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1. 2021
A PAPER ON ROYALTIES IN THE EXTRACTIVES SECTOR IN KENYA
A FOCUS ON NON-RENEWABLE RESOURCES FRAMEWORK
AUTHORED BY:
BRIAN NJAU, ESQ.

2. 1 | Non Renewable Resources Royalties Paper by Brian Njau, Advocate
EXTRACTIVES: NATURAL RESOURCES ROYALTIES
1.0 INTRODUCTION
Natural resource revenues are obtained through various instruments, including royalties,
profit or rent taxes, production sharing arrangements, auction of exploration and
production leases, excise and trade taxes, production by state-owned firms, and state
participation through paid-up equity or carried interest where the state pays for an equity
stake through its share of profits.
Revenues from natural resource activities accrue through more general forms of taxation,
such as customs duties and personal and corporate income tax1.
The practice of carving out rent taxes and royalties for detailed treatment is useful
pedagogically because they are commonly at the core of fiscal regimes for renewable
resources; and much sometimes heated discussion revolves around precisely the proper
roles of the two. The basic distinction between them is conceptually clear. Rent taxes are
charges on pure profits (here, of course, the focus is on natural resource firms, though
such taxes could apply to any enterprise)—that is, on revenues less all imputed costs.
Archetypal royalties, on the other hand, are charges on either the physical quantity or
the value of output. In practice, however, the distinction among tax types is not so clean-
cut. Charges labeled as a ‘rent tax’ come in many different forms, some of which only tax
rents imperfectly; and the standard corporate income tax itself bears partly on rents.
Moreover, some revenue instruments not so labeled are equivalent to rent taxes or
royalties. Royalties themselves sometimes include elements of rent taxation, such as
when the royalty applies to revenues less some components of cost2.
2.0 NATURAL RESOURCES: KENYAN CONTEXT
Generally, Natural Resources are classified into two forms:
i. Renewable resources; and
ii. Non-renewable resources.
The government of the Republic of Kenya has over the past five (5) years enacted and
adopted various measures geared towards increased exploitation of renewable resources.
In fact the Ministry of Energy reaffirms that Kenya treats energy security as a matter of
national priority. The Third Medium Plan (M.T.P) 2017-2022 identifies energy as the
country’s driver into “a newly-industrializing, middle-income economy, providing a high
quality of life to all its citizens in a clean and secure environment.” Kenya considers access to
1
Rent Taxes and Royalties in Designing Fiscal Regimes for Non-Renewable Resources; Robin Broadway
(QMUL) and Michael Keen (IMF), Pg. 2
2 Ibid; further reference is made in Boadway and Keen (2010)

