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Mining and hydrocarbons minister Gabriel Mbaga Obiang Lima
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Equatorial Guinea prepares for new era for oil

‘Drill or drop’ policy will soon result in a new set of license holders that the government hopes will kick-start the West African country’s oil industry

Equatorial Guinea will next month announce the winning bids for 27 oil and gas licences that Opec’s smallest member hopes can help arrest declining production and boost dwindling reserves and export revenues. 

Bids closed on September 27 for the 27 blocks—25 for exploration and two for appraisal and development—and the winners will be announced on November 27 following roadshows in Cape Town, San Antonio, London, Beijing and Equatorial Guinea’s capital, Malabo.  

The China roadshows reportedly attracted interest from multiple Chinese companies including Sinochem, China Gas, Beijing Gas, PetroChina, Sinoenergy and CNOOC. 

Drill or drop 

The licensing round follows a tougher government line over the relative lack of exploration by international oil companies (IOCs). Ophir Energy's license for Block R—now renamed EG-27 and one of the two blocks tendered for appraisal and development—expired at the end of 2018 and was not renewed.  

Mining and hydrocarbons minister Gabriel Mbaga Obiang Lima in February had warned the government could refuse to extend licences issued to foreign energy companies unless they collectively invest $2bn in Equatorial Guinea.  

“Corruption and transparency issues represent ongoing operational risks to foreign investment into the upstream sector” Taylor, Fitch

“I’m very happy to say we have the cooperation of many of the companies in Equatorial Guinea and we have achieved the minimum $2bn of investment for this year,” the minister told CNBC Africa. His country’s petroleum exports had fallen by more than half between 2014-2018 (table 2.5 Opec Annual Statistical Bulletin 2019).  

“Our policy has been to drill or to drop, meaning that we understood that for two years there was an economic hardship for everybody because of the reduction of the oil price.  

“But that situation has changed … and now they have no excuse not to invest and the best way to invest is drilling. We don’t want the companies to sit on the blocks, so we have been very clear—you either drill or you return the blocks.” 

ExxonMobil’s upstream affiliate in Equatorial Guinea, Mobil Equatorial Guinea (MEGI), is Equatorial Guinea’ largest oil producer. MEGI owns 71pc of Block B, located offshore northwest of Bioko Island, which it operates in partnership with GEPetrol (23.75pc stakeholder) and the government (5pc). 

Exxon Mobil produced 27,000 bl/d  on average in 2018, down from 34,000 b/d in 2015, while other notable foreign operators in Equatorial Guinea include Marathon and Noble Energy.  

Although a small player, the country’s oil sector has some strengths including favourable licensing terms, according to a mid-2019 report by Fitch Solutions. Corporate income tax is levied at 35pc, while upstream royalties are no less than 13pc, increasing according to daily production rates. 

“As a potential destination for foreign investment in the latest licensing round, Equatorial Guinea will benefit from a proven below-ground potential, significant existing infrastructure in the offshore—which can potentially lower development costs by offering opportunity for tie-backs, re-development and utilisation of midstream infrastructure—and also an established competitive landscape,” said Richard Taylor an oil & gas analyst at Fitch Solutions. 

Political outlook 

Yet there are also notable causes for concern. President Teodoro Obiang Nguema Mbasago has been in power since 1979 and his status as leader of the ruling party for life suggests there is little likelihood of political reform.  

The president’s eldest son, Teodorin, who is also vice president, has been implicated in corruption probes in Brazil, Spain, France and the US, with the latter three nations accusing him of laundering tens of millions of dollars, according to Human Rights Watch which has also highlighted mismanagement of public funds and longstanding human rights violations.  

“Corruption and transparency issues represent ongoing operational risks to foreign investment into the upstream sector,” said Fitch’s Taylor. “Globally, competition for investment in exploration and upstream projects continues to be high.  

“In the case of Equatorial Guinea, the country scores relatively poorly in terms of the bureaucratic environment, the legal environment and the ease of doing business.” 

Oil production slumped to 114,000 bl/d in the second quarter of 2019, according to Opec’s monthly oil market report in October. That compares with average production of 120,000 bl/d in 2018. For comparison, production peaked in 2004 at 322,000 bl/d. 

Meanwhile, Equatorial Guinea’s proven reserves have shrunk to 1.1bn bl , down from 1.71 bn bl in 2013, again according to Opec.  

“Political risk and the associated risk of an unstable policy and regulatory landscape is unattractive to investors looking to plan and invest in multi-decadal projects,” added Taylor. 

Source: Petroleum Economist
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