OP-ED: African Countries Must Develop Strategic Fiscal Policies To Survive Oil and Gas Industry Changes On Horizon
18 NOVEMBER 2020 | njayuk.com
The future of the global oil and gas industry has been a subject of great fascination and debate for decades. Since COVID-19 surfaced, there has been even more conjecture on this topic and, in particular, the most likely timing for “peak oil,” when crude production reaches its maximum rate before going into permanent decline.
Predictions run the gamut: OPEC’s latest World Oil Outlook, for example, forecasts increasing oil demand for two more decades. But the International Energy Agency stated in its 2020 World Energy Outlook report that demand for oil probably will plateau after 2030. And the 2020 energy outlook from BP states that the world has already passed peak oil and predicts even greater drops in demand as countries comply with carbon dioxide abatement measures.
While no one can pinpoint exactly how the energy industry will evolve, or when major changes will unfold, it makes sense to assume that decreased demand will occur at some point — and to prepare for the new era that follows.
In the case of African countries with oil and gas reserves, those preparations should include a close look at their fiscal regimes: the systems they have in place to determine how extractives revenues are shared among companies and the government. These could include royalty requirements (money paid to governments for the right to extract and sell their resources), taxes, production-sharing agreements (which determine how extracted resources are split between governments and oil companies), bonuses, and similar mechanisms. The key is to develop fiscal regimes that ensure fair treatment for the state without burdening companies with unreasonable obligations on top of their project risks, local content requirements, and the expenses associated with exploration and production such as rig and labor costs. Unless we give local and international companies a fair chance to profit, production activity will decline.
As our recently released 2021 Energy Outlook notes, “African nations with petroleum resources will most likely have to adapt their fiscal regimes similar to how other nations have adapted them in light of the new era with more supply and less demand. Failing to do so can lead to stranded resources and outcompeted resources.”
The African Energy Chamber has said since it was founded that African countries with petroleum reserves must adopt competitive fiscal regimes to promote thriving oil and gas operations. In the COVID-19 era and the years that follow, a wise approach to fiscal regimes will be even more important. Without them, indigenous companies will struggle to launch new projects, and international oil companies (IOCs) will choose other, less financially onerous locations for their upstream activities. If that happens, African countries miss out on invaluable opportunities to harness oil and gas to grow and diversify their economies, to minimize energy poverty, and to create a better future for Africans. That’s why countries that haven’t fine-tuned their fiscal regimes must start now. They have plenty of strong examples to look to.
Angola Continues to Show How It’s Done
In my recent book, Billions at Play: The Future of African Energy and Doing Deals, I praised Angola President João Lourenço for implementing transformative policies, including Angola’s new Natural Gas Regulatory Framework — Angola’s first law regulating natural gas exploration, production, monetization, and commercialization — and the creation of an independent regulator, the National Agency for Petroleum, Gas, and Biofuels, to manage Angola’s oil and gas concessions. By encouraging more efficient and transparent governance, Lourenço made his country a more appealing choice for oil and gas exploration. This year, Angola continued to demonstrate wisdom in its response to pandemic-related lockdowns, oil price drops triggered by dramatically diminished demand, and OPEC+ production cut requirements implemented last spring to stabilize the market. Angola’s National Bank implemented new fiscal policy measures that included extending credit and renegotiating debt payments to help oil and gas companies boost their liquidity.
Angola, which relies heavily on oil revenue, is still feeling the negative effects of the pandemic: The government declared a state of emergency, decided to free 30% of its goods and services budget, and suspended capital expenditures (CAPEX). However, the government’s fiscal measures have appeared to ease major oil and gas project cancellations in Angola. What’s more, these efforts to give companies a fair chance to operate profitably in Angola, most likely, will contribute to a healthy oil and gas industry for years to come.
We can learn from fiscal policies implemented before the pandemic, too.
