Western Cape Business News

Send  Share  RSS  Twitter  08 Mar 2010

VENTURES: Oil And Gas Opportunities Abound


Recent Western Cape Business News

Despite the recession and slowing demand, the finite nature of global oil reserves means supply in the long term remains under continued pressure. As a consequence, oil producing nations in Africa are presented with an opportunity to address the demands of energy hungry nations by exploiting known reserves and prospecting for undiscovered deposits of oil and gas. Across Africa, relative political stability and ready access to coastlines which facilitate transport, the oil and gas industries are set for expansion in the near future. And as East African countries seek to encourage the development of these resources, they are incentivising exploration companies with reduced tax requirements.

That’s according to Peter Kinuthia, manager: tax at Ernst & Young Kenya.
“In East Africa, countries including Kenya, Tanzania, Rwanda and Uganda are believed to enjoy substantial commercially viable deposits. In an effort to encourage discovery and production, which in turn will contribute to the tax revenue base, the governments of these nations are, through tax breaks, incentivising companies to conduct operations,” says Kinuthia.

It is anticipated that Kenya will strike oil by April 2010, the result of the activities of the China National Offshore Oil Corporation in the country’s northern reaches. The company is licensed to explore other basins in Kenya including the coastal region which is estimated to have a potential of producing around 100 million barrels of crude oil and 600 billion cubic feet of natural gas.

With some of the world’s most extensive known deposits of methane gas Rwanda has several projects underway for its exploitation and conversion to electricity. This deposit, Kinuthia adds, indicates the possibility of oilfields beneath or adjacent to it.

Classified as ‘underexplored’ but endowed with diverse energy sources including biomass, natural gas, hydropower, coal, geothermal, solar and wind power, Tanzania shows strong hydrocarbon potential in its oil industry sector. “Leaders and experts in the Tanzania energy sector have expressed optimism concerning the potential for discovering oil. Current reports indicate that over 20 international oil companies are concentrating on various inland and deep sea drilling projects,” says Kinuthia.

Meanwhile, oil companies have recently found more than 700 million barrels of commercially viable oil in western Uganda, which may soon put the country among major Africa's oil producing nations.

Notably, explains Kinuthia, while oil companies prefer to export the oil to recoup investment costs quickly, the Ugandan government is insisting on beneficiation inside the country to ensure a greater share of the profit remains while bringing an end to reliance on imported fuel.

Turning his attention to the taxation structures which are typically in place in these countries, he says in Kenya, incentives for oil and gas companies include levying of the standard resident income tax rate of 30%. “There is no ring-fencing in the determination of corporate tax liability, while depreciation expensing is provided for in terms of wear and tear for plant and machinery necessary for exploration.”

Income tax losses can be carried forward for five years. “However, the Commissioner can extend the period if there are acceptable reasons for recurring losses.  Tax losses, however, cannot be carried back,” Kinuthia adds; VAT relief is extended for exploration and prospecting companies.

In terms of taxation, he explains that, as in Kenya, Tanzania resident corporations are subject to income tax on their worldwide income at a rate of 30%. Again, there is no ring-fencing in the determination of corporate tax liability. Expensing of capital exploration costs is executed on a straight line basis at a rate of 20% of capital allowance. “Income tax losses can be carried forward indefinitely while tax losses may not be carried back. The low-royalty regime requires that onshore project royalties are levied at a rate of 12.5%, while offshore project royalties are levied at a rate of 5%,” Kinuthia explains.  VAT relief is extended for prospecting companies.

Kinuthia points out that with heightened activity and interest in the oil and gas industry in East Africa, organisations conducting business in the region require sound advisory and guidance to take advantage of the tax peculiarities. “With an extensive presence across Africa and intimate knowledge of the shifting taxation landscape, Ernst & Young has the resources and insights to support these companies.”

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