3. 2 | Non Renewable Resources Royalties Paper by Brian Njau, Advocate
competitively-priced, reliable, quality, safe and sustainable energy as an essential
ingredient for the country’s social –economic development. Some of the interventions
include inter alia:
a. Legislative Framework: Energy Act No. 1 of 20193; Mining Act No. 2 of 2016; The
Petroleum Act No. 2 of 2019;
b. Policy Framework: Renewable Energy Feed-in Tariff System; National Energy Policy
(2018); Mining and Minerals Policy (2016); National Petroleum Policy and Plan; among
others
c. Orders/Directives: (a.)Presidential Executive Order No. 1 of 2018 (Revised June, 2018)
- The functions of the Ministry of Energy as per the Order include: (1.) National
Energy Policy Development and Management, (2.) Thermal Power Development,
(3.) Rural Electrification Programme, (4.) Energy Regulation, Security and
Conservation, (5.) Hydropower Development, (6.) Geothermal Exploration and
Development and (7.) Promotion of Renewable Energy; (b.)Presidential Executive
Order, 2021 (March) on Power Purchase Agreement(s) in the Republic of Kenya; among
others.
d. Institutions: Ministry of Petroleum and Mining, Ministry of Energy, Energy
Tribunal4, Energy and Petroleum Regulatory Authority (EPRA)5; Rural
Electrification and Renewable Energy Corporation (REREC)6; Renewable Energy
Resource Advisory Committee7; Kenya Electricity Generating Company
3
Preamble: AN ACT of Parliament to consolidate the laws relating to energy, to provide for National and
County Government functions in relation to energy, to provide for the establishment, powers and functions
of the energy sector entities; promotion of renewable energy; exploration, recovery and commercial
utilization of geothermal energy; regulation of midstream and downstream petroleum and coal activities;
regulation, production, supply and use of electricity and other energy forms; and for connected purposes.
4
The Tribunal arbitrates disputes between the Energy and Petroleum Regulatory Authority and other
aggrieved stakeholders in the energy sector.
5
The Energy Act establishes the EPRA to, among other functions: regulate production, conversion,
distribution, supply, marketing and use of renewable energy; collect and maintain energy data; ensure, in
collaboration with the Kenya Bureau of Standards, that only energy-efficient and cost-effective appliances
and equipment are imported into the country; and co-ordinate the development and implementation of a
national energy efficiency and conservation action plan. EPRA is an independent statutory body with a
regulatory mandate in the operations of the entire energy and petroleum sectors. EPRA exists to protect
interests of the consumer, investor and other stakeholders by enforcing the Energy Act. It has the powers
to formulate and enforce secondary legislation.
6
REREC is mandated under the Energy Act to undertake feasibility studies and maintain data with a
view to availing the same to developers of renewable energy resources and provide an enabling
framework for the efficient and sustainable production, conversion, distribution, marketing and
utilisation of renewable sources in Kenya.
7
The Committee performs an advisory role to the Cabinet Secretary for the Ministry of Energy and
Petroleum on the criteria for allocation of renewable energy resource, licensing of renewable energy
resource areas, management of water towers and catchment areas, development of multi-purpose projects
for power generation and management and development of renewable energy resources.

4. 3 | Non Renewable Resources Royalties Paper by Brian Njau, Advocate
(KenGen)8; Kenya Electricity Transmission Company (KETRACO)9; Kenya Power
and Lighting Company (KPLC)10; Geothermal Development Company (GDC)11,
Kenya Pipeline, Kenya Petroleum Refineries Limited, Kenya-Tullow Oil, Kenya
Chamber of Mines, Independent Power Producers (IPPs)12; Development Partners
and the primary consumer being the Citizens.
3.0 ROYALTIES IN THE EXTRACTIVES SECTOR
3.1 Brief on the Royalties Aspect in the Mining Act (2016)
1. The holder of a mineral right shall pay royalty to the State in respect of the various
mineral classes won by virtue of the mineral right. (Section 183 (1) of the Mining
Act (2016))
2. Section 117 of the Mining Act (2016) provides for Mineral Agreements between
the Cabinet Secretary and the holder of a mining licence13. Section 117 (2) stipulates
the mandatory terms and conditions to be included in a mining agreement.
Section 117 (2) (k) provides for the payment of royalties, taxes, cess and other
fiscal impositions.
3. Section 139 of the Mining Act (2016) further provides that the holder of a Mining
Permit shall enjoy the exclusive rights to carry out mining operations in the area
specified in the permit. Whereas the holder of a mining permit is obligated to take
all reasonable measures to carry out the approved mining operations, Section 139
(2) (c) of the Act stipulates a condition for the payment of royalties, use or dispose
of any minerals discovered.
4. Section 186 (1) of the Mining Act (2016) stipulates that all fees, charges and
royalties payable by the holder to the State shall be paid by the holder into the
designated account of the State Department responsible for collecting royalties.
8
KenGen is the leading electricity power-generating company in Kenya, producing about 60% percent of
electricity consumed in the country. The company utilizes various sources of energy to generate electricity
ranging from hydro, geothermal, thermal and wind. It is 70% owned by the Government and 30%
shareholding is in the hands of the public.
9
The company is 100% Government owned. It is responsible for planning, designing, constructing,
operating and maintaining high voltage electricity grid.
10 Kenya Power is a state corporation. It is responsible for electricity transmission, distribution and retail
sales. It operates energy purchase agreements with KenGen and the Independent Power Producers for
onwards transmission and distribution.
11 This is a state-owned company responsible for geothermal resource assessments, including exploration,
appraisal and steam production. It explores and develops steam fields and sells geo-thermal steam to
KenGen and Independent Power Producers (IPPs) for electricity generation.
12
IPPs are private companies which generate power and supply electricity in bulk to Kenya Power and
Lighting Company.
13 Section 117 (5) of the Mining Act (2016): All mineral agreements shall be submitted to the National
Assembly and the Senate for ratification.

