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New levy set to drive oil exploration costs up

Steve Umidha @steveumidha

The cost of discovering each new barrel of oil in Lokichar fields, in Turkana county, is expected to go up in the third quarter of the year.

This is after the 16 per cent Value Added Tax (VAT) on fuel products – petrol, diesel, kerosene and jet fuel which came into effect on Saturday.

Industry players say the new tax system will have damaging effects on companies involved in oil explorations that ordinarily rely on such products for their daily operations.

“Oil exploration companies’ activities require significant investments in services especially at the exploration stage,” PwC, a firm focusing on audit and assurance,  tax and consulting services said in a recent statement.

As such, it added, taxing services supplied to companies engaged in oil exploration or oil prospecting will lead to increased exploration costs for the companies and by extension to the Government of Kenya.

Oil companies such as Tullow Oil continue to drill wells is some of the most inhospitable regions like Turkana county, where geological, political, geographical, technical as well as contractual risks are high with such activities requiring significant investments in services especially at the exploration stage.

High taxation on petroleum products is further feared could lead to an immediate increase in prices of basic commodities which are ordinarily determined by fuel prices.

“This in our view is contrary to the government’s commitment to reducing the cost of doing business to spur economic growth,” the PwC statement reads in part. Treasury as it stands is one of the few institutions keen to benefit from such a move as it seeks to raise billions of shillings in value added tax (VAT) on  fuel.

It could also weaken gains made thus far in the country’s oil industry barely after President Uhuru Kenyatta flagged off Kenya’s crude oil from Turkana to Mombasa.

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