Impossible n’est pas Camerounais. Cameroon’s Tax Holiday Is a Wise Move
When the Cameroon Senate approved updates to the country’s 1999 Petroleum Code in 2019, it positioned the nation for resiliency and long-term success. The new upstream legislation included a tax holiday for oil and condensate project development and seven more years for natural gas project development. The legislation also allows production sharing contracts (PSCs) to be modified so companies can recoup exploration expenses.
The chamber commends Cameroon for these measures. In fact, the chamber recommended tax holidays in 2020, after Cameroon updated its code, to help African countries prevent oil and gas project cancellations in the COVID-19 era. Tax holidays allow oil and gas companies to control revenue reductions, improve liquidity, and prevent job losses. Tax policies like these could play an important role in keeping African petroleum-producing countries competitive when demand for oil and gas begins to decrease.
The humanitarian, political crisis and violence in the English-speaking Anglophone region with vast oil and gas reserves has increased reputational risks for oil and gas exploration in Cameroon. A fact that has made foreign oil and gas companies nervous when it comes to taking advantage of the improved fiscal frameworks.
The government’s involvement in what is being perceived internationally as one of the worst refugee crisis and its inability to end the overall political impasse creates a more bearish view of the country’s resource potential. The ongoing political uncertainty, Covid 19, regulatory uncertainty from BEAC and low oil prices have thrown a curveball on potential FID’s for many planned oil and gas production projects at a time when Cameroonian officials are seriously exploring options on how to increase oil and gas output, revenues for the state and revive an ailing economy. Massive potential, great hope and super returns, if they get it right, as they saying goes Impossible n’est pas Camerounais.
Gabon Has Positioned Itself for Success
Gabon has taken proactive measures as well to encourage ongoing oil and gas production activity. The country’s 2019 hydrocarbon code, a modification of Gabon’s 2014 law, was written with the express goal of encouraging more exploration and production activity there. There have been several tax requirement changes. For example, companies no longer are required to pay a separate corporation tax on top of the production share that goes to Gabon. And, instead of a “one-size-fits-all” hydrocarbon tax rate for petroleum products, rates will be at different, and lower, levels — and the hydrocarbon tax rates can be negotiated before PSCs are finalized.
Gabon has taken additional measures, as well, to increase investments by making it easier for companies to be profitable. They include:
PSC requirements have been modified with companies’ needs in mind. The state’s minimum stake in an exploration company, for example, has been cut in half.
Government royalties for shallow blocks have gone from 13% to 7%.
Royalties for deep-water production has gone from 9% to 5%
The state’s share of the profit has been reduced, too, from 55% to 45% for shallow blocks and from 50% to 40% for deep-water operations
The changes did not go unnoticed by oil and gas companies: By early 2020, Gabon had signed 12 PSCs with foreign countries. And while COVID-19 has stalled drilling activity, for now, Gabon has positioned itself to see activity, and even more investments, resume after the pandemic.
Remember What’s At Stake
Ideally, developing competitive fiscal regimes should be done in concert with other measures, such as fine-tuning local content laws and working to ensure greater government transparency — anything that can be done to make African countries more appealing choices for oil and gas companies.
I realize that African countries have their hands full between the pandemic, economic struggles, and the challenges that existed long before COVID-19 surfaced. But, one could argue that there never will be a perfect time to revamp oil and gas policies. This process is simply too important to put off. We must do what we can to fully capitalize on Africa’s oil and gas resources so African governments can start using revenue to encourage the creation and growth of other economic sectors. So there are more opportunities for IOCs to share knowledge with indigenous companies and play a role in African capacity building. And, vitally important, so natural gas produced in Africa can be utilized for more gas-to-power projects, which can play a huge role in bringing electricity to more African communities.
While we don’t know the specifics of what’s ahead for the world’s oil and gas industry, we are aware of steps we can take to help us benefit from it as long as possible. Now is the time to act on them.
NJ Ayuk is Executive Chairman of the African Energy Chamber, CEO of Centurion Law Group, and the author of several books about the oil and gas industry in Africa, including Billions at Play: The Future of African Energy and Doing Deals.