Trip to Freetown, Sierra Leone

I returned to Africa last month with a trip to Freetown, Sierra Leone.  As with my visit to Kampala, Uganda in October, it was a fascinating visit and very thought provoking.  As before, I’d like to end this article with a brief request for your help.  I’ll be asking for your input on the subject of licensing in oil and gas – your “Top Tip”.  Your contribution will take a tiny amount of your time but could have a big impact on the work of dedicated government officials in a developing country.  For those that didn’t get a chance to comment last time around please take a couple of minutes out of your day to share your insights.

I travelled to Freetown in January to deliver my “5 Day MBA in Oil and Gas” to officials from the Sierra Leone Petroleum Directorate, the Office of the President, the National Revenue Authority, the Ministry of Finance, the Environmental Protection Agency and Fourah Bay College.

Just as in Kampala, it was very clear that delegates are eager to do the best for their country and to ensure that the oil and gas industry develops in the optimum way.  All were therefore keen to learn as much as possible within the short amount of time we had together and one of the hot-topics during the week was “What is the best licensing system?”

This is a very valid and topical question given the stage of development of the oil and gas industry in Sierra Leone.  And indeed there are many factors to consider, including:

  • Government versus investor perspectives.
  • The role of the NOC versus the Ministry.
  • The strategic nature of the oil and gas industry and fit with government policy.
  • Political philosophy of the country and government.
  • Institutional frameworks in place.
  • Preference for private versus state ownership.
  • Effectiveness at targeting economic rent.
  • Regulating the pace of activity.
  • Local ownership of and domestic supplies of petroleum.

Those are a few thoughts to consider when designing a license system, but what are yours?

This note is going out to many people in the industry with a collective experience of literally thousands and thousands of years.  The politicians, NGOs, development agencies and others all have their views on licensing systems, but what do the industry insiders amongst us think?

Please use the comments area to suggest a few things to consider when designing an oil and gas licensing system.  If you prefer you can leave your comment anonymously.  Or you can email me directly.  Either way, I will ensure that your experience and insights are passed on to the folks in Freetown.

For those reading this in Freetown please feel free to comment on the nature of the challenges you face, as you see it, or to debate the issue that I have raised.

I look forward to reading your comments!

The training programme in Freetown was arranged through the Sierra Leone Petroleum Directorate and sponsored by Minexco Petroleum.  The programme was opened by the Acting Director of the Sierra Leone Petroleum directorate and the opening addresses were featured in the local news that evening:

Comments

  1. Angus,

    First, it seems that the comment feature on your wordpress site has been deactivated — I could not find it. So, here are my comments/pointers. One caveat: my experience with licensing is limited and mostly derives from one case.

    1. Government parties under-estimate their leverage.

    2. This state of affair is often the result of an over-reliance on informal networks and known parties that have established a marginal presence locally, sometimes through low-profile charitable causes.

    3. Government parties focus on post-exploration profit sharing but mismanage the exploration phase. During this phase, the licensor finds itself hostage of marginal licensees. Licensees can leverage interest in unproven reserve as collateral to successive rounds of stocks offering, farm in and farm out agreements, etc.; licensors are paralyzed by the fear of loosing the promised bounty and failed to enforce the terms of the PSA agreements.

    4. Licensing terms are not adapted to the economic and infrastructure level of the region. A natural resource development plan must be developed in a holistic manner, i.e. includes economic development terms. Sierra Leone is not Texas or Abu Dhabi. Exploration agreements offered deferred benefits, if any. State actors should seek immediate benefits.

    5. This last approach is the only politically sustainable. Anything oil-related can become a political liability when a constituency does not understand deferred benefits and capital investments.

    6. It is also the most sophisticated. Third party support should be sought to design and manage such integrated development portfolio. Third party management would also allow financing from multilateral development banks/organizations. But see point No.2.

    7. If properly packaged (tax free zone, PPP contracts, etc.), these development projects could be extremely attractive to larger integrated groups that are also acting in a political capacity or have substantial capacity — mostly Chinese. Some have shown willingness to venture in PPM. Australian mining companies might be the best alternative. See the creation of AAMIG (Australia Africa Mining Interest Group) in Perth and their advocacy for PPP projects in Africa.

    8. Risks under the FCPA and the like are too high; overhead costs have to be low; flexibility, reactivity and creativity are a must. The function referred to in point 6 would be better handled by a small independent company under contract for larger EPCM group. If the Chinese companies had such advisors, they would stop building hospitals only the President’s inner circle can afford (Zambia).

    Best regards,
    Charles

  2. Javier Lopez says:

    Hi Angus,
    Thanks for keeping me on the loop. I should apologize for not taking the time to answer any of your previous emails.

    I could not find the space for comments mentioned in the note about Sierra Leone, my five cents below. Hope this helps.

    Colombia faced a situation in which every government would judge the “association contract” scheme to be either too hard or too soft on private investors.

    When I initiated my career in the E&P business, back in 1998, the country had a government owned O&G E&P company that would also play the role of regulator. All association contracts would give the NCO 40% of production and 20% royalties to the government 20% leaving the PI with the remaining 40%. The contract was called 50/50 and all was fine until Oxy discovered a giant field Cano Limon with over 1 billion bbs and with an aquifer that kept the production plateau for decades.

    Then another 2 giant fields were discovered, Cusiana and Cupiagua (over 1.2 Billion boes) and then politicians started to push for a better deal for the country and other schemes like sliding scale, where the PI share would reduce depending on the cumulative production of the field or the so called R Factor, where “R” would depend on the profitability of the exploitation were put in place. Those contract schemes had such a big Government Take that over time the effect was to drive the exploration activity to almost zero, putting the country at risk of becoming a net importer by year 2002 -2004 (I still remember doing these analysis while in BP Colombia).

