June 21, 2024

Direct negotiations, a win-win for African oil, gas, amidst disappointing licensing rounds- Ayuk, African Energy Chamber

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Oredola Adeola

Nigeria and other African oil and gas-producing countries have been charged to transition from licensing rounds to direct negotiations as a way of minimizing International oil and gas Exploration and Production companies (IOCs) risk of long waits for a decision on rigid opening and closing schedules often associated with licensing rounds.

NJ Ayuk, Executive Chairman, African Energy Chamber(AEC) made this known in a statement obtained by EnergyDay on Friday.

According to him, delayed licensing round starts and long waits for decisions are more likely than ever to dim local and international oil companies’ interest.

Ayuk expressed disappointment in the African oil and gas industry’s future outlook due to delays and hiccups impacting biddings and licensing rounds in the continent.

He noted that oil and gas companies have made dramatic cuts to their capital spending programs, resulting in the postponement and cancellation of numerous exploration and production (E&P) projects around the world, due to the negative impacts of the COVID-19 pandemic, which dramatically lowered demand for petroleum products.

He said, “Now that the oil and gas industry is in survival mode the improvements that should have been recorded through licensing bid rounds since 2019 in the continent is more urgent than ever through the streamlining of the process.

“While the details vary by country, the licensing round process has, in general, become too prone to delays and uncertainty. All too often, exploration and production (E&P) companies must wait one or two years before the exploration projects they propose are sanctioned.

“These practices, which help protect the interests of oil-producing nations, made sense when crude sold for $100 a bbl and no stronger calls to move away from fossil fuels. But they don’t make sense now.
After all, conditions are still uncertain.

“True, crude pricing forecasts for 2023 are cautiously optimistic at the moment, and Goldman Sachs has said Brent oil prices could reach $100 per bbl by this summer, up from the $50 range we saw in 2019.

“But the outlook for Africa’s petroleum market remains shaky at best. Underinvestment has been the biggest problem and exploration activity is lagging.

The Chairman of AEC noted that it’s up to African oil and gas producers to do everything possible to encourage as much E&P activity as possible, particularly by international oil companies (IOCs).

He also noted In the long term, of course, African producer states do need to lessen their reliance on oil and gas revenue. Ayuk charged them to lobby for knowledge transfers, training, gas monetization programs, and other significant opportunities so that their strategically managed oil and gas operations can create pathways for economic growth and diversification.

He said, ” African oil producers should adopt strategic fiscal policies, from revised production sharing contract (PSC) requirements to reduced tax and royalty requirements.

” This would give IOCs an incentive to explore Africa during the current downturn. But we can’t stop there. We need to consider other pain points that discourage foreign operations in Africa and find ways to eliminate those challenges as well.

Why not remove this hurdle?

He said, “It’s time for more African oil and gas-producing states to choose this route. Not all countries use licensing rounds; some use direct negotiation to approve exploration and production rights.

“Negotiating with trusted explorers would help them avoid unnecessary delays and bureaucratic red tape. Making these changes would still allow them to emphasize their own priorities – and it might also make IOCs more likely to keep exploring within their borders.

Ayuk however noted that the licensing round process does have benefits, as it helps participating countries to make sure interested companies have the necessary financial resources and technical capacity to explore successfully.

Speaking more about the importance of licensing rounds, he added that the process ensures that projects are completed in a timely manner. It also helps E&P companies, since the process lays out their rights.

He noted that despite the strengths of licensing rounds, the delay process can create unacceptable hardships for oil companies, adding that countries tend to take a long time to make their licensing decisions.

He said, “When CAPEX budgets have been slashed, waiting one (or even two) years to learn if an exploration project has the green light just won’t cut it.

“In today’s economic environment, it just isn’t realistic to insist on putting much-needed resources aside on the chance that they’ll be needed in a year or two.

“We must admit that we’re seeing more and more examples of licensing rounds gone wrong, from extended delays in getting the bidding process started to instances of little to no company participation.

