorate (NPD) and the Belgium

Economic Affairs ministry. 514This was about the construction of a gas pipeline that was to go

through France, Belgium, Netherlands and Germany.515

Even though such agreements may not be exactly focused on the licensing procedure and the

process, they tend to ensure that the government always keeps environmental concerns when

awarding such licenses. Norway has also entered an agreement with Netherlands concerning the

509Ibid. 510Ibid. 511Extractive Industries Transparency Initiative: Guidance Note Four, June 2016 available at

[https://eiti.org/sites/default/files/documents/guidance-note-4-license-allocations-2016-en.pdf] last accessed 18

August 2016. 512United Nations Convention Against Corruption, U.N. Doc. A/58/422, 9 December 2003, entered into force on 15

December 2005, available at [http://www.unodc.org/pdf/crime/convention_corruption/signing/Convention-­ e.pdf]

accessed 18 August 2016. 513Petroleum Safety Authority Norway: International Agreements. [http://www.psa.no/international-

agreements/category885.html] accessed 19 August 2016. 514Memorandum of understanding on the exchange of information on safety related matters and procedures for

consultation between the Norwegian Petroleum Directorate and the Belgian Ministry of Economic Affairs

(Ministerie van Economische Zaken (mez)/ Ministere des affaires Economiques (mae)) concerning the norfra natural

gas transportation system available at [http://www.psa.no/getfile.php/PDF/FranpipeAvtaleTransitt.pdf] last accessed

19 August 2016. 515Ibid.

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safety and environmental related matters and the procedures for consultation.516 This involves the

safety operation of current pipelines and the installation of new natural gas pipelines crossing the

continental shelf of Netherlands.517 The agreement to constantly exchange information on matters

of mutual concern from the beginning of the process ensures that both countries can do proper

awarding process for such rights and only engage companies that can keep the agreed standards.

There are other several international agreements and corporations that Norway has entered in to

with other countries in the activities of the petroleum sector and its engagement in such

agreements ensures it maintains vigilance on environmental issues from licensing stage.

The safety authority (PSA) of Norway has also adopted certain international standards that are

recommended for the petroleum industry and helps it in promoting environmental issues.

Standards are always utilized as a way of fulfilling certain regulatory requirements.518

International and European standards have always been utilized as the basis of all petroleum

activities in Norway.519 Due to the unique nature of each country’s petroleum sector, Norwegian

experts have designed certain standards that can only fulfill the needs of Norway’s petroleum

sector.520 Such standards such as Norwegian Standards Association (NSF),521 International

Maritime Organization (IMO) and many more ensures that a country incorporates environmental

issues at all stages of the petroleum activities.

4.4 Lessons for Kenya

Kenya has certain immediate concerns that may bar it from taking the issues of environment as

serious as it deserves such as insecurity in Northern Kenya, political tensions, the need for fast

revenue from the industry and lack of infrastructure.522 It is reported that environmental

degradation in developing countries is highest and environmental pollution leads to ill heath,

516 Memorandum of Understanding between Petroleum Safety Authority Norway and the Ministry of Transport and

Public Works (Netherlands) concerning the exchange of information on safety and environmental related matters

and procedures for consultation related to the safe construction, installation and operation of existing and future

transit pipeline transportation systems crossing the continental shelf of Netherlands, June 2004, available at

[http://www.psa.no/getfile.php/PDF/Nederland_MOUHMS.pdf] accessed 19 August 2016. 517Ibid. 518Petroleum Safety Authority Norway: Standards. [http://www.psa.no/standards/category884.html] accessed 19

August 2016. 519Standardization: Petroleum. [http://www.standard.no/en/sectors/energi-og-klima/petroleum/] accessed 19 August

2016. 520Ibid. 521International Maritime Organization. [http://www.imo.org/en/About/Pages/Default.aspx] accessed 19 August

2016. 522L. PATEY, ‘Kenya: An African Oil Upstart in Transition’, Oxford Institute for Energy Studies (2014), p. iii.