5. 4 | Non Renewable Resources Royalties Paper by Brian Njau, Advocate
5. Section 186 (2) of the Mining Act (2016) provides that the payment shall be
accompanied by a statement from the holder stating-
a. Details of the mineral or mineral product;
b. The relevant point of sale; and
c. The date and the amount of royalty paid.
6. A mineral right holder shall report the royalty liability for each month by the fifth
business day of the month. Upon receipt of a royalty payment the State
department responsible for collecting royalties shall issue a receipt.
7. Distribution of Royalties Paid:
Section 183 (5) of the Mining Act (2016): The royalties payable are distributed in
the following manner:
a. seventy percent (10%) to the National Government;
b. twenty percent (70%) to the County Government; and
c. ten percent (10%) to the community where the mining operations occur.
8. Default in Payment of Royalties:
i. Where there is a default in payment of the Default in paying prescribed
royalties by a mineral right holder, the Mining royalties Cadastre Office
shall issue a thirty day notice to the mineral right holder requiring
repayment of the outstanding royalties.
ii. In the event that the mineral right holder does not pay the royalties payable
within the period specified in the notice - the Mining Cadastre Office shall
record the outstanding royalties in the cadastral register; and the Cabinet
Secretary shall suspend the respective licence or permit.
iii. In the event that the mineral right holder does not pay the royalties payable
within sixty days, the Cabinet secretary shall revoke the licence or permit
as the case may be.
iv. Where the holder of mineral right fails to pay the prescribed royalty with
the prescribed period, the Cabinet Secretary may prohibit the disposal of
any mineral or mineral product from the mining area concerned, or from
any other mining area held by that mineral right holder.
9. Reduction or Suspension of Royalties: Pursuant to Section 188(1) of the Act, A
Mineral right holder may apply to the Cabinet Secretary for a reduction or
temporary suspension of a royalty rate.
10. Recovery of royalty, fees and other charges: A fee, royalty or other charge payable
under this Act and which remains unpaid shall be deemed to be a debt due to the
national government which may be recoverable summarily.

6. 5 | Non Renewable Resources Royalties Paper by Brian Njau, Advocate
3.2 Brief on the Royalties Aspect in the Energy Act (2019)
1. Section 85 of the Energy Act (2019) provides for Royalty by a Licensee in
Geothermal Resource Exploitation.
2. Value of Royalties payable: The determination of the royalty payable is based on
the value at the well-head of the geothermal resource extracted:
a. of not less than one per centum and not more that two and half per centum
of the value of geothermal energy produced from such resources during the
first ten years of production under the licence;
b. of not less than two per centum and not more than five per centum of the
value of the geothermal energy produced from such resources during each
year after such ten year period; but
c. shall not include any geothermal energy that is dissipated before it reaches
the point of delivery to the purchaser.
NB: the value of geothermal energy at the well head is a value calculated by subtracting from the
price that could reasonably be realized on sale of the energy to a genuine purchaser at arm's length
from the producer, all reasonable expenses, reasonably incurred by the producer in getting the
energy to the point of delivery to the purchaser.
3. Distribution of Royalties Paid:
Section 85 (3) of the Energy Act (2019): any royalty received by the National
Government from geothermal energy produced shall be paid into the Treasury of
the National Government and apportioned between the National Government,
County Government and the local community as follows—
a. twenty percent (20%) to the County Government [provided that the amount
allocated shall not exceed the amount allocated to the County Government by
Parliament in the subject financial year];
b. five percent (5%) to the Local Community [Share payable through a trust fund
managed by a board of trustees established by the Local Community in accordance
with the regulations under the Act] [provided that the amount allocated shall not
exceed one quarter of the amount due to the County Government by Parliament in
the subject financial year]; and
c. Seventy five percent (75%) to the National Government as revenue in accordance
with Article 203 of the Constitution of Kenya (2010).
4. Counties’ Cross-Border Sharing of Resources (Royalties): where the resource is
being exploited in one or more counties the Cabinet Secretary shall, in consultation
with the Commission for Revenue Allocation, determine the rate of apportionment
of the county share between the counties.

