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More haste, less speed in Malawi?

Malawi hopes to emulate its eastern African neighbours by making big hydrocarbons discoveries but progress is slow

Agricultural revenues are falling and opportunities to diversify the economy are few, so Malawi is seeking to entice explorers to establish the potential of the country's hydrocarbons reserves. It hasn't gone as well as hoped. Serious investment has not blossomed and the government's licensing strategy has attracted criticism.

Efforts to woo companies to the sector started at least a decade ago and gathered momentum with the amendment of oil-sector regulations and the designation of six exploration blocks in 2009. Prospecting licences, or stakes in them, were awarded over subsequent years to several low-profile companies, including South Africa's SacOil, UK-registered Surestream and three companies believed to have links to the UAE and each other—RakGas MB45, Pacific Oil, and Hamra Oil.

While no reserves have yet been discovered (let alone quantified), geologists say conditions around Lake Malawi indicate the area could be home to commercial amounts of hydrocarbons. So the government of one of the world's poorest countries is understandably keen to step up the pace of exploration—especially as it eyes the large gas discoveries made in neighbouring Mozambique and Tanzania.

Alas, the opaque nature and haste of the most recent awarding of licences has sparked controversy—and prompted an investigation from Malawi's Anti-Corruption Bureau. Critics have also raised concerns over the ecological impact of oil exploration. Several of the blocks overlap with Lake Malawi National Park and one of the country's two Unesco World Heritage sites. Meanwhile, a border dispute with Tanzania has intensified as interest in the area's hydrocarbons potential has grown.

Evidence of serious exploration by the licence holders is, for now, thin—though the lack of activity may reflect the reluctance of investors during a period of weaker oil prices. RakGas, Hamra and Pacific were unavailable for comment on their plans, while SacOil declined to provide an update, though its website says the company is in the process of finalising environmental and social-impact assessments for its onshore licence.

Corporate veil

The alleged shortcomings of the licensing process were outlined in a February Oxfam report, which noted the speed and secrecy surrounding production sharing agreements (PSAs) signed with two companies just eight days before presidential elections in May 2014.

Oxfam's country director John Makina tells Petroleum Economist that mistakes were made in the PSA signing process. "Why the rush? No one has been prepared to answer that," he says.

Under the deals, the minister and principal secretary for mining allocated two of the country's exploration blocks jointly to RAK Gas MB45 and Pacific Oil (Blocks 4 and 5) and another to Pacific Oil (Block 6). The deals were signed at a time when government officials were still developing a model PSA—a process that was only 80% complete, according to the UK-based non-governmental organisation (NGO).

'Why the rush? No one has been prepared to answer that'

Malawi's attorney general, Kalekini Kaphale, said in November 2014 that RAK Gas, Pacific Oil and Hamra Oil, which in 2013 acquired a 51% stake in Blocks 2 and 3, then controlled by Surestream, were connected by a "corporate veil", according to local media reports. RAK Gas is owned by the emirate of Ras al-Kaimah. Oxfam says the three companies may all ultimately be controlled by figures in Ras al-Khaima, despite being registered elsewhere. However, the ultimate ownership of Hamra and Pacific is unclear.

Kaphale wanted further investigation of the closeness of the relationship between the companies to ensure the deals had not breached Malawi's licensing framework, under which companies were not permitted to acquire more than two blocks each. The government then suspended all oil exploration operations while a review was carried out, but gave the go-ahead for most exploration to resume in February 2016.

Generous terms?

In its report, Oxfam also highlights Malawi's incoherent tax terms, which, it said, appeared to favour the companies rather than the government. These included "stabilisation" provisions for the duration of a project, which effectively locked in low taxes for the duration of a PSA, even if Malawi's fiscal regulations changed.

Oxfam says that international best practice suggests removing, or at least, significantly limiting such provisions. "Too often in the past, stabilisation has provided one-way benefits."

The NGO also claims that the royalty rate and provisions for the allocation of profit oil were too generous, leaving 20-30% for the government, rather than what it said was the industry standard of 65-85%.

Cassius Chiwambo, senior mining engineer and legal adviser at the Ministry of Natural Resources, Energy and Mining, says the government has since renegotiated the RakGas contract, altering some of its more controversial clauses.

"In short, though not approved by the senior government leadership, the royalty has been increased from 5% to 10%. The government's own participation-share in the ventures has been moved from 10% to 20%," he says. It hopes to update its petroleum policy, which was established in 1983, later this year.

Chiwambo denies negotiations were carried out in secret.

"This is not true. Nothing is being done in secret and with the government's signing of the Extractive Industry, Transparency Initiative (EITI), such an allegation can be ruled to be unfounded," he says. Malawi became a member of EITI, which seeks to set a global standard for transparency in oil, gas and mining, in 2015.

Calls for deeper probing

But areas of uncertainty are still attracting attention. Two Malawian groups—Natural Resources Justice Network and Publish What You Pay—have asked the president not to approve the addendum and to launch an inquiry. They called for the attorney general to investigate why the agreements were signed just days before Malawians elected a new president, and if payments by oil companies to Malawian organisations were made in connection with the agreements. The Anti-Corruption Bureau is investigating such payments, according to Publish What You Pay.

Oxfam isn't hopeful about the outcome. In contrast to developments in Malawi's mining sector, there has been little capacity building within the government on the hydrocarbons sector generally, or fiscal systems for petroleum activities specifically, it notes.

Industry observers are more sanguine, pointing out that countries often offer juicy fiscal terms to investors in areas where the resources are unproven. Nor is it unusual, or necessarily counterproductive, to sign deals quickly or before new legislation is in place.

The opaque nature and haste of the most recent awarding of licences has sparked controversy

In Tanzania, for example, the delay in passing into law its Petroleum Act 2015 not only led to repeated calls by international oil companies for greater clarity on the country's oil and gas laws, but it stalled investments and interest in the government's 2014 licensing round.

The government has also tried to assure the public that drilling would not affect Lake Malawi. Chiwambo says there would be further discussions at a later stage after considering "technical issues". In March, Malawi's president, Peter Mutharika, said that the country would go ahead with plans to drill under the lake itself, but probably using directional drilling from onshore rigs. "We value our lake and we will ensure we implement measures to protect it at all costs," Mutharika told local media.

Hamra Oil says that its exploration plans would involve onshore studies in Blocks 2 and 3, which cover parts of Lake Malawi, largely because offshore drilling would be too expensive.

Border dispute

The lure of potential hydrocarbons revenues has also reignited a long-running border dispute between Tanzania and Malawi over ownership of sections of the northern end of the lake. The two neighbours agreed in February to reopen fresh talks after mediation to resolve the row stalled in 2012.

There are hopes that the countries may be able to work together to exploit any reserves straddling the border. But explorers could face opposition from residents concerned that drilling will disrupt fishing—an economic mainstay in the lake region—and who are seeking safeguards from the government. "If we are relocated away from the lake, we will lose our livelihoods," says Manasseh Chatowa, one local fisherman.

A local senior group chief in the Dwangwa area on the eastern shore of Lake Malawi told Petroleum Economist that he had held a meeting with government officials in 2013, where a form of "mapping" for the lake had been discussed, intended to guarantee protection for the fishing industry from any oil activity. There had been no talks between local communities and the government since then, he said.

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