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deaths and disabilities annually.523 Developing countries tend to be more focused on economic

growth and development at the detriment of the environment which may later have dire

consequences in-terms of climate change.524 The petroleum industry is considered one of the

major contributors to the current environmental degradation and pollution and therefore there is

need to ensure that such activities are carried out in an environmental friendly and sustainable

manner.525 The constitution of Kenya that was promulgated in 2010 and it has certain general

obligations related to hydrocarbons and environment.526 The specific Acts that form the basis of

this analysis are the Petroleum Act and Environmental Management and Coordination Act, Draft

National Environment Policy and the National Land Policy.527 Some of the bodies that are

formed to coordinate the sector include National Fossil Fuels Advisory Committee (NAFFAC),

NOCK and National Environmental Management Authority.528 Only NEMA and NAFFAC are

given the mandate to manage environmental issues and this is done under the Environmental

Management and Coordination Act 1999 which it also encompasses the petroleum industry

activities.529 The advisory committee is also a major participant in the incorporation of

environmental regulations into the awarding of rights process. It has the mandate of advising the

cabinet secretary on matters to do with petroleum activities and operations.530

Every country has a unique political, social and economic environment which impacts on the

legal and regulatory framework hence two countries cannot be similar. Kenya has a dynamic

political, social and economic environment too and it is still a maturing economy that is likely to

undergo many changes in the future in-terms of legal and regulatory framework. The lessons that

will be discussed here are therefore just useful aspects to achieve environmental goals but not the

exact path to attain environmental goals. For instance UK did not have very definitive L&R

framework for the environmental issues in oil and gas, but it has taken constant steps to where it

stands now in-terms of environmental regulation in petroleum sector.

523O. OMOJU, ‘Environmental Pollution is Inevitable in Developing Countries’, Breaking Energy (2014), paras. 1-

4, available at [http://breakingenergy.com/2014/09/23/environmental-pollution-is-inevitable-in-developing-

countries/] accessed 23 August 2016. 524Ibid. 525Z. GAO, note 333 above, p. 14. 526E. G. PEREIRA and K. TALUS, note 6 above, p. 211. 527 Ibid. 528 Ibid 210/211. 529National Environmental Management Authority.

[http://www.nema.go.ke/index.php?option=com_content&view=article&id=21&Itemid=114] accessed 24 August

2016. 530A. K. NJERU, ‘Kenya Oil & Gas Fiscal Regime: An Economic Analysis on Attainment of the Government

Objectives’, 3 Oil and Gas Energy Law (2009), p. 12, available at [www.ogel.org] accessed 24 August 2016.

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One major lesson from UK and Norway is the systematic integration of environmental issues

into contract decisions. The UK and Norway are both successful at ensuring that environmental

issues are always involved in licensing decisions with oil companies. This is evident due to the

fact that licenses contain certain obligations that the operator must first fulfill before

commencing exploration and production activities. The current Petroleum (Exploration and

Production) Act have a very brief mention of the environmental issues, ‘...conduct petroleum

operations in accordance with sound professional and technical skills and adopt measures

necessary for the conservation of petroleum and other resources and the protection of the

environment and human life’531

There are no clear guidelines on how these measures should be taken by the companies so as to

ensure environmental protection. Even though the constitution may give a more specific

guideline, there is need to be more elaborate in the Act to ensure that companies knows what to

expect in-terms of environmental protection. There is also a noticeable lack of specific

environmental obligations in the contract. Even though there is the Environmental Management

and Coordination Act,532 that is supposed to offer licenses for any environmental related

activities, there should be a committee or branch that deals directly with oil and gas sector and

the need to ensure that all the approval information is incorporated in the contract. The PSC

model of Kenya also fails to provide clear guidelines on how the national laws will be

incorporated into the petroleum activities. There is no clear guideline on how NEMA will

execute its mandate in relation to the activities of oil companies. There are existing

environmental regulations and therefore the contract should be very clear on how such

regulations will be carried out by the operator.533

There is need for public participation in the process of awarding petroleum. From the UK and

Norway framework discussed above, one of the major studies that are done before the awarding

of any contracts is the impact to the local communities.534 535 Oil was discovered in Northern

Kenya which is quite remote and these people should have the opportunity to voice their

concerns before the blocks are awarded to companies. The government’s negligence of

531Petroleum (Exploration and Production) s9. 532Environmental Management and Co-ordination act, 1999 (act no 8 of 1999). 533Z. GAO, note 92 above, p. 249. 534United Kingdom: Oil and Gas Authority. [https://www.gov.uk/government/organisations/oil-and-gas-authority]

accessed 23 August 2016. 535Norwegian Petroleum Directorate: Contributing Factors to Climate Cure.