7. 6 | Non Renewable Resources Royalties Paper by Brian Njau, Advocate
5. Alteration of Royalty Rate: The Cabinet Secretary may waive, suspend, or reduce
the royalty for any licensee in the interest of encouraging the greatest utilization
of geothermal resources, if the Cabinet Secretary determines that this is necessary
to promote development or that the licence cannot be successfully operated under the
licence terms.
6. Recovery of royalty, fees and other charges: A fee, royalty or other charge payable
under this Act and which remains unpaid shall be deemed to be a debt due to the
national government which may be recoverable summarily.
3.3 Brief on the Royalties Aspect in the Petroleum Act (2019)
1. Like the imposition of royalty fees in Energy Act (2019) and the Mining Act (2016),
such is the position in the Petroleum Act where applicable: in particular; Section
53(1), 119 (1), 119 (2) (a), 119 (2) (c), 127 (b) and 128 (2) (d) provide for the
imposition of taxes, charges and royalties payable by the licensed contractor.
2. The Kenya Revenue Authority has been granted the authority to collect any
royalty imposed by the Act unlike the position under the Mining Act (2016) where
royalties are paid into the relevant State Department in that Ministry.
3. Non-Recoverable Cost(s): The acquisition costs or any other payments or charges
in relation with the transfer of an interest in relation to the assignment of the
Contract, shall not include any payments of considerations, private overriding
royalties net profits and interests.
4. Share and Distribution of Petroleum Resource Benefits: Interestingly, the Act
does not specify whether the royalties may be distributed, and how the same is
treated once it is received by the Kenya Revenue Authority. Section 57 of the Act
dictates that the profits derived from upstream petroleum operations shall be
shared between the Contractor and the National Government. Section 58 on the
other hand stipulates that the National Government’s share shall be apportioned
between the National Government, County Government and Local Community in
the following manner:
a. The County Government’s share shall be equivalent to twenty percent (20%)
of the National Government’s share;
b. The Local Community’s share shall be equivalent to five percent (5%) of the
National Government’s share; [The share shall be payable to a trust fund managed

8. 7 | Non Renewable Resources Royalties Paper by Brian Njau, Advocate
by a board of trustees established by the county government in consultation with
the local community.14]
NB: Though the Act does not expressly define profits and/or royalties it
provides for the Profit Petroleum sharing formulae as the Commercial
Production less the Cost Petroleum. The formula takes into account
Cumulative Inflows and Cumulative Cash Outflows. A valid question arises
whether royalties should be treated as an independent charge on a contractor
or whether the same is incorporated as a Cash Outflow while determining
petroleum profit from time to time.
4.0 Conclusion
1. All natural resources existing in its natural condition in Property in strata
lying within Kenya and its continental shelf including the Exclusive
Economic Zone is vested in the National Government in trust for the people
of Kenya. To deal in the exploration of any resource, persons must seek the
consent of the Government by dint of the issuance of the Licence.
2. The Government on the other hand raises revenue in this sector by
imposition of taxes, royalties and myriad of charges on the contractors’, the
product, its value addition including the sale and transaction of the
product.
3. The National Government imposes the said royalties, taxes and charges
whilst the Contractors tap into their intellectual property and expertise to
derive benefits for both parties. History concerning exploitation and
exclusivity of natural resources all over the world denotes the reason the
sector is highly regulated. The justification of the imposition lies squarely
on the simple reason that without consent to explore from the owner the
existence of the Contracting companies and the natural resources would be
inconsequential to any derived benefits.
PAPER DATED: 31st March 2021
Author & Researcher: Brian Njau, Advocate15
<Ends>
14 The respective county government shall legislate on the establishment of the board of trustees and the
prudent utilization of the funds received under this section for the benefit of present and future
generations.
15
Brian Njau is an Advocate of the High Court of Kenya practicing law in Nairobi, Kenya.