Gabon: Oil and gas sector rebounds following adoption of new hydrocarbon law
Oil and gas investments are making a comeback to Gabon after five years. Improved domestic economic and political conditions are key drivers for this, but longer-term political and stability risks present headwinds for interested businesses.
During Africa Oil Week, an annual high-level conference for the extractives sector, which was hosted in South Africa’s Cape Town between 4 and 8 November, several oil-exporting African countries showcased their competitive advantages to attract new investment. This follows a five-year hiatus, that succeeded a crash in global oil prices in 2014. Like other oil-producing countries in Africa, the share of oil as part of the government’s revenue dropped from 60 per cent in 2016 to 32 per cent in 2017. Since then, African oil exporters have struggled to reach the same levels of output pre-2014, in part due to a lack of new projects coming online.
Nowhere was this more evident than in Gabon, the continent’s eighth-largest oil exporter, which suffered substantially from the oil-price drop and the divestment decisions by oil majors Royal Dutch Shell and Total in 2017. The divestment of two oil majors, with decades of being present in the country, was telling in itself.
Fiscal consolidation over the past two years has also helped generate new interest in the country
Over the past quarter, however, Gabon has signed nine exploration and production agreements (EPSAs), and more are in the pipeline. The EPSAs follow a five-year hiatus and the adoption of a new hydrocarbon law in July, which was part of conditions imposed by a USD642 million Extended Fund Facility by the International Monetary Fund in 2017. Relative political stability and fiscal consolidation over the past two years has also helped generate new interest in the country. In comparison, Africa’s third-largest producer, the Republic of the Congo, failed to generate any bids for its five blocks on offer in Cape Town. Despite the improved domestic conditions, global oil prices have failed to rebound from the USD100 barrel price in 2014; the price has struggled to surpass USD60 per barrel this year.
On 29 October, the government signed new EPSAs for onshore oilfields in the western Ogooué-Maritime province with the following companies: Assala Upstream Gabon and Assala Gabon – two subsidiaries of UK-headquartered Assala Energy – French junior Perenco Oil & Gas Gabon, and Chinese state-owned Sinopec Overseas & Gas Limited. This followed the signature of two EPSAs for deep-water oil exploration with Malaysia’s state-owned Petronas
Petroleum minister Noël Mboumba has repeatedly highlighted the new hydrocarbon law that came into effect in July as testament to this success. Indeed, the new law is aimed at incentivising foreign investment by lowering the minimum-equity ratio earmarked for the state to 45 per cent in the ‘conventional zone’, and 40 per cent for offshore oil fields The conventional zone refers to onshore and areas with shallow water with no more than 500m depth. This is a reduction from 55 per cent and 50 per cent, respectively, under the previous code. For gas deposits, the government requires a 20 per cent stake in conventional zone gas fields, and 25 per cent for deep offshore fields, which are much more costly to develop. The new code also removes a 35 per cent tax on profits, and lowers royalties to 7-15 per cent for conventional deposits, and 5-10 per cent in offshore fields.
Long-term headwinds are likely to weigh on the sector’s expansion over the next five years
Despite the renewed optimism about Gabon, long-term headwinds, including the continuing US-China trade war, tensions in the Gulf, and increased demand for less polluting energy sources, are likely to weigh on the sector’s expansion over the next five years. Although Gabon’s maturing shallow-water deposits contain light crude that is easy to process, high production costs for developing offshore operations in deep and ultra-deep waters off its coast is likely to offset some of this appetite unless any new major oil and gas deposits are discovered over the next two years. Furthermore, despite three years of relative political calm, presidential elections in 2021 and the continued poor health of President Ali Bongo – which has fuelled fears of his demise or a coup – will exacerbate political tensions over the next two years. Initially, this will contribute to increased levels of civil unrest, led by opposition-influenced anti-government protests. In the longer term, and in the event that Bongo loses power in 2021, stability risks will increase markedly.
THIS ARTICLE FIRST APPEARED IN THE NOVEMBER EDITION OF OUR SUB-REGIONAL INTELLIGENCE MONITOR FOR CENTRAL & WEST AFRICA
Also in this edition:
GUINEA-BISSAU: Coup fears ahead of presidential election damage medium-term investor outlook
NIGERIA: Optimism about amended deep offshore bill faces macroeconomic headwinds