Wednesday, October 28, 2015

Industry and legal experts are of the view that, while a substantial drop in the oil price in the past year has led to exploration and production companies re-assessing investment decisions in the short-term, there is significant potential in the African oil and gas sector over the long-term. It is clear that Africa remains an attractive option, despite a number of challenges, when compared to other global opportunities for investment in the sector. However, regulatory uncertainty across the region is a critical issue and operates as a disincentive to investors.

The opportunity: substantial reserves of natural resources

According to a recent report, Africa’s share of global oil production is now in the region of 9.6%, while untapped proven reserves are estimated to be 8% of the global total. When it comes to gas, the continent still has nearly 70 years of natural gas production available given current production rates, with more proven reserves to be added.[1]

Developing countries need to monetise their natural resources to drive growth and development. However, it is not easy to develop and produce these newly-discovered African oil and gas deposits, particularly with declining commodity prices pressurising the market. Many investors are adopting a wait-and-see attitude while planning for a recovery, which they believe will inevitably come. In addition, emerging hydrocarbon provinces require significant volumes of highly skilled labour and logistic support and consequently local content policies and infrastructure constraints across the region are a key dynamic.

The legal constraints to monetising the opportunity

According to David Forfar, head of the Oil & Gas Sector Group at pan-African law firm, Bowman Gilfillan Africa Group, proposed regulatory changes and uncertainty in processing amendments across the region are impacting investment in this sector. Stringent regulatory and fiscal regimes, many of which were conceived in a much higher dollar oil environment, may also be making projects less attractive.

He says, “Investment decisions are often deferred pending stabilisation of the legal landscape. Additionally, many projects around the globe may have now become sub-economic at USD 50 per barrel albeit that certain related costs will fall in response.”

Examples of issues can be found in almost all relevant jurisdictions:

In Kenya, the Petroleum (Exploration, Development and Production) Bill 2015, which was due to be passed by June this year, has been delayed once again. (It has been outstanding since 2012.)

Under the Bill, a bidding process must be held before an oil exploration block is allocated to the explorer with the best technical and financial bid. This is a departure from the current Petroleum Act that gives the Cabinet Secretary Energy the power to allocate oil exploration blocks. The Bill allows the government to set timelines for the exploration and development of natural gas.

According to Njau Mukuha, partner in Bowman Gilfillan Africa Group’s Nairobi office, “While the legislation in Kenya is under review, and despite a low oil price environment, many oil explorers are maintaining their work schedules as the Kenyan government has been rigorous in enforcing terms of Production Sharing Contracts where such schedules have not been met.”.

In January 2014, suspended Energy Secretary, Davies Chirchir, cancelled Canadian firm Vanoil Oil’s licence for not working on its Garissa-based blocks since 2007. Pancontinental Oil’s licence was also cancelled in late 2013. Fortunately, the Australian explorer successfully negotiated a one-year extension.

CAMAC Energy, an exploration company operating in Kenya as Erin Energy, is seeking to have its exploration licence extended while looking for a partner to finance work on its blocks. Under the Production Sharing Contract signed with the government, work on the first phase of exploration on its two onshore blocks was expected to be complete by last June while activities on its two offshore blocks were to have been wound up by 8 August.[2]

In Nigeria, the proposed and much-delayed Petroleum Industry Bill aims to create a more stringent fiscal regime, with increased taxes, increased rents and royalties. The Act will require oil companies to pay 50% profit tax for onshore and shallow areas, and a 25% levy for frontier acreage and deepwater areas.

In South Africa, the proposed amendments to the Minerals and Petroleum Resources Development Act have raised a number of challenges which include a 20% free-carry for the state with the opportunity take an even higher percentage interest in certain instances. Under the proposals, the Minister will have greater discretion in certain areas and an enhanced strategic oversight.

There are also concerns about licencing and regulatory oversight. Currently this is done by the Petroleum Agency of South Africa. However, the government is considering transferring this responsibility to the Department of Mineral Resources. 2015 is an election year in Tanzania with the current president completing his 10 year tenure. Legislative changes that could be introduced by the new leadership are resulting in increased uncertainty within the business community.

In the interim, the government has issued a long-awaited new model Production Sharing Agreement to coincide with the launch of a fourth licensing round for seven deep offshore blocks and another block in Lake Tanganyika. The new Production Sharing Agreement has more onerous fiscal obligations for investors than its predecessor. Tanzania also released the Natural Gas Policy and is expected to pass new legislation which will replace the framework under the Petroleum Act of 1980.

Governments of these countries would do well to place regulatory, legislative and fiscal policies in order so that they are best placed to benefit from investor interest when the market recovers.
On the positive side, Mozambique's lawmakers recently approved petroleum laws that open the way for new oil and gas bids as well as a special tax break for offshore fields operated by Anadarko and Eni to aid their development.

Another country to have successfully negotiated the required regulation is Uganda. A number of laws and regulations were passed in 2012 / 2013. As a result, a government plan for a 120,000 bbl/d refinery is going ahead.

Bowman Gilfillan Africa Group ramps up to support clients

Within this context, Bowman Gilfillan Africa Group is strengthening its ability to support clients within this complex and challenging sector.The firm recently announced the appointment of David Forfar as head of its Oil & Gas Sector Group. Forfar has upstream experience in Africa which will complement the firm’s infrastructure, project finance and environment teams with on-the-ground expertise across the continent. He previously worked in-house at CNR International in Aberdeen where he focussed on assets in Cote d’Ivoir, Gabon and on block 11B/12B in South Africa.

Named Law Firm of the Year at the Africa Oil and Gas Summit in 2013, Bowman Gilfillan Africa Group provides legal services to the oil and gas sector in Africa from offices in Botswana, Kenya, Madagascar, South Africa, Tanzania, Uganda.
This article was first published in Oil & Gas Decisions, August 2015

[1] “Africa oil & gas review” a report published by PWC in August 2015, p7.

[2] “ US Oil explorer seeks a two year extension of its PSC with government “– Business Daily Kenya August 2015