[http://www.npd.no/en/Topics/Environment/Temaartikler/Contributing-facts-to-the-Climate-Cure/] accessed 23

August 2016.

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development of certain areas has always been blamed on the ethnic tensions in Kenya and for

this reason, the local underdeveloped communities do not have the proper channels to voice their

concerns and be heard which will lead to further negligence of the impacts such activities will

have on them. There is need to collect information and views from the local people before the

awarding of petroleum. This will help the government in awarding contracts to companies that

can attain certain environmental thresholds. There can only be incorporation of environmental

regulations into awarding of petroleum rights if there is sufficient knowledge about the area that

is being awarded. In UK and Norway, the kind of information collected from the environment

determines the conditions of the license to be awarded and the environmental precautions.

Incorporation of environmental regulation into the awarding of exploration and production rights

is also possible if the Kenyan government can ensure there is improved and enhanced

coordination between government agencies and corporation between the central government and

the local governments on matters of environmental protection. With the discovery of oil and the

need to make environmental regulations an integral part of the petroleum provisions, there is

need to ensure that the various levels of government are coordinating well so that there is

availability of information before the awarding of rights. The coordination between governments

agencies will also ensure that environmental issues are approached from the relevant angles as

has been done in UK and Norway. Environmental issues and obligations are quite broad and

overlap between various government agencies and departments hence the need for proper.

Comparing the Petroleum Act of UK and that of Kenya, there is explicit reference to the need for

environmental protection and detailed provisions on all the necessary approvals in relation to

petroleum activities in the UK Petroleum Act. These specific references are made in regard to all

aspects of the environment including the ground water, air, physical environment including the

people and other impacts on protected areas.536

The involvement of different authorities will ensure successful incorporation of environmental

regulations in to awarding exploration and production rights. There is need for involvement of

the parliament, public, and experts so as to ensure that provisions that are incorporated will be

genuinely aimed at ensuring the protection of environment. For example in most cases it is

different when dealing with impact assessment for onshore activities and for offshore activities.

The latter will require different provisions in the contract and will also require a more extensive

impact assessment than the former. In Norway for example, there are certain areas that are

536 Petroleum Act 1998 (UK) s4(a).

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considered too critical and therefore the awarding of such blocks require approval from the

parliament537 and the license will then have certain special obligations attached to it so that the

operator is able to conduct such activities within the framework set by the authorities and the

parliament.

Environmental goals cannot be achieved without transparency and accountability and this is one

of the major problems in the developing world. Lack of transparency and accountability has

marred every sector in Kenya with reported high levels of corruption each year. It is said that the

value of the petroleum industry also makes it attractive for corrupt practices and the need for

involvement in its high revenues.538 Environmental protection requires transparency so that

regulations can be enforced without any influence. When companies influence the process of

awarding of contracts then environmental objectives within the process cannot be obtained. The

need to incorporate environmental regulations into the awarding of rights will require that all

companies have information about the blocks and it is the government to ensure that it gets the

most suitable company that is able to attain its environmental objectives as set in the PSC.

537Norwegian Petroleum: The Petroleum Act and Licensing System.

[http://www.norskpetroleum.no/en/framework/the-petroleum-act-and-the-licensing-system/] accessed 24 August

2016. 538 K. TALUS (Ed.), note 414 above, p. 476.

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5. CONCLUSION

This comparative analysis was to establish lessons that Kenya as a new entrance into the oil

industry can learn from other jurisdictions more progressed in-terms of laws and regulations. Oil

and gas industry is quite complex and dynamic and therefore for a country to benefit from its

production there is need for a stable framework to regulate all the issues pertaining to it. Kenya is

still maturing politically and economically and the oil should provide maximum benefits for its

growth. The desire to get maximum revenues from the sector may also lead to lack of proper

regulation of the sector which will then lead to awarding of contracts to incompetent companies

that will only focus on profits too. The awarding of exploration and production rights has to be

well regulated since this is the foundation of the whole process. This foundation has to be laid on

proper legal framework that will ensure that the other sectors of the industry are well managed.

