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TRANSCRIPT
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
i
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
ii
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
iii
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
iv
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
v
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xxx
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
xxxi
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
1
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.
2
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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
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.
15
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.
16
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
17
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.
18
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.
19
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.
20
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.
21
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.
22
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.
23
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.
24
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.
25
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.
26
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.
27
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.
28
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.
29
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.
30
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.
31
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.
32
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.
33
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.
34
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.
35
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.
36
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.
37
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.
38
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.
39
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).
40
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
41
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.
42
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.
43
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.
44
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.
45
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.
46
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.
47
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.
48
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.
49
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.
50
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.
51
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.
52
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).
53
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.
54
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.
55
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.
56
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.
57
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.
58
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.
59
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.
60
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.
61
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.
62
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.
63
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.
64
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.
65
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.
66
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.
67
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.
68
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).
69
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.