“Consider Algeria, where oil and gas production rates were already declining in 2019, before the pandemic. This trend was large because of repeated project delays caused by, among other challenges, slow government approval. During four licensing rounds, Algeria saw minimal interest from investors.

“Nigeria, too, is known for the less-than-speedy pace at which it sanctions exploration projects. Even before COVID-19, its slow movement on this front contributed to a decline in oil production over a 10-year period. And in 2019, there were licensing round mishaps in multiple countries.

“Some rounds, for example, Ghana’s First Licensing Round, have seen limited successes, while others have suffered delays or suspension,” GlobalData Upstream Oil & Gas Analyst Toya Latham told Offshore Magazine.

“Gabon’s 12th Licensing Round and Somalia’s First Offshore Licensing Round have been extended in 2020 (in part due to delays in enacting pivotal legislation), whilst Madagascar’s long overdue licensing round has been suspended.”

“We’ve seen licensing rounds go wrong before that. In early 2018, only one company responded to Cameroon’s licensing round, in which eight blocks had been available. Think about it: just one and the bureaucrats still think all is right,” the African Energy Chamber Chairman said.

Ayuk also noted that African oil and gas countries must consider investors’ perspectives by enabling the environment for energy companies to be front and center.

He said, “Fast forward to the oil and gas industry of 2023: in today’s reality, delayed licensing round starts and long waits for decisions are more likely than ever to dim companies’ interest.

“These challenges aren’t trivial, since operating in Africa already represents significant risks and expenses for IOCs. Companies must factor in the possibilities of security concerns and lapses in infrastructure along with the risks that come with every exploration project, including the failure to find commercially viable petroleum stores.

“There are also additional expenses of operating overseas, complying with local content policies, supply costs, and a myriad of taxes and fees, among others.

“I will be the first to trumpet the opportunities for IOCs in Africa, from our vast stores of oil and gas to large swaths of unexplored territory. But we must be realistic about how businesses work. Companies need to be able to make a reasonable profit in order to justify their outlays.

“When the oil and gas industry is in the midst of a downturn, as it is now, excessive risks and expenses are the last things IOCs can consider. So, we have to work with IOCs and do what we can to help them profit in order to convince them to choose African sites over other options.

According to him, direct negotiations could be a win-win.

He said, “That’s why I think a transition from licensing rounds to direct negotiations makes sense for African countries. For one thing, negotiation periods would not be tied to rigid opening and closing schedules as licensing rounds are, minimizing the risk of unreasonably long waits for a decision. Even better, direct negotiations would allow E&P companies to work with countries to discuss, and possibly adjust, the major terms of their production contracts.

“With that kind of flexibility, companies with concerns about a country, whether they have questions about tax laws or local content requirements, might be willing to pursue exploration opportunities that they would have turned down, had they been required to participate in the bidding process.

“We can make this work even with a different licensing scheme, African countries will have other unique risk factors to address – factors that could make IOCs hesitant to invest in Africa. High on that list are concerns about corruption. That’s why the African Energy Chamber pushes so strongly for meaningful transparency measures.

“Again, we can’t overemphasize the importance of creating fiscal regimes more favorable to IOCs. Those measures should include, along with fairer tax and royalty requirements, the creation of natural gas-specific production-sharing contracts, rather than relying on crude oil PSCs as a one-size-fits-all template.

“Many countries have a difficult time working with companies to get to FID on natural gas discoveries. Not only will gas PSCs help make it easier for companies to conduct profitable gas projects, but they also could help prevent problems and lengthy negotiations when explorers find gas, rather than crude.

“IOCs are and can continue to be, invaluable allies to African nations. Their E&P activities contribute revenue that many oil and gas-producing countries rely on now, but we also can work with them to foster economic growth and diversification for tomorrow,” he said.

Ayuk however revealed that African countries need IOCs to create job and business opportunities today, but we also can work with them to achieve capacity building and technological know-how that will pave the way for a better future. He also urged African leaders to do everything possible to give explorers the certainty, predictability, and incentives they need to be competitive in Africa.

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