By looking at the alternative approaches to the awarding of exploration and production rights the

paper seeks to determine if Kenya it is using an approach that best suits its political and

economic environment. There are various legal regimes as discussed above and each one has

advantages and disadvantages. After looking at the various legal regimes such as concessions,

PSCs, licensing and SAs, it provided a strong base of establishing what is best for Kenya and for

the main research question. It was an opportunity to deeply analyse if this is a good choice

mainly looking at the existing legal structures and probability of its success. It is important to

note that there may be certain differences between Kenya and the other jurisdictions so there is

no assumption that everything is similar between the different jurisdictions. Both the UK and

Norway uses licensing system for the awarding of rights but that does not automatically makes it

a good system for Kenya based on its current circumstances.

While exploring the legal and regulatory framework of the awarding of exploration and

production rights, it was necessary to look into the systems of allocation of such rights. By

looking at systems of allocation of rights such as direct negotiations, licensing, bidding,

discretionary and first come first serve basis, the paper set a basis for the main discussion

covering environmental concerns in allocation of petroleum rights. It also gave the opportunity

of exploring the system used in Kenya in relation to the other jurisdictions in-order to note the

differences early enough before getting to central area of the research. Each of the systems of

allocation as established by the paper, have certain advantages and disadvantages but all these

are based on the unique legal and regulatory structures of different jurisdictions and therefore it

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is not possible to make a conclusive decision on the best system. It is therefore quite important

that each jurisdiction is studied based on its uniqueness and it was necessary to look into such

areas and establish the differences and make recommendations.

The research established that both UK and Norway use the licensing system of allocation which

is quite formal and controlled by the different respective authorities in consultation with other

regulatory bodies and all the relevant stakeholders. Kenya currently uses negotiations which are

done mainly by the cabinet secretary who has the authority to award rights with assistance from

the advisory committee (NAFFAC) and make any relevant amendment to such rights. The paper

established that the system of allocation used in the UK and Norway is more regulated and broad

and there are no loopholes for companies and the authorities to engage in unethical practices. It

would help in ensuring accountability of the process and high level of transparency that would

then ensure that the most suitable companies are awarded rights. Kenya still lacks stable legal

and regulatory structures that would help in controlling corruption and therefore licensing system

would best suit it to ensure transparency. The corruption levels in Kenya as noted above are still

quite high and there is need to use a system that would allow as much transparency and

accountability as possible. By putting so much power in one authority for the vital process of

awarding of petroleum rights, Kenya risks the menace of corruption and lack of accountability in

the crucial sector of oil and gas. This may then lead to multiple ripple effects in the other sectors

of the industry with severe negative consequences for the premature sector in Kenya.

With the current importance of environmental protection, incorporation of environmental

regulations into awarding of petroleum rights was the key issue of the paper and hence research

in trying to establish how these two sectors can co-exist. The petroleum industry no doubt leads

to massive environmental pollution. There are various environmental impacts from the stages of

exploration to oil refining stage.539 Oil and gas activities impacts all the areas of life such as

water, air, soil and even living organisms and including human beings540 and therefore there is

need to ensure that this vital resource does not lead to more environmental destruction hence

draining the benefits. This is one of the major concerns especially for developing countries and it

is important that IOCs work within proper legal framework that will ensure that they can meet

and maintain certain environmental standards. Most companies are more focused on ensuring

539 F. OLSGARD and J. S. GRAY, ‘A Comprehensive Analysis of the Effects of Offshore Oil and Gas Exploration

and Production on the Benthic Communities of the Norwegian Continental Shelf’, 122 Marine Ecology Progress

Series, (1995), p. 278. 540 Ibid.

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they acquire maximum profits while the developing countries such as Kenya are in need of the

expertise, knowledge and skills of the oil companies (IOCs) so as to attain maximum revenue

from the sector and this kind of conflict may lead to lack of holistic focus on the other effects of

exploration and production such as environmental issues. The UK and Norway takes

environmental issues as part and parcel of the process and therefore they ensure that any

company with the opportunity to operate meets the required environmental standards and should

be given the go ahead by all the relevant bodies before operations. The research objective has

been achieved by drawing important lessons Kenya can on how to incorporate environmental

regulations into the process of awarding of petroleum rights. They include more environmentally

friendly requirements, public participation, extensive impact assessment and more as discussed

above.

Finally, it is important to note that the political, economic and social environment in Kenya is

starkly different from those of UK and Norway and therefore it is important to take such vital

lessons but it should not transpose the laws and regulations to Kenya because that may have

shortfalls in the long end. In-order to have a proper legal and regulatory structure there should be

implementation of such laws, enforcement and monitoring.