Angola’s government is under a proverbial microscope as the country’s leaders make plans to grow its under-developed oil industry.
Economists, and industry experts, including oil and gas legal services group, Centurion, agree that Angola should learn from Nigeria as it moves to reap the benefits of its developing oil industry.
“With production declining and investment scarce, the Angolan leadership has put in place a number of new policies to reboot its oil industry and propel economic development,” the Centurion Law Group said in a recent statement.
“However, those changes take time and renewed deep-water oil and gas exploration for fresh reserves will take years to yield the desired results and stop the daily production crunch,” the Group continued
Angola’s government is currently targeting the country’s multiple deposits of marginal oil fields, which will go on sale this year.
Marginal fields are defined by reduced profitability or lack of commercial viability. These can, at times, represent considerable amounts of crude oil in the reservoirs, but that, due to costly recovery processes, are not worth the investment under the existing legal and fiscal framework.
In May 2018, Angolan President Joao Lourenco’s government published a new framework specifically designed to promote investment in these areas. According to the official text, the law considers marginal fields those discoveries with proven oil reserves of less than 300 million barrels, standing at or below 800 meters of water depth, that do not give returns to the State of more than $10.5 cents per barrel, returns for the operator of no more than $21 per barrel and that have an average return on investment after taxes of less than 15%.
For those that fit these conditions, the government offers extensive tax and fiscal benefits, as well as, easier conditions for cost recovery, in order to make those reserves commercial and promote their development.
Angola is not the first to try this tactic. In 2003, Nigeria had already had a bid round for its marginal fields with a certain degree of success.
Now Angola’s government is hoping that development in these marginal fields will help raise the current crude oil production, which is expected to be stagnant in the run up to 2022, while it promotes renewed investment in exploration and production in unexplored acreage.
A Marginal Fields Bid Round is expected to be launched in Luanda in June 2019 at the Angola Oil & Gas Conference, organized by Africa Oil and Power with the endorsement of the Angolan Government. It is likely to include onshore and offshore blocks in the Congo, Namibe and Cunene basins, and has already received considerable attention from industry players in the region.
“The Nigerian experience with marginal oil field development had measurable success, with 24 licenses awarded to 31 companies, some as sole operators and others as joint-ventures,” explained Centurion.
The 2003 marginal field bid round opened a number of opportunities to local and regional industry players while it contributed to increase the country’s oil output and promoted indigenous participation in petroleum upstream activities.
For companies like Oando, Waltersmith, Shoreline Energy, Seplat, Sahara Petroleum or Brittania-U, these fields represented important opportunities to farm-out some acreage from the majors and lead their own projects. While some developments have been slower than expected, the outcome of the process was mostly successful. Today, around a third of the licenses issued produce meaningful amounts of crude oil.
“However, there are a couple of lessons to be learned from the Nigerian experience that apply to the Angolan reality. Firstly, marginal fields are particularly attractive for smaller indigenous or regional companies that can operate well with smaller profit margins. These companies are also much more cash-strapped than the likes of ExxonMobil or Total and therefore need investment capital to develop their acreage,” said Centurion.
“The Nigerian experience tells us that seeking capital in the local financial sector can be challenging. Nigerian banks have been resistant to awarding credit lines to small operators in this kind of project. Normally, banks issue loans against equity or assets used as collateral. These oil operators’ attempt to use the oil reserves as collateral hasn’t been well accepted by the Nigerian financiers, and that has delayed field development,” added the Group.
This means that inviting foreign partners with access to capital becomes paramount. Local Angolan companies are advised to seek the partnership of mid-size players like Tullow Oil, Trident, Kosmos, Noble, Perenco and many successful Nigerian oil firms, with extensive African experience and available liquidity that can help them progress and be successful in their endeavors.
“Secondly, there is the issue of legal clarity. The Nigerian Petroleum Industry Bill, which in its many forms has been under discussion for over two decades, continues to create disruption and uncertainty in the industry and delaying new bidding rounds. If the current form of the bill is approved, marginal field operators are expected to receive significant cuts in the taxes and royalties, but that remains unclear for the time being,” stated Centurion.
So far, Angola’s journey towards revitalizing its oil industry and boosting production is already yielding positive results.
This is due in part to the perception of international investors already shifting towards a more positive outlook. In December for instance, oil marketers, ExxonMobil and BP pledged new investments in the country, while Total launched its $16 billion Kaombo project in November and indicated further investment in the country in the near future.
“If all continues in the direction it is now, it stands to reason that within three or four years we could again see the Angolan oil industry flourish. However, good governance and business-friendly policies coupled with clear fiscal and legal frameworks need to continue to be developed and upheld if the promise of the Angolan oil industry is truly to be fulfilled,” said Centurion.