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High-risk race for Western Sahara's contested subsea riches

The underexplored waters of Morocco are attracting scores of oil companies, lured by a benign fiscal regime, political stability that some Arab countries can only dream of and the hope of commercial oil discoveries similar to those made elsewhere in the Atlantic basin

As interest in the region intensifies, a growing number of firms are now setting their sights on Western Sahara, the bitterly disputed former Spanish colony annexed by Morocco in the 1970s in a move that the international community never recognised.

Glencore, the Swiss-based mining and trading giant, is the latest to acquire offshore acreage there under controversial contracts awarded by Morocco, the de facto administering authority. It follows others, including France's Total and Texas firm Kosmos Energy, which plans to drill the first exploration well in the territory's waters in December, in what analysts say will be an important test case. Any significant find could have pivotal implications for the political and economic future of the region, sometimes referred to as Africa's last remaining colony and classified by the United Nations (UN) as a non-self-governing territory.

The Polisario Front, an Algeria-backed indigenous Sahrawi independence movement, fought a guerrilla war with Morocco until the UN brokered a ceasefire in 1991. But subsequent talks to resolve the conflict have resulted in stalemate and a promised referendum on self-determination has been shelved. Changes on the ground could tilt the dynamic in Morocco's favour, with exploration success likely to accelerate the rush of oil companies to the region, and help the government in Rabat to normalise the status quo.

So industry players and Western Sahara observers are watching closely. "A substantial discovery would be a play opening for Western Sahara and Morocco," said Tom Quinn, a North Africa upstream analyst at Wood Mackenzie. "The exploration well density - how many wells have been drilled per square kilometre -- is pretty much the lowest you'll see, except maybe in parts of the Arctic. This is frontier acreage, especially off Western Sahara. Nothing has been drilled there."

Besides Glencore, Kosmos, its Scottish partner Cairn Energy, and Total, which is expected to renew its 100,000 square km Anzarane reconnaissance permit in December, firms present in the territory include AIM-listed San Leon, which operates the onshore Tarfaya and Zag blocks, and minnow PetroMaroc which has a 22.5% stake in Zag.

Among those monitoring the exploration activity is Erik Hagen, the head of Western Sahara Resource Watch (WSRW), an international lobby group that opposes opening the disputed area to exploration. He argues that companies trying to exploit the region's natural resources under deals secured with the Moroccan government are acting illegally and hampering a resolution to the 40-year-old conflict, a view shared by some UN officials.

Total and Kosmos both deny the claims, insisting they are operating ethically and that their activities comply with international law. "By signing agreements with Morocco to explore outside its waters - and in the waters of Western Sahara that Morocco is occupying -the oil companies undermine the UN peace efforts and basic human rights of the people of the territory," Hagen said.

Exploration right

Figure 1 - SADR Petroleum & Mining Authority

The controversy over Morocco's right to exploit the resources of the region, which it considers an integral part of its territory, centres on a 2002 UN legal opinion requested by the Security Council in response to two exploration contracts that the Moroccan authorities had signed with Total and US firm Kerr McGee.

The UN document states that unless activities relating to the development of natural resources take into account "the interests and wishes of the people of Western Sahara," they will be violating the principles of international law. After it was issued, both Total and Kerr McGee, along with two European oil services companies, relinquished their contracts amid pressure from rights campaigners and investors, highlighting the reputational risks linked to the ruling.

WoodMackenzie's Tom Quinn describes the UN legal opinion as vague "It says the companies that are operating there need to invest in accordance with the wishes of the people of the Western Sahara, and make a valid contribution to the socio-economic development of the region," he said. "But it's a grey area, whether or not these activities are legal. What is meant by a valid contribution to the socio-economic development of the region? Is that building a school or is that tax revenues that go to the government? And how do you know what the wishes of the people of Western Sahara are?"

But divestment remains a problem for companies operating there. Last year four Swedish pension funds sold their shares in two chemical producers because a Moroccan company was supplying them with phosphate mined in Western Sahara, and Norwegian life assurance firm KLP announced that it had removed Total from its portfolio because of its activities in the territory.

United front

At the end of 2013, Kosmos and Total separately issued joint declarations with ONHYM, Morocco's state energy firm, pledging to ensure that "local populations and their representatives are involved and consulted" in the search for and production of hydrocarbons, "and will benefit equitably".

They did not say how the local populations would be consulted, and the Sahrawi Arab Democratic Republic, the territory's self-proclaimed government-in-exile, which is based in refugee camps in southwest Algeria, categorically rejects their promises.

Kamal Fadel, spokesman for the SADR Petroleum and Mines Authority, insisted the Sahrawi people did not consent to, and would not benefit from the deals between Morocco and the oil companies operating in Western Sahara, which, he claims, will "serve to entrench Morocco's illegal occupation". "The money will go directly to the regime and its cronies. Sahrawis have not benefited from their resources for the past 38 years," he tells Petroleum Economist, pointing out that half of the Sahrawi population lives in refugee camps in Algeria and there was no mechanism for them to benefit from any deals.

WSRW's Erik Hagen believes Rabat would have no incentive to enter into any purposeful UN peace talks with the Polisario if an oil discovery is made, and claims the two licences granted to Glencore Xstrata were awarded "in clear violation of international law, as described by the UN in 2002". "The multinational company misrepresents the location of the blocks - placing them in the occupying country, Morocco," he said.