    Then the country opted for a number of actions:
    – To separate the regulator and the E&P roles, creating the National Hydrocarbons Agency (ANH, Agencia Nacional de Hidrocarburos)
    – To treat Ecopetrol as any other company, leaving them the rights over the signed and still active association contracts. This meant the NOC would not automatically get 40% of every deal. It also meant opening the company to private investors by selling 15% or 20% of the company to the public and allowing Ecopetrol to internationalize its operations.
    – To change the licensing methodology to a more flexible one depending on the size and type of reserves and to let the PIs tender on things like the level of royalties
    – To issue an stability law that would provide some guaranties to PIs in terms of stable taxes and other thing to protect investments

    All this turn the situation from that mentioned above to today’s where Ecopetrol has investments in various LatinAmerican countries and even in the GOM, the country’s production has increased up to close to 1 Million bpd, and self supply has been extended until year 2020.

    All this not to say that I find the approach taken 100% successful but just to tell the story of a country than as Sierra Leona has been for the last 3 decades looking for the right mixture of things on its approach to the O&G resources.

    Hope this is of help and good luck with all your endeavors,

    Javier Lopez

  3. Tim O'Brien says:

    Hi Angus.

    I hope all is well. My top tip is very simple based on my experience as a regulator and of working in a regulated business….keep the licence simple and relatively short. Overly detailed and proscriptive licences are a nightmare – keeping it simple and high level gives the regulator a lot of flexibility and likewise the licence holder also has room to manoeuvre. If I compare for example the Northern Ireland very detailed approach to licencing of gas TSOs for example with ROI, the latter (30 pages or so) is very simple, has low regulatory maintenance/overhead whereas the former because of its complexity (180 pages typically) will take more effort to manage from both sides – imagine a regulatory compliance programme for example based on a licence of 180 pages versus one of 30 pages.

    The style of licence will reflect the style of regulation to an extent. We have found in Ireland that the regulator, whilst it issues relatively straightforward licences, has ample enforcement powers through primary legislation and can use a number of regulatory tools, in addition to the licence, (directions, codes, guidelines etc) to supplement the licence. So once the licence covers the key areas (supported by the legislation) the regulator can regulate in a flexible way without having its hands tied to voluminous and very specific licence conditions. For the company a very detailed licence might be more beneficial if it can negotiate the specifics to its advantage coupled with a regime in which licence changes are difficult to make – because for example the legislation is written in a way that makes licence changes difficult, subject to public consultation etc. In general though I think companies appreciate the less detailed approach.

    I hope this helps.

    Regards

    Tim

  4. Gregar Haugen says:

    Hello Angus

    You have requested some input with regards to your visits to Africa. I do not know if you are aware, but the Norwegian Petroleum Directorate has an extensive international activity which includes giving advise on managing oil and gas resources. The information provided by the NPD on this can be found on their web site http://www.npd.no. E.g. there is an article on ’Sharing knowledge with Uganda’ at http://www.npd.no/en/Topics/International-activity/Temaartikler/Sharing-knowledge-with-Uganda/. You may find this interesting. The Norwegian model is probably not directly adaptable to other countries, but key elements of how the licensing is done may be relevant, but also other countries have models that work for them (apparently), but I guess it depends a lot on the political situation and the demography of the country.

    Regards Gregar

  5. Joseph Muriithi says:

    Oil and gas exploration is a relatively new activity in Kenya or alternatively it is getting more attention now.
    The country is subdivided into exploration blocks based on advice by technical officers.There are ground as well as library research on all blocks.Minidtry of energy plays the lead role.It kind of drives the process but interministerial committee exists to input into policy framework.
    Potential licensees apply to the ministry of energy stating the key competences-personel, equipment, capitalisation, key partners, previous projects etc.The application for one or more blocks is evaluated by a committee and may or may not be granted by the Energy minister.More details may be called for.A fee has to be paid and such necessary terms and conditions given.A license is for a fixed term with reversionary interest to the government.
    Certain preexploration activities have now been made mandatory eg.EIA studies etc.
    This is but a brief outline. A link with our commissioner for mines may give the broad view,mine is an eye view.
    Many regards.

  6. Adekunle King says:

    Hello,
    My opinion is that the license must be in simple plain english devoid of technical terms that are not defined , it must be reached in a fair and open negotiations so as to avoid one party calling for renegotiation in the future on the grounds of unfair and prejudicial terms . Experts should be involved in the negotiations right from the start and the license should combine both flexible and prescriptive terms .

  7. Hi Angus
    Good to see you active in SL, a burgeoning E&P industry in a great country.
    My comments on licensing would be;
    1 – Run with a simple contract (as has been said above), with few complications. In particular, use only tax/royalty concession terms OR production sharing contract terms. Some countries fall into the trap of a hybrid model. In my experience a country in really frontier exploration like SL benefits from simple tax/royalty concessions. When E&P is more mature a service contract system is more appropriate, and the government has more muscle to strengthen their terms.
    2 – A stability clause must be included to avoid any retroactive changes and to give (oilco) contractors the confidence to commit. The government should commit to its participation early on, via a carry through exploration, or profits tax based on R factor.
    3 – Know who to take advice from. To date the geophysical contractors (TGS in particular) have had a very strong influence in licensing, data exclusivity, managing oil company partners and general HC policy. All Rounders like Senergy or RPS are the best companies to advise on licensing and data management.
    Regards
    Peter

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