Foreign companies exploring for oil and gas in Kenya have opposed the planned introduction a 5% tax on the sale and acquisition of exploration blocks.

The companies contend that a clause in the Petroleum (Exploration Development and Production) Bill 2015 that seeks to introduce a 5% capital gains tax on the sale and acquisition of exploration blocks could have an adverse impact on the ability of the East African nation to attract investors to the sector.

According to oil and gas sector consultant Patrick Obath, the planned tax could deprive the country of much-needed funds to accelerate exploration activities.

“Imposing a capital gains tax on blocks will only discourage foreign investors, who are keen to prospect in Kenya, either directly or through partnerships,” he says.

Obath, who is the managing consultant at Eduardo & Associates and former chairperson of the Kenya Private Sector Alliance, adds that a capital gains tax can only be imposed during the sale of exploration blocks, when commercial oil or gas has been discovered and the amount quantified.

“During the farm-in (buying) and farm-out (sale) of interests in exploration blocks, there is no gain,” he contends.

Kenya, which has discovered crude deposits in the Lokichar basin, in the north-west of the country, is seeking to tap into the billions that foreign companies that control prospecting licences for various blocks are making when they sell stakes in the blocks.

Recently, Canadian company Africa Oil Corporation made a windfall when it sold half of its stake in three exploration blocks in Kenya and Ethiopia to Maersk Oil, of Denmark, at a cumulative cost of $845-million.

The oil and gas industry depends heavily on the partial sale of shares in exploration blocks to attract firms with the technical and financial capability to take the projects to the production phase.

British company Tullow Oil, which has discovered oil in Kenya, started exploration in the East African nation in 2010, after signing agreements with Africa Oil and Centric Energy to gain a 50% operational interest in five onshore blocks.

The sale and acquisition of blocks are also a vital component in Kenya, attracting huge sums in foreign direct investment (FDI) inflows.

The World Investment Report 2014 of the United Nations Conference on Trade and Development shows that FDI inflows to Kenya stood at $514-million in 2013, up from $259-million the previous year. The capital was largely destined for the oil, gas and manufacturing industries.