Glencore holds a 38.25% interest in the Boujdour Offshore Shallow Block, which it operates, and 18.75% in the Foum Ognit Block, and the company's chief executive Ivan Glasenberg did indeed locate them unambiguously in Morocco in a presentation he gave in May.

Glencore dismissed the accusations of illegality, saying the granting of the licences by the Moroccan government were "consistent with the 2002 UN legal opinion regarding resource activities offshore Western Sahara" and that they were currently being used for exploration activities only.

But it is the Cap Boujdour permit in Western Sahara's deep offshore, which Kosmos operates in partnership with Cairn and ONHYM, that appears to hold the most promise so far. The expected cost of drilling the well in itself reveals the high hopes of the consortium, which is targeting the block's Gargaa prospect and which Kosmos estimates has potential reserves of up to 1bn barrels of oil equivalent.

The newbuild drillship Atwood Achiever will carry out the drilling, in water depths of more than 2,000 metres, targeting a prospect about 3,700 metres subsurface, according to Kosmos spokesman Thomas Golembeski.

Paying a high price

Figure 2 - ONHYM

The Dallas-based company declined to comment on how much the drilling operation will cost, but analysts say the bill would probably run into the hundreds of millions of dollars.

Kosmos has held rights to the Cap Boujdour contract area since 2006, under a petroleum agreement with ONHYM, and Bill Hayes, the company's senior vice president, defends the company's operations in Western Sahara. He argues that responsible resource development has the potential to create significant long-term social and economic benefits for the Sahrawi people, while pointing out that exploration is still in the early stages and, in the event of a commercial discovery, any production remains a long way off. Hayes points to corporate social responsibility initiatives that Kosmos has undertaken in the region, which include education projects and workshops to promote best practice in resource management.

Unlike every other country in North Africa, Morocco is a newcomer to the oil and gas industry. It has made only negligible gas finds to date, and imports around 95% of its energy needs, with the cash-strapped government battling to reduce its unaffordable oil subsidies. But the kingdom is now enjoying a drilling bonanza, prompted primarily by a very attractive fiscal regime, similar geology in prospective regions elsewhere in the Atlantic like Canada's Nova Scotia, and improved offshore drilling technology.

Morocco's state energy firm had just a handful of foreign partners 15 years ago, where now there are dozens of companies operating in more than 130 exploration and reconnaissance permits - and not just small independents. Chevron and BP both arrived in 2013. Experts say the contractual terms on offer are among the best in the world, although they would probably be changed to the government's benefit in the event of a discovery. But another important draw for foreign firms is the guaranteed local demand for any oil and gas they manage to find.

ONHYM chief Amina Benkhadra said around 30 wells would be drilled this year, both on and offshore (of Morocco and Western Sahara), compared to just four in 2013, in what is considered a 'high-risk, high-reward' frontier. The results have so far failed to match the initial excitement, with Cairn, one of the most active new players in Morocco, drilling two dusters in its offshore acreage in the past 12 months. Portugal's Galp Energia also came up dry with a well spudded on the Tarfaya Offshore permit. In May, Kosmos plugged and abandoned a well in the offshore Foum Assaka Block in the Agadir basin that BP has farmed into, after disappointing results.

One reason sometimes cited by companies that have decided to do business in Morocco is the relative stability that the country enjoys, in a region rocked by Islamist violence and political turmoil since the Arab Spring uprisings in 2011. That year, mass protests erupted in Morocco's main cities as young demonstrators called for sweeping change, but King Mohammed VI managed to defuse the unrest through a combination of coercion and promises of reform.

A new constitution designed to limit the monarch's near-absolute powers was introduced and snap polls held that saw a moderate Islamist party elected for the first time, causing the protests to largely fizzle out, even as long-serving dictators were overthrown in revolutions across North Africa. But despite the return of stability to the streets of Morocco, local and international rights groups continue to highlight serious human rights violations, particularly in Western Sahara, relating to freedom of expression, political dissent, unfair trials and the alleged torture of detainees.

Pro-independence protests in Western Sahara are not tolerated by the Moroccan authorities, and reports often emerge of detainees being badly treated by the police, most recently in the case of Hassana al-Wali, a young Sahrawi activist whose death in custody late last month sparked unrest in Dakhla, the territory's second city, where hundreds of protesters clashed with security forces.

Under pressure

The Moroccan government has vowed to clamp down on torture and improve judicial proceedings, and has invested heavily in Western Sahara. Last year, as part of efforts to address social discontent and the lack of development, a palace-appointed council called for a £13bn  ($16.4bn) investment plan, with the aim of doubling the region's GDP and creating 120,000 jobs.

But the ongoing debate that first erupted last year about widening the mandate of the territory's UN peacekeeping force to include human rights monitoring -- a proposal angrily, and so far successfully opposed by Morocco - shows how the issue has risen up the international agenda.

Another potentially awkward problem for the oil companies operating in Western Sahara, especially if they strike oil, is the fact that SADR, the so-called government in exile, awarded 10 exploration blocks in 2005 which overlap with those granted by Morocco.

Companies holding SADR-awarded acreage include the London-listed firms Ophir Energy, Premier Oil and Tower Resources. "There may be an issue there of  if a discovery is made, which is a big if, will those small companies have some legal basis for saying 'that's in our acreage'," said Tom Quinn, the North Africa analyst at WoodMackenzie. "I think what it comes down to is the legal clout that Kosmos and Total have, which will protect them and their interests. It might all be a moot point if nothing is discovered."

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