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October 17, 2017

Canadian firms raise alarm over Kenyan mining sector

Political appointment: Mining CS Najib Balala inspects Taru Coal Exploration project in Kwale County on May 14.
Political appointment: Mining CS Najib Balala inspects Taru Coal Exploration project in Kwale County on May 14.

US President Barack Obama’s visit to Kenya was an event the country’s government had awaited for years. With the world’s attention focused on Kenya, the birthplace of Obama’s father, the East African nation had an opportunity to show it welcomes foreign investment and does not tolerate corruption.

As such, one of the last topics the government wanted anyone to bring up is Canadian resource companies that are fighting it in court. Two small companies, Vanoil Energy Ltd and Pacific Wildcat Resources Corp. have begun international arbitration cases against Kenya, claiming they lost access to their properties under very peculiar circumstances.

Vanoil is seeking $150 million (Sh15.2 billion) and is threatening additional litigation, while Pacific Wildcat wants more than $2 billion (Sh203 billion), according to a report. Interviews with executives at the two companies paint a troublesome portrait of Kenyan government officials willing to push out companies that own concessions. Kenya has traditionally been viewed as one of Africa’s most attractive places to invest, but political risk, along with a tenuous security situation, are harming that perception.

In the Fraser Institute’s latest rankings of mining jurisdictions, Kenya was ranked the worst place to invest in Africa, and third worst in the world. Clare Allenson, an Africa analyst at the Eurasia Group, said political corruption has been a significant challenge in Kenya’s resource sector (though not in other industries). “Particularly the mining sector has been bogged down by corruption,” she said.

President Uhuru Kenyatta has taken the issue seriously. Last March, he suspended five ministers over corruption, including energy minister Davis Chirchir. He has tried to make the anti-corruption crackdown one of his priorities.

But the experiences of Vanoil and Pacific Wildcat suggest there may be more work to do. “By the middle of 2014, we realised the Kenyan government had no interest in negotiating in good faith,” Vanoil chief executive Don Padgett recalled. Vanoil got involved in Kenya almost a decade ago, when it was awarded a couple of drilling concessions.

Chairman James Passin was a firm believer that there were commercial hydrocarbons in Kenya, and he was proven right. In recent years, companies like Africa Oil Corp., Tullow Oil PLC and Vanoil made substantial discoveries in the area and have piqued the interest of Big Oil. The trouble for Vanoil started in mid- 2013. The Vancouver-based company was setting up its exploration drill rig in Kenya just as the security situation was deteriorating in the country’s Garissa county.

A local governor asked the firm to halt its work during the unrest, and Vanoil agreed to do so. However, the company had a requirement in its production-sharing contract that the first well needed to be drilled by September 2013. Vanoil assumed it could negotiate an extension, given it halted work at the request of a politician.

But within a few months, relations between the company and the government deteriorated and they never reached an agreement. Padgett suspects government insiders wanted to seize the Vanoil concessions and sell them off to large oil companies.

“It was clear to us that the government, or certain people within the government, were looking at our concessions,” he said. In particular, Vanoil pointed its finger at Chirchir, the suspended energy minister. Chirchir has been engulfed in a separate scandal, as he and other officials are accused of accepting bribes from convicted British executives hoping to win printing contracts in Kenya. The debacle has been nicknamed “Chickengate,” with “chicken” the alleged codename for the bribes.

Vanoil began an arbitration claim, seeing no other opportunity to recoup its funds. Kenyan attorney general Githu Muigai invited Padgett to Kenya to discuss the situation, and after a couple of false starts, Padgett arrived in Nairobi for a meeting last January. “The attorney general comes in with at least 12 of his henchmen,” Padgett said. “And who walks in at the end but Davis Chirchir, whose name is all over our (legal) complaints.”

According to Padgett, Muigai pleaded with him to keep the dispute quiet and hold off on arbitration, claiming the government needed time to resolve the situation. Vanoil said it has heard nothing encouraging from Nairobi since that date.

The company has filed its initial arbitration claim, and can set the process in motion by selecting an arbitrator. Padgett hopes a cash settlement can be reached instead. The Pacific Wildcat case is a bit different, as that company’s licence was actually revoked. Pacific Wildcat, which is based in British Columbia but is led by a group of Australians and South Africans, started drilling its Mrima Hill niobium project in Kenya in 2010. The drill results were encouraging, and the firm eventually received a mining lease in March 2013.

The trouble started a few months later, when Najib Balala became Mining Cabinet secterary. He cancelled licences held by 42 companies, including Pacific Wildcat’s Kenyan subsidiary – Cortec Mining. The company challenged the suspension in Kenyan court and lost. Meetings were organised with senior government officials to try to resolve the situation.

But they didn’t go the way Pacific Wildcat hoped. David Anderson, managing director of the firm’s Kenyan unit (Cortec Mining), said officials told him the government should have a stake in the Mrima Hill project. They proposed a solution: the mining licence should be transferred to a new company, with Kenya receiving a free carried interest of 10 per cent to 50 per cent. Kenya has called for a 10 per cent interest in other projects as part of a new mining law. But in this case, it hoped to get up to half of it for free, according to the company. “This left our chairman and CEO speechless,” Anderson said in an emailed response to questions.

“We were told to go and think about it or there would be no restoration of our licence.” John Lanyasunya, Kenya’s high commissioner to Canada, said he was not familiar with the Vanoil and Pacific Wildcat disputes. But he noted that some Kenyan mining licences were revoked because companies either did nothing with them, or the government wanted to review some terms to make sure they were fair to the state. “No company has been locked out,” he said.

“They are still all welcome to participate in the mining industry of Kenya.” Still, these disputes have become potential red flags for anyone looking to invest in Kenya. Allenson said corruption concerns have deterred foreign investment, especially from firms based in countries with anti-bribery regulations (of which Canada is one). She added that President Uhuru Kenyatta’s crackdown has lost momentum in Kenya.

Just five days after he suspended the ministers suspected of corruption, terrorists murdered 147 people in an attack at the Garissa University College. Understandably, that tragedy consumed the government’s attention. The country’s tenuous security situation was an important talking point when Obama and Kenyatta met.

Some foreign investors in Kenya hoped Obama’s visit would also highlight corruption concerns. Kenya is blessed with vast untapped resources, particularly oil, but political uncertainty remains a major overhang.

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